Earnings Call Transcript - CRUS Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Third Quarter Fiscal Year 2020 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 over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thurman Case, CFO

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 third quarter of fiscal year 2020 at approximately 4:00 PM 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 [email protected]. 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 undertakes no 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 issued today, which is available on the Cirrus Logic website in 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 current expectations. Now, I'll turn the call over to Jason.

Jason Rhode, CEO

Thank you, Thurman. Before we begin taking questions, I would like to make a few comments. For a detailed account of our financial results, please read the shareholder letter posted on our Investor Relations website. Cirrus Logic delivered Q3 FY '20 revenue of $374.7 million, as higher than anticipated volumes of boosted amplifiers, haptic drivers, and smart codec shipping into smartphones drove revenue above guidance. GAAP and non-GAAP earnings per share were $1.13 and $1.41 respectively. During the quarter, the company was actively engaged with a variety of customers and development activities were robust across new and existing product categories. We began sampling several new devices and continued to execute on key strategic initiatives. As we move forward through the next 12 to 18 months, we are excited to have a number of new products coming to market that we expect will bolster our leadership position in audio and voice and establish a strong foothold with other signal processing components beyond these traditional domains. Furthermore, we are pleased to have announced that John Forsyth has been appointed President of Cirrus Logic. As President, he is assuming a broader role in day-to-day business operations while leading the company's product development teams and continuing to drive product line strategies. As Chief Executive Officer, I will oversee the long-term growth and direction of the company. On a personal note, I'm looking forward to working with John in his new role. Before we begin the Q&A, I would also like to note that while we understand there is intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationship. Operator, we are now ready to take questions.

Operator, Operator

[Operator Instructions] Your first question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg, Analyst

Yes, thank you, and congratulations on the strong results, and congratulations to John on his promotion. I was hoping you could address the transition from 55 to 22 nanometer. I don't know if you're prepared to share the timelines or the types of products that will be using that next generation node?

Jason Rhode, CEO

Yes, sure, happy to. We think 22 is going to be a really great mixed signal node for us. As 55 has been, certainly not the case that everything we do would need to migrate to 22 nanometer going forward. Generally speaking, it's a very different dynamic compared to a fully digital piece of silicon. In that analog components generally don't shrink anywhere near as much as the Moore's Law curve would imply for digital. So, if you just took the same device and shrunk it from 55 to 22, you'd most likely make it more expensive. So, the number one reason for doing that, which could be in our domain could be power. It could be silicon area or board space, but more often it's related to being able to embed a lot more digital signal processing content. The amount of processing power we can bring to bear in 22 nanometer is really remarkable. We got our first test chip back a while ago this fall with really remarkable performance out of the box. Of course, there are things to work through and such, but that's the bulk of our IP going down to 22 nanometers, so we will be able to do exciting smart codecs and such in the long run. So, really not a lot of commentary about exactly what the first products would be and so forth, but you can imagine that we're doing that because we want to add a lot more DSP capability. As far as timeline, that's still something that's a couple of years out. We're excited about the new stuff going on this year, and we have further new content that we're looking forward to for the following year, and most likely the 22 nanometer stuff would be beyond that.

Tore Svanberg, Analyst

That's very helpful, and as my follow-up, you made several references in the shareholder letter to signal processing opportunities beyond the audio and voice domain. I know you've talked a little bit about that already about closed-loop controllers. But could you share any other things that you're working on beyond the audio and voice domain?

Jason Rhode, CEO

Yes, I mean the only thing we've really talked about is just the haptic example of where we've taken our existing technology and broadened that out beyond audio. The closed-loop controller we don’t have anything further we want to say about that, other than that it continues to be on track. There are additional things beyond that that are in an entirely different domain again non-audio, non-voice for handsets that we're extremely excited about, and that would be in the year beyond. So, I think that's about as good a lineup as I can remember having, and continued good things in audio and voice as well long-term.

Operator, Operator

Your next question comes from Matt Ramsay with Cowen. Your line is open.

Matt Ramsay, Analyst

Thank you very much. Good afternoon. First off, John, congrats, well deserved. The first thing I wanted to ask about, I think Jason or John. One of the things I saw that you mentioned in the shareholder letter was in the discussion around haptics and amps is a portion to I think the top four Android OEMs. I know you guys had mentioned significant traction with the top three before. Is there something to read into that, that there is an expansion? I know, Jason you described it as sort of singles and doubles with Android outside of Samsung in the past, but are things progressing there? And I guess what are the levers that you are or what products are driving the expansion across OEMs presumably in China? Thanks.

Jason Rhode, CEO

Well, certainly the most traction we've had in China is with the audio amps, followed by the haptic devices. We've made good progress there; it is—I would definitely still characterize it as kind of model-by-model. Those accounts are definitely more singles and doubles than home runs, and we've been shipping to the bulk of the top 10. There is always some movement, both within the ranks of who composes the top 10. It's an area where we need to be a lot more opportunistic, but those parts—part of the reason those parts are doing so well there is that they were architected specifically to enable that kind of flexibility. Our teams are adding new functions via software support, tools, and of course, tuning, which is a critical element of a number of those devices both for audio, and acoustic tuning, and also for haptics, in terms of the feeling of the device. So, that's all been well received in China; there is a wide array of customers there, they have their own drummer that they're marching to, and of course, the biggest guy in China has its own complexity to it, obviously, this past year.

Matt Ramsay, Analyst

Got it, got it. Thanks for that. I guess, as my follow-up. I wanted to ask Thurman about OpEx. There is the chart that you guys always put in the shareholder letter around headcount and OpEx and it looks like headcounts down, I don't know, 100, 150, 160 people over the last seven, eight quarters. There are some reallocation and restructuring around MEMS and a few moving parts; maybe just talk about sort of OpEx in the medium-term contrasting some of those actions versus what you guys have been talking about quite a bit of investment for new products going forward. That'd be helpful. Thank you.

Thurman Case, CFO

Yes, well, we've reallocated those resources. As Jason noted, we haven't seen as many opportunities as this in quite some time, so we'll continue to invest in R&D. When you start looking at SG&A, that should remain relatively flat for us. Our infrastructure is good, and we don't see a lot of investment needed there. In terms of how things look on a year-over-year basis for next year, just in general, we don't expect it to grow significantly because we're still catching up from the effects of what has happened over the partial pieces of this year; reductions will show up for the entire year next year. So, with that happening, you won't see expenses increasing significantly on a quarter-over-quarter basis just because we're hiring or things like that.

Jason Rhode, CEO

I would add to that; we've talked about the MEMS thing a little bit last on the last call. At this point, the people that we were wanting to redeploy on that have successfully been redeployed, which was a big victory for the company; I think the team did an awesome job of doing that. The folks that we moved to are excited to be working on this new fancy mixed-signal stuff, and we have a very good prognosis of success. That was probably kind of a highlight for me.

Operator, Operator

Your next question comes from Blayne Curtis with Barclays. Your line is open.

Tom O'Malley, Analyst

Hey guys, this is Tom O'Malley on for Blayne Curtis, and I want to pass my congratulations to John as well. The first, just looking at the slide deck, you guys lay out a $1 billion SAM opportunity in 2024 for haptic drivers and closed-loop controllers. Most of the time, particularly with this new closed-loop, you start with the lead customer and that works its way down into the Android ecosystem, and sometimes that presents challenges, given the custom design work you do for some of those customers, in particular, the big one. Can you talk about if you see an opportunity elsewhere for products like the closed-loop controller, particularly where in the Android ecosystem you may target?

Jason Rhode, CEO

That particular thing that we're developing, we will certainly keep our eyes on it. We don't— that's not a primary focus of that investment. It would be at a trickle that down. There are certainly many things that we sell, like haptic for example or audio amplifiers that are in fact closed-loop controllers. We do see opportunity; again, that particular level took on a life of its own that wasn't entirely intentional. But the particular thing that we've been talking about will ramp later into the market.

Tom O'Malley, Analyst

Okay. And then just on the same chart, right above you talk about SAM for about $1 billion for further adjacent mobile opportunities; obviously, part of that historically could have been those MEMS might. What other areas are you targeting there? Just because a billion bucks is still a pretty big SAM?

Jason Rhode, CEO

Yes, sure. That's another one of these areas that we're not going to want to get too far ahead of ourselves on, but it's just another thing in the handset on audio, non-voice that directly leverages our advanced mixed signal capabilities. It’s something we're really excited about and wish very much that we can tell you more about it.

Operator, Operator

Your next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland, Analyst

Congrats on the good report. Congrats, John. Talking about what we have to fix for a second here, you mentioned in the letter something for media consumption. So, do we think about that as like a vibrating remote or is it something still with the handset? And then I think you also mentioned gaming. Is that an opportunity for something like tens of millions of units over the next 18 months or so, or is this just really starting with a small volume?

John Forsyth, President

This is John, let me take that. So, I think specifically what we're referring to there is the level of enrichment of the user experience that we can deliver through haptics beyond the simple button replacement. So, when we talk about gaming and media consumption, we're talking primarily about enhancing the smartphone experience. To give examples of that, we've seen customers very interested, for example, in technologies we've developed which provides haptic feedback during playing video games. Even if the game developed didn't necessarily incorporate those functions, the end user still gets a lot of tactile feedback through the device, which deepens the experience. We can provide the smarts to enable that kind of functionality and add that kind of richness to the user experience alongside the more traditional use of haptics in terms of providing the virtual button feedback and so on.

Christopher Rolland, Analyst

Okay, great. And then to the 22 nanometer codec, I know, Jason, you mentioned potentially more expensive silicon. I don't know if that was just the silicon or if that only included analog or if that's an expectation for digital, and perhaps you can talk about differences in ASPs and margins versus your 55 nanometer. I know sometimes these changes catch investors by surprise in the past. Are there any changes there in ASPs or margins? Thanks.

Jason Rhode, CEO

So, I would generally say there are always ebbs and flows from a margin perspective. I generally wouldn’t think about changes there being primary margin drivers one way or the other. They can be to a minor degree, but it shouldn't be a primary impact. As I say, if you took our smart codec today and didn't change anything else about it other than moved from 55 to 22, that would generally make it more expensive from an ASP basis certainly. Though, the motivation to move it to 22 is to add additional digital content as well. So, that should also be an ASP play in the long run as well.

Operator, Operator

Your next question comes from Charlie Anderson with Dougherty & Company. Your line is open.

Charlie Anderson, Analyst

Yes, thanks for taking my questions. My congrats on the strong results and to John on the promotion as well. Yes, so I wanted to start with Jason; we've only got a few months left in the year for you guys. And there's a lot of talk about content increases. I wonder if you have any big picture view on fiscal '21 in terms of how that shapes up in terms of growth or otherwise. And then I've got a follow-up?

Jason Rhode, CEO

Well, yes, I do actually. So, as you know, I mean we don't provide annual guidance. There are a lot of moving parts; of course, it’s harder, probably impossible for us to know how they would net out. We would love to be able to do that. But that said, as some color on the moving pieces is probably helpful for you. We said last fall we expected incremental new progress in hearables, wearables, tablets, and laptops. Thus far, silicon has been seen in untethered earbuds out there from multiple different customers. That's clearly a form factor that everybody is excited about; we're excited about it. We think it's a great platform to build on in the long run. The rest of those new applications, meaning wearables, tablets, laptops, those appear to be on track. We should be able to benefit from those during the year and going forward; a lot of that is completely new content from us. These are form factors that are getting a lot of attention as well. We continue to expect to deliver new content in handsets later this year, along with further opportunities over the next several years. That said, there are often puts and takes to the overall content story that we're not able to get into for obvious reasons. This year is no exception to that. We're very pleased overall with our position in handsets; I just don't want anybody to interpret that as meaning that every individual element of our business is up into the right. The largest driver of our revenue and revenue variability is handset volumes, which from other news sources we’re obviously doing very well currently. Of course, when new models are launched it’s one of those harder or impossible things for us to know how they will actually do, which makes it hard for us to call the full year. But we currently have a very robust outlook there. So, and then all of that, of course, is against the backdrop of the overall economy and other things that are out of our control. We take a conservative view of what will happen and plan accordingly. I think that's a good approach for investors as well. We do put a lot of thought, by the way, into our risk factors, and we've added one specifically related to things like the overall economy.

Charlie Anderson, Analyst

Excellent, thank you so much for all the color. And then sort of for my follow-up, you've identified the closed-loop Controller, I think going into calendar '20, and then there are other opportunities that you're after. I wonder is that the proper cadence as you move into these adjacencies as another one a year, or is that just this year or how it looks? Just kind of thinking about your plans long-term. Thanks.

Jason Rhode, CEO

I think that's just kind of how it fell out; we would certainly—the closed-loop controller is a platform that we would expect to be strategically important and things that we will be able to continue to build around in the long run. So, you may be speculating, but that's the kind of thing we would expect to get onto a continuous improvement curve of being able to adapt and modify them and improve them, similar to how we do with audio codec amplifiers. Not every year, but the cool thing about shipping in very high-volume handsets is that you've got so much unit volume that you can afford to revise the devices pretty frequently, adding new value for customers, and then kind of not always be on the same part for the same customer year-in and year-out, which has good dynamics from a pricing perspective.

Operator, Operator

[Operator Instructions] Your next question comes from Adam Gonzalez with Bank of America. Your line is open.

Adam Gonzalez, Analyst

Hi guys, thanks for taking my question and congrats to John on the promotion. In the opportunities that you alluded to beyond your core audio and voice domain, are these engagements broad-based or more narrowly focused across your top one or two customers? Let's say, and then if you were to talk about it in terms of years of visibility into potential design wins, how far out does your visibility extend at this point? Thanks.

Jason Rhode, CEO

So, yes, our current level of investment is definitely heavily focused at the top tier of our customer base. As far as visibility, the bulk of our business—this is one of the least well-understood things. When we do a custom piece of silicon for somebody, we're often working on things that are three years away from actually shipping for revenue, which is a big investment by customers in us. There is a lot of back and forth, and our customers are generally pretty good at not wasting our time but are meticulous about not wasting their own time. So, generally, the bigger moving pieces for us are much more in the design phase rather than the shipment phase, which means we've got quite a lot of visibility of a particular sort. And by that, I mean we know we're working on important things and sometimes we know what they go to; if it's a completely new form factor, sometimes we know exactly what it goes into, but we don't know what end feature the customer is going to enable with it, especially given the programmability of our devices. Of course, we never know the customer's marketing decisions that they can change their mind on very short timelines. So, yes, I would say we've got great visibility in a big picture sense; there are definitely some moving pieces that we often don't know until quite late in the game, but relative to most semiconductor companies, I would say it's definitely a strength for us.

Operator, Operator

Thank you. There are no further questions at this time; I will now turn the call back over to Chelsea Heffernan.

Chelsea Heffernan, Director of Investor Relations

Thank you, operator. There are no additional questions, so I will turn the call over to Jason.

Jason Rhode, CEO

Thank you, Chelsea. In summary, Q3 FY '20 results exceeded guidance as we experienced higher than anticipated volumes for component shipping in smartphones. During the quarter, development activities across all our major product categories progressed, and the company continued to execute on key strategic initiatives that we believe will fuel future growth. With a compelling pipeline of products that address audio, voice, and other signal processing applications, we believe Cirrus Logic is well-positioned for long-term success. 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 participating today. Goodbye.

Operator, Operator

This concludes today's conference call. You may now disconnect.