Cirrus Logic, Inc. (CRUS) Earnings Call Transcript & Summary

All right. Welcome back, everyone. I'm Tom O'Malley, semi and semi-cap analyst here at Barclays. Very pleased to have Cirrus Logic with us. We've got John Forsyth, CEO; and Jeff Woolard, the CFO. Thank you being here.

Thank you. Thanks for having us.

So forgive me, but I must ask the question that is floating around on everyone's minds. At this time. You've got this big spending trend in AI, right? And today, it's very data center focused, right? $3 trillion plus in announced data center spend. You've got companies that are very data center-centric that are addressing this first. And they're doing that through retimers, cabling, memory, et cetera. But over time, the idea is that you're moving away from data center-centric compute and potentially to the edge. The edge seems like a place in which Cirrus can play a lot more effectively. Correct me if I'm wrong, one. And two, where do you see yourself potentially intersecting this trend kind of longer term?

Yes. So first of all, yes, like I think we're very much at the edge. I believe that AI will become more and more of a thing of the edge. I don't think it's quite that yet and the kind of boundaries between what takes place at the edge versus the data center is not completely clear. But at a high level, I would say a couple of things. Firstly, anything that squeezes power and space is favorable to us. And what I mean by that is you can be doing a lot more intensive compute at the edge, just going to put a lot of pressure on the power consumption of the device. You're going to want bigger batteries, you're going to need to have more memory in there. And 2 things that we do extremely well, create very, very power-efficient chips. So we can help the system optimize for that level of power consumption. And also by the standards of our peer companies, we tend to produce chips that are not overly more power-efficient, but they're also in smaller packages. So again, we can be a part of the design solution for devices doing AI at the edge. The other thing I'd say is that I really believe, however AI at the edge ends up being used, a lot of it will be done through voice. And so whether it's on the input side, the output side around voice or in fact, when it comes to the image path as well, we are part of the basic I/O of the device. And we have a lot of voice-enabling IP great amount of history in delivering enablers for the voice interface. And I think that's the natural mode for using a lot of AI functionality is the conversational interface in the end. So I think that creates great opportunities for us in devices that you see as in today, whether that's phones or PCs but also in new categories of AI devices that we're going to see in the coming years.

That's perfectly lead-in. So I saw an announcement around auto earlier this week. Obviously, in the midst of all this, I would be better to have you fill me in on the details here. But it seems like when you think about voice at the edge, auto is the perfect place to kind of see that intersection because a lot of times, at least today, your hands are busy, right? So why is this an interesting future path for you guys? And how real is that in terms of revenue contribution in the near term?

Well, thanks for highlighting the announcement this week. We announced some automotive haptics product this week. We didn't say anything about voice and AI in the car this week, but that is something that we think a lot about as well. I'll begin with that because the car actually brings lots of really interesting audio and acoustic challenges, whether that's noise cancellation or isolation and having different audio zones for different people in the car, all of whom are potentially speaking to each other or speaking to the AI and so on. So lots of really interesting challenges for us in that space. And I think you'll see more from us in that area as we go forward. This week, and I think this is very complementary to that. We announced a family of automotive haptic pots. And that's really us kind of signaling our entry into automotive haptics, where I think it's fair to say the end user experience up until now has been really disappointing. So much so that as you probably know, auto makers have received a fair amount of pushback from consumers on the transition away from traditional buttons and so on. And that's -- not purely because consumers don't want to use buttons on the screen. It's partly because the actual experience and the feedback is so poor, and it can be hard to determine whether you pressed it properly. Sometimes it's laggy which is an absolute killer for any kind of haptic experience. So we've obviously been leaders in haptics in the consumer device space and cell phones and so on for a long time now. In my opinion, it's not really an exaggeration to say that automotive haptics is somewhere around 20 years behind the haptics experience in consumer devices today. And we want to do our part to help address that. So the products we announced earlier this week are bringing a kind of cutting-edge haptic experience to auto cabins, which means highly responsive, stuff that really feels like you're genuinely clicking on something stuff where the click experience adapts to the speed to the road conditions and so on. So you'll always get a really great user experience that we've been delivering on other products.

So auto supply chain is very different than consumer supply chains. Can you talk about the certifications first that you need to get into automotive-grade products. That takes a long period of time. Where are you in that certification process? And then two, design in cycles 3 years -- 2 to 3 years. If you're on to these products today, should we be thinking kind of the '27 -- like '27, '28 time frame for revenue?

Well, I think, as you mentioned, the auto does take a long time, even in the quick design cycle. So we're still a ways off from where we'll start giving color commentary on that. But as John said, we think there are a lot of exciting opportunities for us there. We're actively investing in pursuing those and feel good about where we're at, but it will take some time for it to materially show up.

Helpful...

But to be clear, the products we announced are auto-qualified. And this is a public announcement. It doesn't mean we've just started working on the -- these products have been in some fantastic demonstration platforms which have been going around OEMs and Tier 1 integrators for quite some time now.

Can you explain the difference to me? Obviously, you use an amplifier to do the haptics in smartphone from a design perspective, is there a major difference in the automotive ecosystem. I would assume there needs to be reliability around being qualified in auto?

So you have reliability and quality considerations with the temperature ranges and so on. But it's also aspects like the user experience, like, as I said, being able to have a system that adapts to -- that adapts the feel of the click to the speed or the road conditions and so on. So actually delivering stuff at an algorithmic level, not just the chip level that really makes it fit for purpose in the car.

So another area that you've been diversifying the business is on the PC side. You had a reference design with Intel, which is proliferating, which is helpful for your suite of products. Looking into next year, I think you've talked about tens of millions, and that's growing substantially into next year as well. Remind us what the 2026 outlook looks like there? But then you've got this other dynamic PCs actually sound better next year. OEMs are kind of talking low single-digit growth. But then there's this counterbalance that's associated with memory, where there's a fear around consumer devices of potentially slower sales given guys can't get memory. How do you balance that all out for what you're thinking about the PC business?

Well, First of all, what I'd say is that for us, we're starting from a small base, it's all growth. I mean the overall units picture affects us much less than many of the other guys right now because we're going -- we're growing quite significantly within the PC space. Yes. And I think just to give you color on the outlook. Yes, in fiscal '25, which ended in March for us, we said low tens of millions of dollars revenue and that we expected that to double in fiscal '26, which we're tracking to. And then that we would anticipate coming out of fiscal '26 with still a very good growth momentum as we go into FY '27. And we'll give more of an update on that as we go forward. But I think you can see now in the market, some of the transition taking place that we think is very favorable to us. So one of the factors that is driving our adoption in the PC market is the transition from a legacy interface called HDA, the high-definition audio interface to a new audio architecture called SDCA. And that transition has been kind of slowly underway for a couple of years now. It's gathering momentum. We estimate that somewhere between 15% and 20% of laptops today are using SDCA. That's ultimately -- that's going to be practically 100%, and that transition is going to complete over the next over the next 2 or 3 years. Today, out of those 15% to 20% where people have migrated to SDCA, we estimate that 75% of those products are using Cirrus silicon. So that's a big driver for adoption of our content.

Super helpful. Okay. We saved the fun for last, so smartphone side. So I think going into this year, particularly with your largest customer, but just generally in the model, you talked about front-end weighted cycle. And I think that there are multiple reasons for that, just given your camera controller content, given what you saw from like a tariff perspective this year, it just seems like to be safe, people were building a little bit earlier. And I think if you look at the trajectory that you guys saw, it really has mirrored that so far. Just a broader question. Like if you look at this cycle on a unit perspective and a content perspective versus kind of where you sat when you first started talking in the March, April, May, June time frame, anything materially different? Or is that largely tracked to kind of what you thought?

I think it's largely tracked to what we thought. I mean, as we pointed out in some of the other calls, so the shape was a little different. But I think largely pretty close to where we thought at the beginning of the year.

And then others have referenced older generations of phones? Or just like have you seen any of those trends as well? Like we've heard from other companies, RF providers in general that they've seen a mix of legacy phones, last year's phone or the year before on still selling a little bit better. Is that something you guys are seeing?

Those previous generations are still selling, but I think that's generally -- roughly with where we thought we would be.

Okay. And then just checking in, we get this question a lot as well. last generation, you talked about, the 22-nanometer more codec, some of the AMS as well. The cadence there has been every 5 or 6 generations. Is that still the right way to kind of think about the updates on those? Any reason why you would push that forward faster?

There's a little bit of a balancing act to be done between getting on with other things, getting leverage out of the very substantial investments that we made to bring those products to market versus not allowing there to be any room for somebody to come in sniping for those sockets. So the way we approach that is we have a fairly steady ongoing dialogue with our customer about what features an IP will be valued and useful when it comes to making the next generation without needing to put a tenant which year that's going to be in. And so our working assumption is something along the lines of what you said. The last generation of codec [ and apps ] were shipping for 5 years and 6 years when they were superseded, but to be clear, they continue to shift. And in fact, were in the mid-price device that was launched earlier this year. So they still have some runway ahead of them as well and lifespan of 1 of these devices could easily be 7, 8 years, I think. They're designed with that in mind. So something like the codec typically has a lot of capability that isn't necessarily all exploited fully in the first product cycle that's incorporating that codec. This is one of the things that people don't always appreciate about our largest customer is, a, how much thought goes into that, like planning ahead so that the silicon doesn't need to constantly be turn. But secondly, also just how that -- how atypical that is of the consumer electronics business. It really doesn't look like consumer when you step back from it and say, well, these parts are going to run for 7 years. We can say with a reasonably high degree of certainty, how many hundreds of millions of them we're going to need each year. And that's an extremely strong and stable part of our business. But I think -- so you would expect us to always have some innovation and research going on what the next generation of those products look like, the bulk of the R&D resource is actually available for us to target at other new areas where we want to develop novel IP and expand our content.

So it almost helps you in the middle of those cycles where you're like this is pretty secure at this point. And in time, we can allocate elsewhere. And as we get a little bit closer to a period of time, which you know you need to upgrade then redirect dollars?

Exactly.

Okay. Camera controllers is an area where you definitely see content proliferation across devices. I know in the lowest version of the phone, you have as little as 1 and then the highest version of the phone. I believe it's 4. So a vast array of different content per device. How do you see that content moving on a go-forward basis? Is it kind of top-down or bottom-up meaning like. You have the Pro Max, which has the largest met of camera controllers. Is the pro quickly to follow and then your base model relatively to follow or do you see kind of like the lowest volume phones kind of going up to scale. Obviously, it's associated with image stabilization and cameras, whatever moves first. Where do you see that content waterfall going?

So we're doing a few things, order focus, image stabilization and some other elements of mechanical control within the camera system. And then closely aligned to each of those functions is a bunch of digital processing to kind of figure out what the corrective actions are for stabilization, for example. That's -- in all of those areas, I think we see opportunity to continue to expand the feature set and increase the performance of the devices. So if you look back to the first generation that we introduced, which is in 5 years ago in the 2020 cycle. The current generation of devices have something like 6x the amount of processing those first channel devices did, all of which translates into a superior user experience for the camera. I think from the kind of go-forward perspective, I would anticipate it probably following a similar pattern to what's happened in the past, which is we see features introduced in the kind of pro level devices. That is the area with not only the greatest attach rate, but also the latest and greatest camera controllers from us. And then we see a pretty reliable waterfall down year after year. There have been cases where between those 2 Pro level devices, the content is different. Actually, right now, as you're saying, yes, it's equaled up. But one of the challenges we have talking about this area is people often ask the question, we get it a fair amount is, aren't we done on the camera? Like isn't it good enough? And the short answer is no. It's not good enough. It can always be better. It can be meaningfully better. And then people say, well, like, how like what's going to happen? You say, well, I can't tell you that. But there are a lot of things in our road map and within the plans of our customers that are going to continue to drive the camera experience. to be significantly better than where it is today. And so we plan to be a part of that.

I know you can't talk about your largest customer, but we can talk a little bit about design schematics and where you've seen increased content in the past. So rumors around potential foldable phone in 2026. Two things that strike me when I think about foldable phones is you've got more beachfront area when you are thinking about handling device that's bigger, that calls to me like something that would require potentially more speakers. And then two, if you're looking at a larger phone in general, perhaps you have something related to power that may increase. You guys haven't talked about content increases for this year. But generally, in the past, has device size changed anything in terms of the content that's required from an amplification perspective?

Not really or not necessarily, I would say, we've been in a number of -- I'm not saying anything about unannounced products with other customers of ours, we've been in a number of foldable products. Many of them have exactly the same hardware configuration or almost identical. Some of them are slightly different. But there's a number of ways of skinning that gap.

Yes. On the power conversion control side, it's been an area where people have been focused for continued development. I think there was a start and we've been kind of waiting for the follow-on there. When you think about like the technology and what sort of enablement that you can offer for smartphone, I think many people have run to, you talked about this like high-power non-plug-in devices, if you add processing power, it seems like a perfect fit for more power conversion and control in general. What kind of transition needs to occur in smartphones or what kind of technology do you need to solve in order to see that increased content there?

I think we -- I've been pretty transparent. I think that we're interested in developing innovative and differentiated IP around the battery. We think that's a good opportunity where we can improve system performance, improve power efficiency and potentially mitigate some of the factors that affect and accelerate battery aging. And so we've been working on a number of IP areas in that space around the battery. As you've said, we have one product shipping today. which I think is in its fourth year of shipping. So hugely successful from a revenue point of view, but at the same time, still V1. So we have, as you would expect, an active dialogue with our customer about how that platform evolves and what other areas we can contribute in. I'm not going to put a time frame on like how that translates into revenue for us. But we remain really optimistic that, that is a space where we have some very compelling differentiated IP and we hope to see that in products.

This year was a year where you didn't have the big content uplift, but you had a waterfall of content effect, which helped you kind of offset. As investors look forward, is there a way for us to mark to market? You've done a good job in the past of kind of highlighting to us as early as you humanly can, when you would see content uplift you have more of that waterfall that's going to exist over time. But where should investors be focused from a content perspective, not just at the largest customer, but across your content portfolio over the next couple of years?

Well, I think the areas -- with our largest customer, I think you've got the phone products, obviously, within the phone products, I think it's pretty clear as the -- we just had a big refresh of audio. Camera continues to be a really healthy space, which has kind of shown pretty steady growth since we first introduced camera products, and we continue to expect that to be the case in the future. And then you've got power and other stuff. And so I appreciate it from an investor perspective, that's probably the most opaque. But we believe there are good opportunities there that will bear fruit in good time. There are, of course, I think, really good opportunities outside of the phone. And then in our across our broader customer base, I think there are a number of interesting things happening. One, of course, we mentioned PC. From a revenue and growth point of view, I think it's worth pointing out that one of the most significant things in penetrating the PC market is getting into the mainstream devices because the volumes of those are so much larger than the kind of flagship devices when we enter the market. So to give you a sense of that, and by mainstream, we typically are referring to devices that are kind of between $800 and $1,000 in both the consumer and the enterprise space. If you go back to when we first started talking about the PC in fiscal '24, the total amount of revenue from mainstream devices was -- it was effectively 0, it rounds to to 0. In fiscal '26, approximately 50% of our PC-related revenue is going to be driven by mainstream products. So it's a huge growth trajectory that we're on there. And that's very exciting because I think when we're -- we're in those products, we can continue to expand the content over time. And then beyond that, something I would throw out as an exciting category for us is AI-enabled devices because I think the -- I don't know that anybody has like kind of split the atom there yet, we'd like exactly what -- what that device what those AI devices are going to look like, but there's a lot of people trying and there's a lot of really interesting innovation potential there. we think that voice is going to play a big thought in that. And so we see that space as being a really exciting category that we should be participating.

And not to mention, I think you mentioned with the camera controller, a 6x of performance generation over generation, I would imagine that you also are going to get paid V2, V3, V4 of other sockets as well. You've talked about being V1 control, you would imagine that there is probably some waterfall there as well over time.

I would hope so. Yes.

Okay. Pivoting a little bit to the M&A side, capital return side. clearly, announcing new wins and new chipsets into auto is a diversification direction of the business. But in terms of organic versus inorganic, activity. Do you feel like at this point with the cash balance that you have, which is quite nice that you would go out and need to do any sort of bolt-on acquisition that would kind of take you further down that road?

Yes. We're excited about our growth opportunities in some of the non-phone segments, and we've talked about some of those. So certainly, we look for M&A opportunities that will help us accelerate in those different segments. Looking for places we can have some true value creation and also leverage what we think is a really great IP asset to help us accelerate in some of these segments.

And then capital returns, investing in the business, you guys have always been very consistent on that. But in terms of your ability to maybe buy back share, any kind of outlook on your priorities?

Well, our capital allocation strategy remains unchanged. We want to make sure all of our organic opportunities are funded and that we will look for inorganic opportunities to accelerate that growth and buybacks will be third. We do still have over $400 million left on our buyback authorization. And we'll look at that. We look at it on a quarter-by-quarter basis to see what does the environment look like? What are our opportunities look like?

As we go into next year, where should investors get excited about Cirrus Logic. Clearly, there's diversification effort, which is always exciting. But where should we be paying attention here as the year turns?

Yes. I think the reason I highlighted that leading indicator of SDCA penetration in laptop in the PC market as a whole is I think like that's a very good tailwind for us as we go forward. And then I think you're going to continue to see more from us in terms of products for the PC space, automotive. And of course, we continue to work on expanding our content at our largest customer.

Very helpful. Thank you very much, guys, for joining us, and happy holiday season. Hope to see you in the new year.

Happy holidays.