Cirrus Logic, Inc. (CRUS) Q2 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Second Quarter Fiscal Year 2021 Financial Results Q&A Session. At this time, all participants are in a listen-only mode. After a brief statement, we will open up the call for questions from analysts. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thank you and good afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic’s Chief Executive Officer; John Forsyth, the Company's President; and Chelsea Heffernan, our Director of Investor Relations. Today, we announced our financial results for the second quarter of fiscal year 2021 around 4 pm Eastern. The shareholder letter discussing our financial results, the earnings press release with a reconciliation of non-GAAP financial information to the most relevant directly comparable GAAP information, along with a recording of this Q&A session, can be found on the Company's Investor Relations website at investor.cirrus.com. This call will include questions from analysts covering our company as well as questions submitted via email to [email protected]. Please be aware that during this session, we may make predictions and other forward-looking statements that are subject to risks and uncertainties that could lead actual results to differ significantly from projections. By providing this information, the Company explicitly disclaims any obligation to update or revise any predictions or forward-looking statements, regardless of new developments or otherwise. Please refer to the press release and shareholder letter issued today, which are available on the Cirrus Logic website along with the latest form 10-K and 10-Q, and other corporate filings with the Securities and Exchange Commission for additional discussions of risk factors that might cause actual results to diverge materially from current expectations. On a personal note, Jason, it’s been a remarkable journey, and I have truly enjoyed working with you. Now, for the final time, I will turn the call over to Jason.

Thank you, Thurman. And I agree, it's been a pleasure. Before I start, I'll note that we are having significant technical difficulties with leader view. If you're an analyst covering us, could you do us a favor and maybe text Chelsea a quick question? We're having a very hard time figuring this all out. But anyway, we'll at least try to be able to cover some of your thoughts. Thank you, Thurman. Before we begin discussing our results, I'd like to make a few comments on today's announcement that I will be stepping down as CEO on January 1st. I joined Cirrus Logic after completing school in 1995, and it's the only company I've ever worked for. It's been an incredible journey for me personally. I'm proud of the Company's transformation during my tenure. We've developed strong relationships with some of the best customers in the world, delivered meaningful financial growth as a result, and built an incredible corporate culture that fosters innovation, execution, integrity, and camaraderie while promoting a fun work environment. We're thrilled with our outlook going forward, and I'm confident that John's passion, strategic vision, and leadership skills make him the right person to lead Cirrus Logic into a bright future. I'm excited to continue working with him in our new roles. The Company also announced that David Tupman will become Chairman of the Board of Directors on January 1st, succeeding Al Schuele. I'd like to take this opportunity to thank Al for his outstanding stewardship as Chairman of the Board over the last eight years. Al's experience and expertise have been incredibly valuable, and I'm thankful for the relationship we've built over the years. A member of the Board since 2015, David brings an extremely valuable and deep understanding of engineering and product design to our team. I believe his expertise will be extremely beneficial as Chair to the management team and technical leadership. I look forward to his expanded role as our Chairman. I will now turn the call over to John.

Thank you, Jason. Before I comment on the results, I would like to take a moment to thank Jason for everything he has done in his role as CEO of the Company. Under Jason's leadership, Cirrus Logic has enjoyed exceptional business growth and developed an outstanding corporate culture. I count myself personally fortunate to have been able to call Jason a leader and friend over the last six years, and I look forward to our relationship continuing in our new roles. I'd also like to say how excited and honored I am to become the next CEO of Cirrus Logic. We have a tremendously talented team across the Company, a proven track record of execution in advanced mixed-signal products, and a culture of delivering outstanding service to customers who create the world's most innovative products. In assuming this role, my focus will continue to be on driving the strategic initiatives that will support our customers, strengthen our leadership position in audio, and expand our reach to new technology areas. With a focus on engineering excellence, creating a great place to work for our employees, and creating more value for our customers and shareholders, I believe the Company is well-positioned to drive growth and profitability in the coming years. I'm looking forward to working closely with my leadership team, our employees, the Cirrus Logic Board, and our customers as we continue to fulfill our vision of being the first choice in signal processing. Turning now to the results. Cirrus Logic delivered Q2 FY21 revenue of $347.3 million, as stronger-than-anticipated orders for components shipping smartphones and to a lesser extent, tablets and truly wireless headsets drove sales significantly above our expectations. During the quarter, we made excellent progress in both our customer engagements and development activities. The number of smartphones, wearables, and tablets in which our products ship grew, and we were particularly excited to see new content featured in several recently launched high-volume products. Additionally, despite the majority of our employees continuing to work remotely and the challenges that this situation presents for all those individuals and for us as a team, we made significant progress on several key development programs and completed the tape-outs of multiple products that we expect to begin sampling to customers in the coming months. With outstanding customer relationships, increased product diversification, and continued design innovation that broadens our addressable market, we are excited to leverage both near-term and long-term opportunities to create greater shareholder value. Before we begin the Q&A, I'd also like to note that while we understand there’s intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationship. Operator, we're now ready to take questions.

And your first question comes from Tore Svanberg.

Great quarter, and congratulations to John, and Jason, congratulations on your next move. We'll miss your great humor and sarcasm. My first question is about the codec for wearables, specifically for wireless headsets. Up until now, it seems your involvement with premium truly wireless headsets has primarily been on the amplifier side. Can we assume that this is entirely new content for you?

Thank you, Tore. I appreciate the best wishes. This is our first specific smart codec designed for truly wireless headsets. We had previously shipped smart codecs in truly wireless headsets, but those were originally created for various applications and were later adapted for wireless headsets. What we are now sampling to our customers and expect to launch in the coming months are products that feature our first smart codec specifically aimed at truly wireless headsets. This represents new content, while also building on the progress we've made with products from our existing catalog. It includes significant improvements, especially by introducing hybrid active noise cancellation to this product category at very low power consumption. It's worth noting that when we discuss these products in detail, we are not referring to custom products for our largest customer.

And Tore, just to follow-up, I'd like to think of it as sarcasm rather than cynicism. And I look forward to seeing you again soon. I really am not actually going anywhere. So, I look forward to seeing you, and you've been an absolute class act, and we appreciate it.

Thank you for that. As a follow-up on the next-generation haptics, it seems that you are currently finalizing the second generation with some improved features. Could you provide more details about what that entails in terms of content, whether it pertains to smartphones or wearables?

Yes, we discussed the new haptic component that is primarily aimed at smartphones, but we believe it could also be applied in other areas. There is growing interest in haptics across both portable and non-portable devices. The content addition is an update on what we shared earlier this year, where we are integrating an analog front end to provide a dedicated haptic path for data conversion and actuator driving. Traditionally, haptic drivers were separate from these components, but this change reduces the number of parts needed and saves board space. In terms of content, the traditional haptic driver is nearly the same as an amplifier, with an average selling price close to that of an amplifier, around $0.70 to $0.75. It's important to note that different architectures will seek various solutions, and we are pleased with this development. It enhances our product lineup and offers a robust high-performance integrated solution. There will still be a need for haptic drivers that do not include the integrated front end as well.

And your next question comes from Matt Ramsay with Cowen.

Thank you very much. Good afternoon everyone. John, congratulations on your new role, and Jason, it's been great to see you develop the engineering and culture at Cirrus. Congratulations on your next role as well. For my first question, it seems that the outlook for the December quarter suggests that the content for the closed-loop controller, whether in terms of units per phone or the average selling price, may be significantly higher than what many of us had anticipated. Now that the devices have launched, John, could you provide more insight into how that device is being used? Any information regarding its functionality, units, or ASPs per phone would be very helpful. I have a follow-up question as well. Thank you.

Thank you for your kind words, Matt. Previously, when we discussed that product, we provided general guidance suggesting that you should view it as an amplifier associated with an average run rate per phone sold. This is averaged across various SKUs and designs, which means the attach rate could vary among them. However, since those are our customers' products, we prefer not to delve into specifics, and we cannot predict how many customers will choose each SKU. I want to emphasize thinking of it as an amplified phone that we anticipate will add significant content value. We're also excited about this custom product, though we tend to keep details about our customers' custom products to ourselves. Achieving our first success with this type of product is a major milestone for that component of the phone, which serves as a crucial competitive advantage. Starting this new journey and roadmap in that area is incredibly thrilling. As we've mentioned, it facilitates various imaging-related functions, and we believe we can continue to develop and enhance its value over time.

Yes. Thanks again, Matt, for the kind words. And also, I'd note, I mean it's fine detective work by various folks to note patent filings and things that the chip can do. But I will point out, patents aren't data sheets, and it's always possible for chips to do things that aren't in a complete product. It's a chip to do things that are additional to what is in the patent.

Got it. I appreciate the sensitivity around that. For a follow-up, many of us have been working in the smartphone sector, observing the challenges Huawei is experiencing in sourcing their own chips and the potential impact on the industry regarding market share shifts that could benefit your largest customer as well as other companies in China. I noticed in the shareholder letter some new content and successes with Xiaomi. I wonder, John, if you could discuss Oppo and Vivo and how your business might develop with them if they become beneficiaries of some of the challenges Huawei is facing. Thanks.

Yes. I guess, as always, we don't know how many people are going to turn up and buy which kind of phone. But we are focused as ever on winning all the sockets that we believe matter in the Android space, which is chiefly around the boosted amplifiers. As you know, we had been building some good momentum with Huawei. It still represented a relatively small amount of our revenue, but the trajectory was great. I think we continue to supply certain components to Huawei where we have a license. But, we are obviously also making a lot of headway since the reawakening of the Android market, which sold earlier in the year with COVID, but we've certainly seen, to some degree, an uptick in demand from other smartphone customers, including Xiaomi, who we mentioned in the letter, that somewhat offsets that headwind with Huawei.

Your next question comes from Charlie Anderson with Colliers Securities.

Great. Thank you for taking my questions. And congrats, Jason, on really a tremendous run, and congrats, John, on the appointment. For my first question, I wanted to ask about haptics. You guys are really fully flushed out the portfolio here with a number of products. So, I guess, I'm curious if maybe just could step back and give us a bird's eye view of how you view penetration of haptics onto the end devices, how wide it spans in terms of types of end markets you could cover with these products? And then, I've got a follow-up.

Sure. Yes. Well, as you know, haptics history began with our largest customer, and we've, as you say, built out a pretty impressive portfolio of haptics focused devices, targeting the general market. Along with, although we talked less about this, a key part of enabling the haptics business is a whole tool chain and a suite of algorithms and so on that simulate various touch experiences for the end user. In terms of penetration, it's still in the Android space is selectively found in the high end of the market. It's not saturating the high end, the flagship devices, just yet. I think, over time, it would be a reasonable expectation that it does, and that we see some trickle-down into the mid-tier. I would say, in general, on haptics in the smartphones, you have to really care about the details of the user experience, which obviously, the kind of customers that we generally focus on, they do, but it's not going to be in every device. That said, I think haptics is one of the categories where we see meaningful interest from OEMs and customers working on other kinds of devices. We've mentioned it in relation to wearables. We've had some notable wearable launches deploying our haptic technology in recent months. We see exploration of haptic drivers for use in automotive and laptops and other kinds of devices. So, we think there's certainly a breadth to the reach of haptics, which should provide us good leverage on that IP downstream.

Great. And then, for my follow-up, you did mention in the shareholder letter that you've now taped out the first generation power conversion and control IC. I wonder, similar to how you've sort of given us a view on the closed-loop controller average selling price, if you'd be willing to share that one, and maybe just sort of thinking broadly about units per device. There's a lot sort of just to kind of similar question the way Matt asked about closed-loop. Thanks.

Yes. I think we're going to shy away from talking about the average selling price there. We did have said previously that I'd reiterate this, but we think it has the potential to be meaningfully bigger than the closed-loop controller content gain for us. It's still a long way between now and where that actually comes to market. As I've said previously, we're targeting the back end of calendar '21 for that. There's a whole load of work to be done between now and then. And I plan to be relatively new in the gig. So, I'm not going to jinx it by saying too much about it. But we're extremely excited about what that category of device can mean for us.

And your next question comes from Christopher Rolland with Susquehanna.

Hey, guys. Congrats on the fantastic quarter. Jason, I will definitely miss my time on the road with you. Congrats. And John, congrats as well. A long way for a wee Scotsman. So, congratulations indeed. First question is, I know you guys don't guide two quarters in advance, and I'm not looking for that, but many of your peers have suggested that March would be ahead of typical seasonality, just given the late launch this year. So, I was wondering if you guys could maybe talk out loud as to how you're thinking about March in terms of typical seasonality.

Yes, sure. And thanks for the nice words there. I appreciate it, as well to my countrymen back in Scotland. Yes. So, as you know, we just provide guidance for one quarter. There are a whole bunch of things that could come to bear and impact our people, given the uncertainty and volatility around the COVID-19 situation and the kind of associated global economic disruption as well as timing of shipments. It's not easy to read across from what we are doing and what we're shipping to what's happening with our customers' products in terms of sell-through. So, I'd express some caution around that. So, it is clear that certain new products look like they're having a pretty incredible start. And on the back of that, we're obviously feeling bullish. But, if you take all of those factors into consideration, I'd encourage people to be conservative with that.

Yes. I’d just follow up on that and say, I too am very bullish on that sentiment. But again, it's complicated. We tend to be more conservative than our peers. We don't know anything different than what our peers do at this point. So, it's always a work in progress this time of the year. You kind of never really know yet. But, certainly, as John said, it feels like an out-of-the-park home run so far. But if we were dialing up, in our world for our fiscal Q4, if we woke up in the morning and consensus stayed where it was, that would feel great because it's conservative, and that is kind of always where we want to be on the side of things, but they're your model. So, do what you like for them?

Understood. And then, perhaps you guys can talk about Cirrus' opportunity for the closed-loop controller into Android in '21, and the PMIC perhaps into Android in '22. Do you expect more traction there? Are you guys kind of unique and market-leading there? And do you think it will crossover into the Android space? Thanks.

Let me begin with the last part of your question by stating that we are not entering the PMIC space. We have discussed our custom product related to power conversion. In the previous call, we indicated that while there isn't currently a similar product on the market, what we are developing is exciting. However, this also means we won't be providing extensive details about our work. Regarding the closed-loop controller space and the custom product, we have a lot on our plate. When we talk about market potential, we are considering what we can realistically invest in. At this point, we don't have a specific plan for pursuing the Android market for those products. This is simply because we are focused on the current opportunities in front of us, which have a high success rate. For now, that will remain our priority.

Your next question comes from Blayne Curtis with Barclays.

Good afternoon. Thanks for taking my question. Congrats, John, and Jason, I'll miss you as well. Maybe assume when we can travel one of these states. Maybe just on the first question, just on the Android side, I think I've done a decent amount of beating you up on how low it's gotten, but it actually kind of pops up. So, just some color on that. I know you lost some content at Samsung, but it looks like it's up. And then, any comment into December for Android as well, just directionally?

I don't think we're going to break out any commentary on Android for December. I feel, to your point about beating us up on it, Blayne, our feeling on Android this year was that there were at least a couple of things going on, which counted as headwinds. One was COVID, obviously, one was the Huawei situation, and one was our second-largest customer having a product launch, which was not one of their delay years; all of which did create headwinds. But, from the perspective of our underlying business, we've continued to win the sockets. And we have more stuff in design now than I think we ever have had in the Android space, principally, as I said, centered around the boosted amplifiers. There's certainly been the case that if you step back from it, it looks like there are a bunch of people kind of eyeing Huawei's market share and being aggressive on the back of it and wanting to produce devices that lead in one area. Another, we're benefiting obviously from audio being one of the things that they're investing in to focus on there.

No, nothing structurally has changed in the business over the past year. Gross margin will fluctuate due to various factors such as supply chain efficiency, product cycles, and product mix. Even though we provided guidance for Q3 and Q4, our long-term perspective remains unchanged. We believe maintaining a sustainable margin at 50% is achievable, and we will continue to optimize it. Based on our current visibility for FY22, we expect to see an increase in margins again.

And your next question comes from Raji Gill with Needham & Company.

Yes. Thank you for taking my questions. And congrats, John, as well. And good luck to you, Jason. Just a question on the true wireless momentum that you've been seeing. What do you think is the kind of the next leg of growth in that market? What's going to be the next kind of product catalyst to drive attach rates in that market?

Thank you, Raji. I appreciate it. That's certainly been an incredibly exciting category for us. And I would say it's for sure exceeded our expectations over the past year or two. As I mentioned earlier, we're just really on the precedence of launching out the first device for the general market that we have designed specifically for truly wireless headsets. We have a roadmap that extends beyond that, obviously, as well. But that for sure is introducing a lot more in the way of smart processing for that product category. It seems pretty clear to me that features like not just noise cancellation, but hearing augmentation, the kind of personal sound amplification features that we talked about and smart environmental listening. So, it can be attenuating noise, but then identifying if there's some acoustic feature of the environment you should be aware of and so on. All of that means packing more processing in close to the analog to digital boundaries. Obviously, we like that. But it for sure feels like the clock rate on that product category as a whole is really high just now. Customers have a lot of ideas, a lot of stuff they want to talk to us about, a very aggressive schedule of iterating on those products with new innovations. So, I think we'll continue to see that growth of processing in the way that I talked about. And hopefully, we can serve some meaningful part of that.

Thank you for that, John. And just for my follow-up. If we look into March, and I know you guys are hesitant about talking about future quarters. But obviously, seasonality in margins is typically down pretty significantly historically speaking. Any color in terms of whether that is going to be different this time around? Is there going to be any change in patterns given the delay in the product at your top customer, any kind of questions or color around inventory positioning ahead of that? Any thoughts there would be helpful.

Well, we'll certainly give a lot of color on that in January when we report. As you know, we don't guide ahead. I appreciate that it would be useful to you if we did. But in all honesty, I mean, what I said earlier, I mean, sincerely, there are a whole bunch of factors in terms of the global economic volatility, and the various products still being relatively early in their cycle, which means it would kind of be crazy to speak confidently about what's going to happen in that space even if we could. So, as I said, it really looks like those new recently launched products are off to a great start. They're certainly incredibly compelling devices to use. And that seems to be the reaction generally. So, that certainly makes us feel very bullish about the potential around the new products. But, we'll update you in January about how we're feeling about that quarter. Hopefully, that's going to be solid as well.

Your next question comes from Tore Svanberg with Stifel.

Yes. Just as a follow-up, and excuse my ignorance on the technical side. But, what exactly is hybrid active noise cancellation?

Yes, sure. Thank you, Tore. So, you can have something called feed forward noise cancellation, where you have a microphone outside facing the world outside the ear canal and then calculating the anti-noise that you generate on the back of that. There is what's called feedback noise cancellation, where you have a microphone in the ear canal listening to what's going on in there and the effect of the anti-noise that you're generating. There are plenty of devices out there and implementations of ANC, which are being either one or the other. It takes a lot more processing to do both, but that is what hybrid is doing. There are pros and cons to each of those approaches. The best performance overall, you will unsurprisingly find is a hybrid approach, which makes use of both paths.

And then, on smart home, in your investor presentation, you talked about being a supplier to the top two smart home OEMs. Not exactly sure what that means. If it's the two of the highest share or what have you. But, could you talk a little bit more about your content there? Is it primarily on the amp side, or do you have some smart codec exposure there as well?

Yes. So, I think on the smart home side, the volumes are still pretty small. We have a mixture of content that's shipping in those devices. Historically, because we have low power codecs feature low power voice wake capability, that's been an attractive feature for smart home devices. There are various smart home devices from those leading OEMs, which incorporate our smart codecs. But, when you think about it from the point of view of our strategic focus, we don't put a huge emphasis on that market because if something is mains powered, it's plugged into a wall and can make a lot of use of the cloud for signal processing, then that's just not quite a nice sweet spot. We can leverage our expertise to create more value elsewhere in a battery-centric device which is doing more processing at the edge. So, it's certainly a business we like, but it's not a major strategic focus.

And there are no further questions. Chelsea, please go ahead.

Thank you, operator. There are no additional questions. So, I'll now turn the call back over to John.

Okay. Thank you. So, in summary, we are pleased with our results in the September quarter as we experienced broad-based demand for components across our portfolio, particularly those shipping in smartphones, which resulted in revenue significantly above our initial expectations. With a solid pipeline of products coming to market over the next several years, a deep commitment to investing in innovative technology, and a proven track record of execution, we believe Cirrus Logic is well-positioned for growth in audio, voice, and other adjacent product domains. I would also like to note that we will be participating in the Barclays Global Technology Media and Telecommunications Conference on December 10th. Please check our Investor website for the details. If you have any questions that were not addressed on the call, you can submit them to us via the ask the CEO section of our investor website. I'd like to thank everyone for participating today. Goodbye.