Earnings Call Transcript - CRUS Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Fourth Quarter and Full Fiscal Year 2022 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 queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would like to turn the conference over to Ms. Chelsea Heffernan, Vice President of Investor Relations. Ms. Heffernan, you may begin.

Chelsea Heffernan, VP of Investor Relations

Thank you, and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's Chief Executive Officer; and Venk Nathamuni, Chief Financial Officer. Today, we announced our financial results for the fourth quarter and full fiscal year 2022 at approximately 4:00 p.m. Eastern. The shareholder letter discussing our financial results, the earnings press release, along with the webcast of this Q&A session, are all available on the company's Investor Relations website. Additionally, the results and guidance we will discuss on this call will include non-GAAP financial measures that may exclude certain items. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release and are all available on the company's Investor Relations website. 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 10-K form as well as other corporate filings registered with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectations. I will now turn the call over to John.

John Forsyth, CEO

Thank you, Chelsea. First, let me say welcome to Venk, who’s joining us for his first earnings call with Cirrus Logic. Many of you on the call today know Venk already and are aware of his considerable experience and background in the semiconductor industry, and we are certainly all very excited about what he brings to the team here at Cirrus. I'd also like to take this opportunity to thank Thomas Case for his dedication and contribution to Cirrus Logic's growth and progress over the past 21 years. As you've seen in the press release, Cirrus Logic delivered outstanding results with record revenue and earnings per share in fiscal Q4 and for the full fiscal year 2022. Before we discuss the details of those results, I'd like to take a moment to recap the three key pillars of the strategy driving the momentum and success that we are now seeing. These are: One, maintaining our leadership position in smartphone audio by continuing to deliver world-class products and expanding execution with the strongest customers in the market; two, broadening sales of audio components in key profitable applications beyond smartphones; and three, leveraging our world-class mixed-signal engineering expertise in order to build a growing footprint of products outside of audio in the area we call our high-performance mixed-signal product lines. We believe this area will yield significant opportunities, both within smartphones and beyond. We executed on this three-pronged strategy very successfully in fiscal year 2022, delivering both strong results and we believe laying the foundation for further future growth. In audio, we maintained our leadership position in smartphones and grew laptop revenue compared to the prior year. In high-performance mixed signal, we shipped our first-generation power conversion and control integrated circuit, increased the attach rate of our camera controllers, began shipping our latest generation haptic driver in a leading Android smartphone, and broadened our product portfolio with the addition of fast charging solutions. Looking ahead, we're developing intellectual property and underlying advanced technologies today that not only push the boundaries of performance, power, latency, and size, but are also important for the execution of our long-term roadmap in all of these product areas. With our growing investments around high-performance mixed signal in areas such as power and charging, we are optimistic about our ability to create greater shareholder value through product diversification and long-term growth. I would also like to touch briefly on the supply chain environment. We continue to experience significant constraints as demand continues to outstrip supply, and our supply chain team has done a tremendous job of navigating these challenges, including those associated with the recent COVID-19 shutdowns in China. Finally, I want to thank all of our employees and our partners for their significant contributions in achieving our record results. And with that, let me now turn the call to Venk to provide an overview of our financial results for fiscal Q4, 2022, as well as guidance for fiscal Q1 2023.

Venk Nathamuni, CFO

Thank you, John. First, let me say how excited I am to be part of Cirrus Logic. I really look forward to supporting and helping shape the company's strategic vision and our plan for long-term growth in both revenue and profitability. I believe we have a great opportunity to drive compelling returns and shareholder value. Now Q4 was a record fourth quarter with stronger-than-expected results that drove record revenue and EPS for fiscal '22. Fourth quarter revenue was $490 million, up 67% from a year ago. For the full year, revenue was a record $1.78 billion, a 30% increase from a year ago. These outstanding results were driven by high-performance mixed-signal content gains in smartphones, and to a lesser extent, sales of fast-charging integrated circuits in smartphones as well as audio products in laptops. Non-GAAP gross profit in the quarter was $259 million or 52.9% of revenue. Gross margin was roughly flat sequentially and but up 240 basis points year-over-year. The year-over-year increase in gross margin was driven by higher ASPs, which were partially offset by supply chain cost increases. Going forward, we expect gross margin to moderate towards our long-term model, and I'll cover this topic more in the guidance section. Non-GAAP operating expenses in the quarter were $123 million, up approximately $8 million sequentially. The sequential increase was primarily due to higher employee expense and to a lesser extent, an increase in product development costs. For the full fiscal year, non-GAAP operating expenses were $456 million or 26% of revenue. Non-GAAP operating income was $136 million in the fourth quarter or 28% of revenue, representing a record for the quarter. Full year operating income was $472 million or 27% of revenue. Non-GAAP net income in the fourth quarter was $118 million, or $2.01 per share. For fiscal year '22, non-GAAP net income was $408 million or $6.90 per share. Let me now turn to the balance sheet. Our balance sheet is strong, and we ended fiscal year '22 with $444 million in cash and cash equivalents. This was up roughly $173 million from the prior quarter due to strong cash flow generation. We have no debt outstanding. Inventory was $138 million, down $10 million sequentially; and days of inventory was 55 days in Q4, up three days sequentially. Turning to the cash flow. Cash flow from operations was $258 million in the quarter. And free cash flow for the quarter was $250 million and for the full year was $95 million as we used $277 million in cash for the Lion acquisition as well as $255 million for wafer purchase commitments. We are pleased with the results of our capital return activities during the year. We repurchased roughly $75 million of our common stock in fiscal Q4 and a total of $167.5 million during the full fiscal year. As of the end of fiscal year '22, we have $192.5 million remaining in our current share repurchase authorization. And now on to the guidance. For the first fiscal quarter of 2023, we expect revenue in the range of $350 million to $390 million. On a year-over-year basis, our expected revenue growth is primarily driven by anticipated increases in demand for certain components, shipping in smartphones and to a lesser extent higher ASPs compared to the prior year. As I alluded to earlier, we expect gross margins to normalize around a long-term model of 50% as we ship inventory built at higher cost compared to Q4 fiscal '22. As a result, in the June quarter, we expect gross margin to range from 49% to 51%. Non-GAAP R&D and SG&A is expected to be flat sequentially, in the range of $117 million to $123 million. We anticipate a tight labor market in fiscal 2023 with associated inflationary pressures on wages. On the tax front, due primarily to a tax rule effective this year that requires companies to capitalize and amortize R&D expenses rather than deduct them in the current year, we expect our fiscal '23 non-GAAP effective tax rate to increase to approximately 23% to 25%. However, we anticipate that under this rule, our effective tax rate will decrease and may return to a normalized range in about five years as additional years of R&D expenses are amortized for tax purposes. There appears to be strong legislative support for delaying or eliminating this rule, which we’re watching closely. I'd note that without the impact of this rule, our non-GAAP effective tax rate would be in our more typical mid-teens range. In closing, we had an outstanding fiscal Q4 and fiscal year 2022. Going forward, we will focus on the best opportunities to enable the company to continue to grow both revenue and profitability over the long term. Finally, I want to thank Thurman for his leadership and contributions to Cirrus over the past two decades and for building a world-class finance organization. And before we begin the Q&A, I'd like to note that while we understand there is intense interest related to our largest customer, in accordance with Cirrus Logic company policy, we will not discuss specifics about our business relationship. With that, let me turn the call to Chelsea to start the Q&A session.

Chelsea Heffernan, VP of Investor Relations

Thanks, Venk. We will now start the Q&A portion of the call. Operator, we are now ready to take questions.

Operator, Operator

Thank you, Ms. Chelsea. Our first question comes from Tore Svanberg of Stifel, Nicolaus & Company. Your line is open.

Tore Svanberg, Analyst

Yes. Thank you. Congratulations on the strong results. And Venk, congratulations to you and look forward to working with you. My first question is on seasonality. So we all know that this year the seasonality is a little bit off, especially in the first half of the year. I was just hoping you can maybe talk a little bit about some of the puts and takes for the seasonality for the second half. Obviously, you're not going to give us annual guidance, but just given the seasonality was so weird here in the first half of this year, how do you expect it to trend in the second half?

John Forsyth, CEO

Yeah. Thank you, Tore. This is John. Well, we've certainly seen a very strong March quarter. And then, as you can see, very strong guidance for the June quarter. We’re not going to guide further out at this point, and it's difficult for us to provide much more color on that. I think one of the big benefits of our business is that we ship multiple products into multiple generations of our customers' devices. But given that and given the fact that supply is still really running as hard as it can just to catch up with demand for current-generation devices, almost by definition, all visibility is very limited.

Tore Svanberg, Analyst

Very good. And as my follow-up; you mentioned a little bit in the shareholder letter, the SoundWire technology being a very important trend for your business. I assume it's still very early days in your penetration into the laptop market. But I was hoping perhaps you could address that in a bit more detail. What does SoundWire really do for the market opportunity? And then I assume as a follow-up, you'll also get perhaps some power products in the notebook as well.

John Forsyth, CEO

Thank you, Tore. The SoundWire opportunity we discussed is focused on laptop computers, particularly on the transition we expect towards SoundWire-connected boosted amplifiers and potentially some codec products with SoundWire capability. This represents an evolution in laptop architecture, which we have been targeting in our laptop market strategy. We anticipated this shift a couple of years ago, believing it would make laptops architecturally resemble smartphones more closely, providing us a strong opportunity to utilize much of the intellectual property we have successfully applied in smartphone audio, where we hold a leadership position, and apply it to the laptop market. It's important to note that it is still early in this phase. We have seen some revenue in the laptop sector from legacy products due to the impact of COVID. However, our long-term strategy revolves around new products, such as boosted amplifiers based on SoundWire, codecs, and more. As you mentioned, we are still in the early stages, and we expect these developments to become more significant as we approach fiscal year 2024.

Venk Nathamuni, CFO

Thank you, Tore. Look forward to working with you as well. And operator, we’ll take the next question.

Operator, Operator

Our next question comes from the line of Matt Ramsay of Cowen and Company. Please your question.

Joshua Buchalter, Analyst

Hey, this is Joshua Buchalter on behalf of Matt. Congratulations on the great results and guidance. And thank you for taking my question. I guess I just wanted to start with, I guess, the near-term results in June guidance. You took a pretty conservative tone last quarter and clearly, there have been a lot of moving parts. But things are coming in better than you initially expected despite a choppy smartphone backdrop. I guess I'm just wondering, if we look back a couple of months, what changed? What's allowing you the much higher confidence in that June quarter as we sit here in May, I guess, versus a couple of months ago? Thank you.

John Forsyth, CEO

Yeah. Thanks, Josh. Well, when we guided the March quarter and provided that commentary on the June quarter, we anticipated a stronger than normal March quarter with a demand pause coming in June. And that was based on everything that we could see and believed at the time. As you can see from both the results for the March quarter and the June guidance that we're giving now, demand has frankly continued to be stronger than we expected. So the step down from March to June on a sequential basis is still larger than we would typically see, based on normal seasonality. But really, the story here is a very strong customer demand and our continuing efforts to fulfill that on the back of a very successful product cycle.

Joshua Buchalter, Analyst

Thank you, and congratulations on your transitions. Venk, it's only been a few weeks, but can you share your observations in the new role? Also, what are your thoughts on the balance sheet and the best ways to deploy those funds? Thank you.

Venk Nathamuni, CFO

Yeah. Thank you, Josh, and look forward to working with you as well. So a great question. So in terms of what I've seen, and obviously, it's been a couple of weeks. But clearly, Cirrus has a tremendous track record of both technology and product innovation as well as operational excellence to basically meet and deliver on all the customer requirements. And that's demonstrated amply with the great success that the company has had, not only with their marquee customer, but across the board, and in terms of just expanding the market opportunity that the company has delivered over the last few years with diversification into high-performance mixed solutions and such. And also we have a very good finance team that I'm happy to be a part of. And as it relates to your question about what we see with regards to the use of cash and so forth, as you pointed out, we have a very strong balance sheet. And the company has had a pretty good track record of generating significant amounts of cash flow on a consistent basis. So as it relates to how we look at the opportunities ahead, we still see quite a bit of opportunities to invest in R&D. There's a significant pipeline of opportunities that the company was to pursue. And we intend to do that. We clearly will be very focused on operational excellence. And to the extent that we can have leverage on the SG&A side, we will deliver that. And as it relates to just use of cash, you've seen us be a very frequent buyer of our stock. And also, we have the flexibility to do opportunistic M&A. And as it relates to M&A, we want to be disciplined, we want to identify what the strategic fit is and ensure that we fill portfolio gaps on an as-needed basis. But we will be very focused on the strategy on the fit and ensure that we pay a decent valuation for it as well. So lots of things to do. But overall, the company is in a great position with outstanding opportunities that we still see ahead of us. And lots of optionality in terms of how we deploy the cash. Thank you.

Operator, Operator

You are next, Blayne Curtis of Barclays. Please ask your question.

Tom O'Malley, Analyst

Good afternoon. This is Tom O'Malley filling in for Blayne Curtis. How is everyone doing? I wanted to ask a question. I noticed some background noise, but focusing on the main point, I wanted to discuss the next-generation device you mentioned in the release, which is expected to enhance performance in both converter and processing capabilities. Could you elaborate on what this product will focus on? I believe you mentioned it for CSC. What kind of increase in average selling price can I expect from it, and where do you anticipate it going?

John Forsyth, CEO

Tom, we had a bit of trouble with the audio, but I'll give it a try and hopefully be close to what you were asking. It seems like you were inquiring about our commentary on the next-generation camera controller device scheduled for product launches in the second half of this year. This device represents an evolutionary upgrade from our current camera controller offerings. As you know, we experience different attach rates across various SKUs and generations in that area. Additionally, introducing a second variant of the camera closed-loop controller may add some complexity. However, it will provide a slight increase in blended average selling price on the camera side. The more significant aspect, as I've mentioned, is that I believe we can continue to grow the camera-related content year after year for the foreseeable future as we support our customers in delivering exceptional user experiences. Beyond that, I would prefer not to discuss our customers' specific products.

Tom O'Malley, Analyst

Thank you, and I appreciate your patience. I wanted to ask about the discussions regarding next-gen autofocus becoming more common among your largest customer and others. Can you explain what that means and whether you plan to approach this in a way that could lead to increased content or additional opportunities for you?

John Forsyth, CEO

In general, there are certain camera features where we really want to enable our customers to continue pushing the performance envelope. So we're concentrating very hard on that. Taking advantage of advanced geometries and process nodes for mixed signal allows us to incorporate more and faster processing into the camera controller chip. This means that, as you know, we're currently working on enhancing autofocus and driving optical image stabilization. More processing and faster processing lead to better performance for those features.

Venk Nathamuni, CFO

Thanks, Tom. Do you have a follow-up?

Tom O'Malley, Analyst

That's all. Thank you, guys.

Venk Nathamuni, CFO

Thank you, Tom. Thank you.

Operator, Operator

Our next question comes from the line of Christopher Rolland from Susquehanna. Your line is open.

Christopher Rolland, Analyst

Hey, guys. Thanks for the question. And welcome, Venk. I wanted to review your expectations versus your results, or at least the guidance for the June quarter. I know you guys said it was units in your release. But I guess I'm trying to understand what your expectations were and why such a difference for June? It seems like the seasonality in June is much more normal, and we would have expected this. Why did you think it was going to be different?

John Forsyth, CEO

Chris, I believe I've addressed that question. We didn't provide formal guidance, but we did share some insights based on our observations and interactions with customers and the supply chain. We anticipated that there would be a demand pause during the June quarter. As I mentioned, while the decline between March and June is greater than usual for that period, it remains true that we had a robust June, which reflects the strong underlying demand we are experiencing.

Christopher Rolland, Analyst

Okay. Thanks, John. And then secondly, we've been looking at some teardowns recently, and you guys have been making some progress in Android, which is great. I was wondering if maybe you could give us some expectations for Android perhaps for this year. Is this an inflection year in Android? Maybe talk about your outlook.

John Forsyth, CEO

Yeah, thanks. We’ve been making good progress in Android both in the boosted amplifier space which is obviously be a part of our strategy to maintain our smartphone audio leadership and in haptics. We’ve seen our latest generation haptics device come to market in an Android flagship very recently. We don't break it out. We don't break Android out and break it out quarter-by-quarter. But I can give you a little color that fiscal '22 was very strong, certainly relative to fiscal '21 and fiscal '20. So we have good momentum there. I would, though, also say it's been supply constrained. And I would envisage that will be the case to all of fiscal ’23. I don’t think that’s going to change during that timeframe.

Christopher Rolland, Analyst

Thanks, John.

John Forsyth, CEO

Yeah, thanks.

Chelsea Heffernan, VP of Investor Relations

Operator, we have time for one more question.

Operator, Operator

Our last question comes from the line of Tore Svanberg of Stifel. Please ask your follow-up.

Tore Svanberg, Analyst

Yes. I had a follow-up on your power products. You mentioned the 22-nanometer process, obviously, the 45 that allows you to do more programmability. I was just wondering, are you able to do programmability both in power and battery management? Or would it be one or the other?

John Forsyth, CEO

To elaborate on a few points, Tore, as we move down to smaller nodes, we are able to include more digital processing, which is suitable for some of our products more than others. Currently, our power products are generally based on 55-nanometer technology, and for fast charging, we utilize even smaller nodes. However, we anticipate that there will be an increasing amount of digital control logic integrated into power products over time. This will encompass areas such as battery management, battery health, and charging components. I believe this underscores the importance of our investment in advanced nodes for mixed signal technology, and the effort we are putting into migrating our power intellectual property to these nodes will yield benefits in the future.

Venk Nathamuni, CFO

Thanks, Tore. Do you have a follow-up?

Chelsea Heffernan, VP of Investor Relations

Thank you, operator. With that, we will end the Q&A session. And I will turn the call back to John for his final remarks.

John Forsyth, CEO

Thank you, Chelsea. In summary, in the March quarter, Cirrus Logic delivered record fourth quarter revenue and earnings per share, driven by strong execution across our three strategic pillars, those being: Maintaining our leadership position in audio; broadening sales of audio components in key profitable applications beyond smartphones; and third, applying our mixed signal expertise to expand into new adjacent markets. We're excited about the opportunities we see ahead, and we thank you for your continued interest in Cirrus Logic. Before we close, I'd also like to note that we'll be participating in the Cowen conference on June 1 in New York, and the Stifel conference on June 7 in Boston. 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 participating today. Goodbye.

Operator, Operator

This concludes today's conference call. Thank you again for participating. You may now disconnect.

Chelsea Heffernan, VP of Investor Relations

Goodbye.