Cirrus Logic, Inc. Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Cirrus Logic's Fourth Quarter and Full 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. 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 John Forsyth, Cirrus Logic's Chief Executive Officer; and Chelsea Heffernan, our Director of Investor Relations. Today, we announced our financial results for the fourth quarter and full fiscal year 2021 at approximately 4:00 p.m. Eastern. The shareholder letter discussing our financial results, the earnings press release, including a reconciliation of non-GAAP financial information to the most directly comparable GAAP information, along with the webcast of this Q&A session are all available at the company's Investor Relations website at investor.cirrus.com. This call will feature questions from the analysts covering our company, as well as questions submitted to us via email at investor@cirrus.com. Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information, the company expressly disclaims any obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to the press release and the shareholder letter issued today, which are available on the Cirrus Logic website, and the latest Form 10-K and 10-Q, as well as other corporate filings made with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from the current expectations. Now, I'll turn it over to John.

Thank you, Thurman, and thank you everyone for joining the call today. In the past year, Cirrus Logic made excellent progress on key growth factors and strategic initiatives that we believe will contribute to our continued success in the quarters and years ahead. We increased the penetration of our audio solutions in smartphones. We gained momentum with audio and haptic solutions in exciting categories beyond smartphones. And we brought innovative products to market in new technology domains, expanding the range of product areas where Cirrus is recognized for its leadership. We're particularly pleased with the progress we've made in driving product diversification in the high-performance mixed-signal area, which we have highlighted as a key pillar of our strategic vision for the company's future. The introduction of our first camera controller contributed to 55% year-on-year revenue growth in the high-performance mixed-signal category. I feel it's also especially important to take a moment to thank our employees for everything they have done over the past year. Amid many challenges, they've shown extraordinary dedication, both to supporting our customers with their current products and to keeping on track with the many important development programs that we believe will be central to our customers' future success. Turning now to our results. Cirrus Logic delivered FY 2021 revenue of $1.37 billion, up 7% year-on-year, and a non-GAAP EPS of $4.58, up 27% year-on-year, driven largely by content gains and higher unit volumes. Like many in the semiconductor industry, we have been experiencing strong demand and excessive supply. While capacity constraints have not meaningfully affected the largest parts of our business, they did have some impact on our revenue for the last quarter, as well as on our outlook for the first quarter of FY 2022. Today, we still see demand and excessive supply in some areas of our business, most typically in older products and in some cases in parts of our audio business that we've added during the supply constraint period. Our experienced team is working closely with our supply chain partners to meet that demand as rapidly as possible. In the coming months, we will begin shipping new technologies to our customers across a range of end devices, including important new content in the high-performance mixed-signal category. Based on these factors, we expect to accelerate revenue growth in FY 2022. With this pipeline of new products and the R&D investments we are making to further strengthen our roadmap of compelling audio and high-performance mixed-signal solutions, we're extremely excited about the coming year. Before we begin the Q&A, I'd also like to note that while we understand there is always intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationship.

And our first question comes from Matt Ramsay of Cowen. Please go ahead. Your line is open.

Thank you very much. Good afternoon, everyone. John, considering the results and the stock movements tonight, I think it's relevant to raise a question. You have shared some insights about content expansion expected in premium devices, particularly in the power domain for this fall, as well as your work on the 22-nanometer codec for future products. While I understand you can't disclose too many details and we all have numerous questions regarding these matters, could you discuss whether any of these expectations have shifted in terms of penetration, content average selling prices, or visibility on these programs compared to the update you provided us a quarter ago? Thank you.

Thank you for the question, Matt. I want to emphasize that we can't disclose details about our customers' products, but you're definitely asking about some of our most exciting developments. I can provide a bit more insight since we are further along than we were last quarter. Specifically, you're referencing the power conversion and control IC we’ve discussed. We're very excited about this as it represents an expansion into another high-performance mixed-signal area for us. As I've mentioned before, we believe this device will trend towards an attach rate of one, which seems natural. We think there's a strong case for the beam 1 being in every phone, and we anticipate a healthy attach rate from the start. It's still early in the year to say much more, but we are particularly enthusiastic about its value in terms of average selling price, which we've noted is significantly higher than that of the closed-loop controller. Indicatively, its value is around $1. Regarding the 22-nanometer technology, we’ve made excellent progress. I've previously mentioned that we're pleased with the silicon we've seen and that we're deeply engaged with customers. While we don't have a product ready to discuss yet, we see multiple applications for this technology on our roadmap that we find very exciting. As a reminder, investing in 22-nanometer technology aims to either increase digital processing proximity to analog or to create something significantly smaller and more power-efficient. We can identify several applications for that intellectual property investment across various device categories and products. We are working on specific routes to market that we've hinted at before, but we don't have anything more detailed to share today.

Got it. Thanks, John. I appreciate the insights and the sensitivity regarding this. For my follow-up question, Thurman, I wanted to ask about the printed results for the March quarter. I think many of us who follow the company understand that the June quarter is typically transitional and seasonally down. It can be challenging to model that accurately from the outside. However, I've received concerns in my inbox tonight about the March quarter results, especially considering the strong performance from your largest customer reported last night. I would have expected that when you provided guidance for March back in December and January, you would have been able to assess the units shipped to support their phone and other device sales and adjust the guidance accordingly if there had been overshipping compared to their actual sales. Could you provide some insights on how you approached the March quarter results? Additionally, if there were any other factors, such as supply constraints, that may have impacted the March quarter, I would appreciate that information. Thanks.

Matt, I’d like to quickly share a few thoughts on that. In my last discussion, I touched on the challenge of linking our shipments and revenue recognition to what our peers or customers are shipping. Specifically, the closed-loop controller content related to the module assembly phase has caused some scheduling discrepancies in terms of revenue recognition. We’re starting to see that become clearer now. In our Q3 results, we saw a 30% year-on-year increase, driven largely by that content, which has been supporting our customers for quite some time. Regarding the March quarter, we've been able to meet all the demand from our largest customers without any supply constraints affecting us. However, this has limited our ability to capitalize on opportunities in certain areas of our business. Thurman, if you have anything else to add, please feel free.

We were able to serve our largest customers, but we faced some constraints with our general market customers during the quarter. However, we managed to meet most of that demand, and it did not impact our results for the quarter.

Our next question comes from the line of Blayne Curtis of Barclays. Please go ahead. Your line is open.

You seem to have changed your reporting segment. I assume that the growth is primarily coming from the new products with DAC and the power chip. I'm curious about your thought process around that. Additionally, when looking at the segment, it appears that audio has been flat year-over-year and quarter-to-quarter. This is the first time we've observed these figures historically. How do you view the growth rates in this unit segment moving forward?

You’re absolutely right, Blaine. The focus here is to eliminate the growth we anticipate in line with our strategic plan, where we believe we have great opportunities now and in the future in the high-precision mixed-signal category. Referring back to my comments on strategic growth sectors, we see growth potential in audio. The two main areas are the expansion of our presence in Android and in other non-smartphone categories. However, we believe that the growth rate in high-performance mixed-signal will be higher. Over time, you will see this become a larger part of our revenue mix.

Gotcha. I just want to ask, it’s obviously harder to kind of back out and analyze now. But just your performance in the Android world in the March quarter and then I think you mentioned in your letters, a positive outlook going forward, but perspective as to how that business turned it for you in March and into June?

I believe that in the Android sector, we faced challenges in 2021 with the decline of smart codec content, which required us to recover. Throughout much of last year, our key Android customers showed limited momentum, but we experienced significant improvement in the early part of this year. This positions us for a strong FY 2022 in the Android market, likely matching or exceeding historical performance based on our current outlook.

And our next question comes from the line of Tore Svanberg of Stifel. Please go ahead. Your line is open.

Yes. Thank you. Just the question on the segments, you talked about some of the growth, but what about profitability? Is there a gross margin differential between the new segments?

Broadly, no. The new products that we introduced had a really consistent gross margin profile, whether they were in audio or high-performance mixed-signal product. There are one or two obvious exceptions to that in that we've mentioned in the small print, which you may not have thought to yet, but there are some legacy products that sit in high-performance mixed-signal, which typically do have a high margin; they're very low volume, so they don't really move the needle around. So, broadly, across both of those categories, the gross margin would be consistent with the corporate model.

Very good. And when it comes to capacity, you said it's still tight, but you were able to increase your inventory days. I'm just wondering, as we think about the June quarter, do you think that you'll sort of be back into equilibrium before the ramp in the second half or no?

No. We are currently facing constraints on many products, and we're doing what we can to address that. However, we believe that these capacity constraints will continue throughout fiscal year 2022 and possibly beyond. This situation will not hinder our ability to meet our ramp schedules for the latter half of the year. Demand remains strong, but we may not be able to fulfill all of it. We are actively trying to find additional capacity where possible, and that is our current approach.

Our next question comes from Christopher Rolland of SIG. Please go ahead; your line is open.

Thank you for the question. Regarding the PMIC and the timing in the second half of the year, could you provide any details about the preassembly for DAC? Is that the only factor that could affect the timing for that component? Also, as we move to the next handsets, is there any update on the parts that might lead to an inventory drawdown now in preparation for ramping up a new part later this year? Any details on this transition would be appreciated.

Let me take a run at that and you can let us know in the follow-up whether I hit the nail on the head there, Chris. So, first of all, on timing, there's nothing really out of the ordinary. We are, with the power conversion device, preparing for a ramp that takes us through a full launch of product. It's going to be a steep ramp. As I said, we're expecting a pretty healthy attach rate straight out of the gate. So, there's a lot of wafers and content to move between now and then, a lot of work to do. But this is the basis for our optimism and upbeat tone about FY 2022, as you all picked up. There is nothing really out of the ordinary from a schedule perspective there. The power conversion and control IC that's not replacing anything, so there's nothing that gets phased out or impacted from a legacy product inventory perspective by that. One thing that I haven't touched on elsewhere in the call, though, that may be looking in the background there, we've mentioned previously, and there's been discussion about it, that our camera controller device has given attach rates. We again, without saying anything about our customer's products, and there's a lot of stuff we don't know about our customer's products, however, it would be very consistent with what we've seen in many of our customer's products over the years if that attach rate were to go up over time with cascading of kind of high-end camera features through that product. Again, we think that's likely to happen, but there's no particular drawdown of old inventory or anything like that associated with that ramp.

Thank you. Our next question comes from Derek Soderberg of Colliers. Please go ahead. Your line is open.

Hi, everyone. I appreciate you taking my questions. Thurman, could you share some insights on the pricing environment, particularly regarding any unusual declines in average selling prices and their impact on results or guidance? As we look ahead, do you anticipate any unusual average selling price declines this year? Any insights on the pricing environment would be helpful. I also have a follow-up.

No, we've noticed standard year-over-year declines in our average selling prices with our older products. I wouldn't characterize this as anything unusual compared to our typical performance. The main factor for us was pricing pressure due to capacity constraints, which did have an impact.

Got it. John, could you explain how the pandemic may have created new opportunities and products, such as voice authentication and interface? In the early stages of the pandemic, there was a lot of discussion about a new normal where voice usage would increase. I'm curious if that has materialized in any way. I believe you mentioned some new products in the shareholder letter. Are these resulting in shipments for these types of applications? Thanks.

We haven't seen specific developments around those technologies. However, one significant area of growth for us, partly driven by the pandemic, is the increased utilization of laptops, tablets, and mobile devices. We have noticed steady demand across these categories from various customers for higher-quality audio. This change is largely due to the central role that audio and video conferencing has taken in people's lives, especially with the rise in remote work. A year ago, we had almost no business related to PCs, but now we are experiencing a notable increase in customer engagement and are beginning to gain real traction in this area, which is very encouraging. We believe these devices are undergoing a transition similar to what we've seen with smartphones regarding audio and haptics. As they become slimmer, there will be a demand for advanced amplifiers and haptic drivers to replace mechanical controls, creating a significant opportunity for us to expand our audio solutions into new non-phone categories. This is one of the main areas where we've seen growth and increased customer interest as a result of the pandemic, and it constitutes a substantial part of our projected demand for FY 2022.

And our next question comes from the line of Christopher Rolland of SIG. Please go ahead. Your line is open.

Hi, everyone. I wanted to follow up on your mention of laptops and haptics. You indicated that there were a few customers interested in that area. Could you elaborate on that? Additionally, could you share which mixed-signal product, aside from the PMIC, you are most focused on for 2021 or even 2022 as we look ahead?

Sure. Yeah. I think I may have just hit on most of my talking points around the PC space. But just to recap, there's a really interesting transition. There were a couple of meaningful changes taking place in particular around Ultrabooks where their architecture and industrial design are becoming more and more akin to smartphones and encountering many of the same problems. We anticipate that many of the mechanical assemblies in laptops, as they get thinner and thinner, will be replaced by haptic devices. We've seen that in some products with trackpads, and we've talked about our technology and collaborations around that, which we're really excited about. We've been seeing great customer interest and attraction there. In addition to that, the challenges that people faced with smartphone audio were really partly as a result of wanting better and better audio out of thinner and thinner devices. That drove a desire for higher voltage, boosted amplifiers sitting close to the micro speakers. Again, that's something which has been hugely successful for us in smartphones. We believe there will be, and we are seeing a transition towards that in the Ultrabook space as well. For sure, that's been an exciting avenue of opportunity that's opened up over the past year or so. On the subject of the high-performance mixed-signal areas, I'm going to say we're not in the standard PMIC business here. Obviously, over time, we'll be able to share more details about what we're doing in the power conversion and control product that I talked about. But we're really not replacing anything there. We're doing something new that we believe has a lot of value to certain kinds of battery-based systems. That in particular is very interesting and exciting for us for two reasons. One is because of the avenues it opens up. Longer term we believe it's relevant to a lot of battery-based systems and has a whole roadmap of innovation around it where we can continue to grow value and bring new stuff to our customers. But also because of the real world near-term revenue impact for us. That's a meaningful ballpark dollar additional content that we anticipate seeing from the fall of this year, and therefore will be very meaningful in FY 2022 and even more meaningful in the full cycle in FY 2023.

Thank you. There are no further questions in the queue. I will turn the call back over to Miss Heffernan.

Thank you, operator. There are no additional questions, so I'll turn it over to John for final comments.

Thank you, Chelsea. In summary, we're proud of the year-on-year growth and the strategic progress that we've delivered in FY 2021. We're also incredibly proud of our employees' ability to execute on new product development and to provide outstanding support to our customers, despite the challenges associated with the COVID-19 pandemic. With an extensive intellectual property portfolio and continued investment in compelling audio and high-performance mixed-signal solutions, we're excited about the opportunities ahead of us in FY 2022 and beyond. I'd also like to note that we'll be participating in conferences hosted by Cowen, Bank of America, and Stifel this quarter. Please check our investor website for the details. If you have any questions that were not addressed, you can submit them to us via the Ask the CEO section of our investor website. I'd like to thank everyone for joining the call today. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Again, thank you for your participation. You may now disconnect.