Cirrus Logic Q2 2024 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

Key Takeaways

  • Revenue of $481.1 million in Q2 FY2024 was near the top end of guidance, up 52% sequentially but down 11% year-over-year.
  • Non-GAAP gross margin came in at 51.3%, above guidance, driven by lower supply-chain and freight costs and reduced inventory reserves.
  • Smartphone audio strategy advanced as first silicon for the next-generation custom boosted amplifier arrived and the 22 nm smart codec is sampling, with market introduction planned next year.
  • Expansion into laptops continues with initial shipments in a high-end model featuring seven Cirrus Logic chips and ongoing design engagements with the top five OEMs.
  • Inventory peaked in Q2 at $328.9 million (128 days) to support seasonal ramps and wafer commitments, and is expected to decline in Q3 alongside controlled operating expenses.
AI Generated. May Contain Errors.
Earnings Conference Call
Cirrus Logic Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Second Quarter Fiscal Year 20 24 Financial Results Q and 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.

Operator

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Ms. Chelsea Heffernan, Vice President of Investor Relations. Ms. Heffernan, you may begin.

Speaker 1

Thank you and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's President and Chief Executive Officer and Venk Natsamuni, Chief Financial Officer. Today, at approximately 4 pm Eastern Time, we announced our financial results for the Q2 of fiscal year 2024. The shareholder letter discussing our financial results, the company's earnings press release, The webcast of this Q and A session are all available at the company's Investor Relations website. This call will feature questions from the analysts covering our company.

Speaker 1

Additionally, the results and guidance we will discuss on this call will include non GAAP financial measures that 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 development 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 ks 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.

Speaker 1

Now I'd like to turn the call over to John.

Speaker 2

Thank you, Chelsea, and thank you everyone for joining our call today. As you've seen in the press release that Chelsea referred to, in the Q2 of fiscal 2024 Cirrus Logic delivered revenue of $481,100,000 near the top end of our guidance for the quarter. In a moment, I'll hand the call over to Venk to discuss those results in greater detail. Before we get on to that, I'd like to provide some color on the progress that we made during the last quarter regarding the strategy that I have outlined on prior calls. Our first strategic priority is leadership in smartphone audio.

Speaker 2

And this quarter, we received the first silicon of our next generation custom boosted amplifier sampled it to our customer. Like our customer, we're excited about the performance, the efficiency and the system cost improvements that it will deliver. Alongside that product, we remain on track with our first 22 nanometer smart codec, which represents a significant step forward for audio, sensing and other key signal processing applications. Both of these products, the amplifier and the codec are on schedule to be introduced next year. In the general market side of our smartphone audio business, this quarter we had multiple customers introduce new flagship devices featuring our audio components.

Speaker 2

And we anticipate more devices using our products to be introduced in the first half of the coming calendar year. Turning now to the 2nd pillar of our strategy. Our goal is to continue to broaden our high performance mixed signal content in smartphones. Progress in Q2 on this front included ramping shipments of our latest camera controller ahead of a customer's product launch. Once again, in that product launch, we saw the camera stand out as a key differentiating feature, and we are proud that our products help enable our customer Deliver outstanding innovations in this area.

Speaker 2

We continue to maintain an exceptionally close engineering relationship with our customer in the camera space and anticipate partnering on further exciting products in the future. Beyond the camera, we've also been investing in new intellectual property that aims to enhance overall battery monitoring, health and performance, expanding the portfolio of technologies that began with the power conversion and control device that we introduced in fiscal 2022. We continue to be excited about the long term potential these areas represent for further growth and diversification of our revenue. The third element of our strategy is our focus on expanding into new applications and markets beyond smartphones. I've talked principally about the laptop space here given that it is the market where we see our efforts coming to fruition soonest.

Speaker 2

While we are still in the early innings of our strategic plan for this market, today we are shipping content in each And we are actively engaged with those same OEMs on design win opportunities for next generation laptop models. There are several favorable trends driving the adoption of our products in this space. First, the post pandemic desire for high quality audio, which had historically not been a focus area for most laptop OEMs. 2nd, the desire for thinner and lighter devices. That desire creates a need for better audio amplification for haptic rather than mechanical trackpads And for fanless designs where the thermal constraints bring demand for ever greater efficiency and power conversion.

Speaker 2

Finally, there is the architectural evolution towards Soundwire that we've spoken about previously, which creates an opportunity for OEMs to rethink their audio architectures and their partners. Today, we have excellent product sampling to customers. We have participation in the Soundwire And we are seeing great customer interest. While it will take some time for that momentum flow through to meaningful revenue, we continue to be excited about these opportunities. As an example of what can be possible at the higher end of this market, During the quarter, we began initial shipments for a high end laptop model that features 7 pieces of Cirrus Logic silicon, including several amplifiers, multiple haptic drivers and a codec resulting in multiple dollars of content.

Speaker 2

We continue to believe this is a market where Cirrus Logic has an opportunity to increase both content per device and market share over time. Beyond the laptop market, we're also investing in new products for our general market business, which services a large number of customers across the These components offer sustained differentiation with improved performance, Lower power consumption and new feature enhancements, and we believe they can be important contributors to our profitability in the years to come. In summary, we believe the company is well positioned for the future with new products in the pipeline for the coming year, momentum building in our market diversification efforts and significant opportunities to expand our high performance mixed signal content. And with that, let me now turn the call over to Venk to provide an overview of our financial results for our fiscal Q2 2024 as well as guidance for the Q3.

Speaker 3

Thank you, John. Good afternoon, everyone. I'll start with our fiscal second quarter results. Fiscal second quarter revenue was $481,100,000 which was near the top end of our guidance range due to higher than expected demand for products shipping into smartphones. Revenue was up 52% quarter over quarter, driven primarily by higher volumes associated with new smartphone launches.

Speaker 3

On a year over year basis, revenue decreased 11%, which reflects a reduction in components shipping into smartphones as well as continued weakness in sales of general market products. Turning to gross margin. Non GAAP Gross profit in the quarter was $247,000,000 and non GAAP gross margin was 51.3%, which was above the high end of the guidance range we have provided. On a sequential basis, gross margin increased 90 basis points, reflecting lower supply chain costs largely due to a reduction in freight costs. On a year over year basis, Gross margin increased by 110 basis points due to lower supply chain costs and inventory reserves, partially offset by a less favorable product mix.

Speaker 3

During the quarter, we completed the disposition of wafers associated with a new high performance mixed signal product that was previously expected to shift this year. We work in close collaboration with our key customer and supply chain partner in resolving this issue. And as anticipated, the disposition did not have a material financial impact. Turning to operating expenses. Non GAAP OpEx in the quarter was $114,400,000 Roughly flat sequentially and close to the low end of the guidance range, mostly due to product development timing as well as lower discretionary spending.

Speaker 3

We will continue to control discretionary expenses, especially given the current environment. Non GAAP Operating income was $132,500,000 in the 2nd quarter or 27.5 percent of revenue. And lastly on the P and L, non GAAP net income in the 2nd quarter was $101,600,000 or $1.80 per share as the higher than expected revenue and gross margin as well as the lower than expected operating expense flowed through to the bottom line. Let me now turn to the balance sheet. Our balance sheet continues to remain strong And we ended the Q2 of fiscal 2024 with approximately $352,500,000 in cash and cash equivalents.

Speaker 3

Our ending cash balance was down $73,600,000 from the prior quarter as we built inventory to support seasonal product launches and used cash to repurchase stock during the quarter. We continue to have no debt outstanding. And additionally, as noted in prior quarters, we have $300,000,000 undrawn on our revolver credit facility. I'd like to reiterate that our balance sheet remains strong with a solid cash position and no debt. Turning now to inventory.

Speaker 3

As we indicated in prior quarters, we've been building inventory to support seasonal product launches as well as fulfill our wafer purchase commitments per our long term capacity agreement with GlobalFoundries. As a result, inventory was $328,900,000 up from $301,000,000 in Q1 'twenty four. However, days of inventory declined 47 days sequentially, and we ended the quarter with approximately 128 days of inventory, down from 175 days in the prior quarter. Looking ahead, in Q3 fiscal 'twenty four, We expect both inventory dollars and days of inventory to decline from the September quarter as we draw down the inventory to support the ongoing seasonal Product ramps. While we expect inventory levels remain elevated through this fiscal year as we balance anticipated product demand and wafer purchase commitments, We expect Q2 fiscal 2024 to have been the high point of inventory for the current fiscal year.

Speaker 3

We'll continue to actively manage our inventory position to meet customer demand while fulfilling our purchase obligations. Turning now to cash flow. Cash used in operations was $22,700,000 in the September quarter and CapEx was roughly $8,500,000 resulting in free cash flow for the quarter of minus 6%. For the 12 month period ending in the September quarter, free cash flow margin was roughly 7%. On the share buyback front, in Q2, we utilized $40,600,000 to repurchase Approximately 510,000 shares of our common stock at an average price of $79.45 As of the end of Q2 fiscal 2024, we had $422,000,000 remaining in our share repurchase authorization.

Speaker 3

Subsequent to Q2 fiscal 'twenty four, we utilized $24,400,000 to repurchase roughly 350,000 shares at an average price of $69.40 under a Rule 10b5-1 share repurchase plan. We expect to continue to return capital in the form of stock repurchases, which we believe will provide a long term benefit to shareholders going forward. And now on to the guidance. For Q3 of fiscal 'twenty four, we expect revenue in the range of $510,000,000 to $570,000,000 and we expect gross margin to range from 49% to 51%. Non GAAP operating expense is expected to be up sequentially in the range of $120,000,000 to $126,000,000 primarily due to an additional week of salaries as well as higher variable compensation.

Speaker 3

As a reminder, fiscal year 2024 is a 53 week fiscal year and our fiscal Q3 will span 14 weeks instead of the typical 13 weeks. Overall, from an operating expense perspective, we'll continue to control discretionary spending, but invest strategically in product development to drive our long term growth. On the tax front, as we previously discussed, our fiscal 2024 non GAAP effective tax rate will continue to be unfavorably impacted by capitalized R and D expense and as expected our foreign tax credits will be lower this year. Our fiscal 2024 non GAAP tax rate is expected to be approximately 24% to 26%, consistent with our prior quarter's guidance. We continue to anticipate that the impact of capitalized R and D will become less unfavorable over time as additional years of R and D expenses are amortized for tax purposes.

Speaker 3

In closing, we had a strong Q2 fiscal 'twenty four as we executed well to deliver these results. Going forward, we will continue to focus on the best opportunities to enable the company to grow both revenue and profitability over the long term. And finally, while we understand there is intense interest related to our largest customer. In accordance with Sidus Logic Company policy, we'll not discuss specifics about our business relationship. With that, let me now turn the call to Chelsea to start the Q and A session.

Speaker 1

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

Operator

Your first question comes from the line of Ramsey Mathieu. Ramsey, your line is now open.

Speaker 4

Hey guys, thank you for taking my question. John, there's a for the first time in a long more time, from an Architecture and share perspective, there's a lot going on in the notebook market with the emergence of what Apple's done with The M2 and now M3 and obviously what Microsoft is going to do with Copilot and sort of shaking up the ecosystem a bit and you guys have been Sort of hinting at opportunities in that space. So what I'm interested in is to sort of compare and contrast that to what you've seen. The Windows market in laptops Versus the Android market and smartphones for your company. You obviously have your largest customer and a really, really strong relationship there.

Speaker 4

But Do you have like legit opportunities in audio and other areas in sort of the Windows part of The notebook market, is it dependent on ARM folks gaining share or do you feel like your opportunities with Intel platforms are equally strong? Thanks.

Speaker 2

Thank you, Matt. I agree with your observations. I think there are a number of dynamics that Make this market, the laptop market, really interesting again and specifically interesting for us in a way that It hasn't been in quite a long time. And there are multiple drivers for us that I think will help us gain customer adoption. To answer your question specifically, we have great relationships with customers across the Windows side of the laptop market.

Speaker 2

And our relationship with Intel and our presence in the Intel reference design that I referred to earlier It's really helping to drive customer engagement around the new products that we have. So we feel we're in Very good position with regards to our engagement with the key market leaders in Windows laptops. Today, we're shipping to, as I mentioned, the top 5 OEMs overall in the laptop market And we're engaged with each one of those OEMs around future designs. So we're very excited about that. And those conversations tend to be Right now, more focused on audio, but also including haptics and to some extent power products, Which are coming a little behind the audio and haptic products for us.

Speaker 2

But lots of great opportunity there and it's in no way limited to ARM. In fact, I think ARM It is potentially a tailwind for us given the experience we have integrating into ARM based systems in the smartphone space and the degree to which Notebooks start architecturally looking more and more like smartphones, especially with the advent of ARM based SoCs, But that's not a necessity. I would just say it creates additional opportunity over time.

Speaker 4

Thank you for that perspective, John. As my follow-up question, I wanted to ask I think it was good to hear your comments on sort of the resolution of the content and the product that didn't ship this year as you guys I wanted to ask a bit about the technology and the IP that you developed for some of these haptic opportunities And its applicability into the Android market. I mean, when you guys made the big push and did the Wolfson acquisition and tried to push into audio And Android, it was fits and starts and you had to kind of break the bundle with Qualcomm and MediaTek in those markets and sometimes it was Successful, sometimes not. But if you look at the haptics arena, you have technology, you have IP. And I wonder if the environment for the Android smartphone market around haptics, if there's an opportunity there and are the SoC providers that they have

Speaker 2

Thank you, Matt. In haptics, we are shipping haptics today into flagship Android phones. The story of haptic adoption In Android has been somewhat different from the iOS world in that not every OEM values it to the same extent. And to begin with the platform support was somewhat limited. We've seen in key flagship designs an appreciation for high quality haptics and that's Tended to win our sockets.

Speaker 2

But I think there's probably a bit of a long term headwind to the SAM for us there given that It comes at a higher cost and OEMs are perhaps comfortable Putting high quality haptics into flagship devices, but less so as they go down the tiers. I would say that the opportunity for us to continue serving flagship phones there with haptics continues And we'll certainly aim to do that.

Operator

Question comes from the line of Christopher Rolland. Christopher, your line is now open.

Speaker 5

Guys, thanks for the question. I guess, first of all, can you talk about your inventory balance once levels are done with this customer ramp? Is that where you're going to want them to be? And does the wafer supply commitments come into play? Or is that behind us at this point as

Speaker 3

Yes. Chris, thanks for the question. Yes, as I had indicated in my prepared remarks, the inventory that we have been building the last Couple of quarters was just to come to balance with the both the supply that we had to fulfill in terms of our commitments to our partner, but In addition, also the ramp of the new products that we alluded to. Now as you may recall, prior to The last two, three quarters, we were in a pretty constrained position from the standpoint of inventory And leaving a pretty much hand to mouth existence, so we wanted to build inventory in anticipation of these product lamps. And as I mentioned on the call earlier, We are expecting that the current fiscal quarter, which is Q3, will see a meaningful reduction in inventory from what it was Last quarter, and we expect Q2 to have been the high point.

Speaker 3

Now obviously, looking ahead, we still have some supply Requirements that we have to meet in terms of the purchase commitments to our partner, but we also see reasonable demand with the next Set of products and such. So it will be something that we will carefully monitor. As you've seen, we have come down the inventory path Pretty substantially in the last few quarters and we expect that to be substantially better going forward. But we'll just guide for it 1 quarter at a time. As it relates to this current quarter, we do expect inventory to be down from the prior quarter.

Speaker 3

And just to give you some perspective, last fiscal year, we were at about 4.0 turns in inventory, and that's our ultimate goal in terms of where we want to be from an inventory turns perspective.

Speaker 5

Excellent. Thank you, Venk. And maybe following up, just Talking about the Android opportunity over the next year, where you think you could capture some kind of needle moving revenue. It sounded like in the letter audio you have some I would assume that there are amps coming in the first half, but maybe you can talk to that. Do you think anyone would ever copy your lead customers' telephoto camera architecture for How are haptics ramping?

Speaker 5

I think you said you had some battery products, Efficiency products that you're trying to ramp as well, where are all the opportunities, particularly needle moving opportunities for Android?

Speaker 2

So specifically around Android, I'd say the market for us really splits into Two buckets. There's the China based OEMs and then there's Korean and North American based OEMs. And If you look at the China based OEMs, we still have a good business there. We very much value our business with Xiaomi, Vivo and Meizu. So we think that that environment long term has some headwinds for us.

Speaker 2

It's become a more difficult environment to do business. So it's not a major area of investment. If we then look at the other bucket, the other side of the house and Android, We've got great relationships with those OEMs. We continue to invest in those and to support future designs. I think our business with Samsung was up was bigger this year or has been bigger so far than last year.

Speaker 2

We feel very good about that and we're excited about supporting them further in the future. But the Android opportunity as a whole Is something that I think for us is not as large when we look further out As the potential of the laptop opportunity. So we can see as we look a few years out, we can see a scenario where the laptop Opportunity in our laptop business exceeds that of our Android business. And that's one where we have, I think much more greenfield space for expanding content and gaining market share right now. So that's the greater area of our focus When it comes to customer engagement and new product development.

Operator

Your next questions come from the line of Tore Svanberg. Tore, your line is now open.

Speaker 6

Yes. Thank you and congrats on the results, especially getting through this wafer purchase commitment in light of the spread product. That was great execution on your side. I had a question about the 22 nanometer products, John. You mentioned the word introducing them next year.

Speaker 6

So Does that mean that they will be sampling in calendar 24 and then we'll see potential revenues the year after? They

Speaker 2

are sampling today. Thank you for opening the door to that clarification. Sorry, the sampling today, the 22 nanometer smart codec in particular is the product that we're talking about. That's in our customers' hands. It's performing beautifully.

Speaker 2

It's a marvelous product and we're very happy with it, which means that we are working towards a market introduction in the back half of next calendar year. Very good.

Speaker 6

And as far as the timing and opportunity in laptop, I understand you're in the top 5 today, but as far as this sort of bigger content ramp, is that something that could happen already next year or is that more At calendar 25 or 26, Doris.

Speaker 2

Yes, that's a great question. Obviously, I've referred to the fact that we have a significant number Designs in development now. And we need that, but it's also important to have the right Being the right products have the right designs in development and enough of them to start moving the needle on revenue given where our overall revenue is today. So I guess I'll try to frame that for you in broad terms, so you can get a sense of what we anticipate could happen here. This year, As I mentioned, we've got a number of designs coming to market within the remainder of fiscal 'twenty four, including the post It's a child device that I referred to in my prepared remarks, which we're very proud about.

Speaker 2

But by definition, anything shipping in The second half of the fiscal year and that really means in practice in the laptop space most likely in the early part of next calendar year isn't going to contribute much during the current fiscal year. So think of the contribution of laptops in our fiscal 2024 as being pretty minimal. However, those there are designs coming to market now, which will start to contribute to revenue as we move into So we anticipate seeing a moderate step up in fiscal 2025 as more of those current design wins start going into production, putting us Likely in the range of the low tens of 1,000,000 revenue in fiscal 2025. But a lot of what's happening today around the reference platforms that I mentioned in the prepared remarks will lead to customer product that's Launching early calendar 2025. So we would anticipate that, that would likely lead to steeper growth And more meaningful revenue than in fiscal 2026 beyond.

Speaker 2

And as I mentioned Previously, I know that we don't break it out as such, but to give you a sense of how we think about the opportunity, if Android stayed flat, Then somewhere beyond that, we are we see the potential for our laptop revenues to overtake the Android business.

Operator

Your next question comes from the line of Blayne Curtis. Blayne, your line is now open.

Speaker 7

Hey, thanks for taking my questions. I I wanted to ask you, you've been mentioning several quarters in a row of diversification efforts in HBMS. I don't want to read too much into language, I guess the language is a little different. You said there's some customer interest in power and battery. Can you just talk about those diversification efforts and maybe any kind of rough timing as to when we should think about maybe that impacting the model.

Speaker 2

Yes, we certainly have customer interests, Blayne, principally that's around the power space. So really stuff that sits around the battery is an area that we believe we have Significantly differentiated technology. We have that IP in silicon for the most part at this point. So we've been able to demonstrate IP to customers there and we're excited about that. Translating that into specific program design awards and design wins and so on, I'm going to limit what I say on this call, but that would be a little further out.

Speaker 2

That's obviously beyond the audio products that we Coming next year, it's likely still some time before we see that come to fruition, but we believe they are meaningful opportunities. So We're certainly investing in securing those.

Speaker 7

Thanks. And then maybe a question for Venk. I wanted to ask on Seasonality for March, obviously the 14 weeks impacts OpEx. I don't know with such high cost tumor concentration whether that matters for revenue, Any thoughts on March seasonality?

Speaker 3

Yes. I mean, it's too early to talk about March, but You're right. I mean in terms of just the current December quarter, we do have that extra week of both revenue and expenses and that's kind of factored into the guidance. Now what happens in March obviously is a big function of what happens to our the top customers' main products. So I think we'll just reserve judgment on it.

Speaker 3

But a typical The sequence between the December quarter March quarter is that there's a seasonal decline. We'll quantify it at the right time, but I don't see anything that's different this time around in terms of the seasonality. Just the magnitude of it is what we'll have to determine going forward.

Speaker 1

And this will be our last question.

Operator

Our last question comes from the line of Ananda Baruah. Ananda, your line is now open.

Speaker 8

Hey, thanks guys. And I appreciate the questions. I guess going back to the PC, John, would you if there sort of it's thought that there perhaps could be a little bit of a PC adoption dynamic in 2024, if that were to happen broadly, would you anticipate Seeing an impact to your PC business that we may notice as well. And then I have a quick follow-up also.

Speaker 2

Sorry, are you referring to headwinds in the PC market?

Speaker 8

Tailwinds Taylor, would you be a bit of a PC cycle?

Speaker 2

Yes. I guess, yes, although We're still building design momentum. So we would certainly expect Benefit from that and we think that when you do an AB comparison between laptops that have Cirrus Logic audio And haptics in them versus competitive products that do not, the difference is really striking. It's really a night and day difference. We're very, very proud of what we're doing there and we think it's really meaningful for the PC experience.

Speaker 2

So I would certainly hope to benefit from that next year even if we're still building our design momentum And our pipeline today.

Speaker 8

And then on the PC opportunities that you spoke about a few moments ago, if Like HP is talking about in the next handful of years, 40% essentially Their PCs and laptops shipping with what they're calling AI enabled processing. Dell, it's probably in the similar ballpark, so it looks like that. Do you would that is that captured So that kind of AI adoption AI capability in PCs and laptops, is that already captured in your thought process or Would that provide kind of incremental content opportunity with that kind of AI enablement?

Speaker 2

I'm not sure how that intersects quite with our current laptop focused Product portfolio, it may be that it does. We know of course that typical AI use cases burn a lot of power. So Anything we can do to increase power efficiency across the system is obviously going to be a benefit. But what I would say more broadly is I think anything that makes laptops more interesting And more of a vector for innovation and more of a focal point for improving the user experience is likely to benefit us in general.

Speaker 1

And with that, we will end the Q and A session. I'll now turn the call back over to John for his final remarks.

Speaker 2

Thank you, Chelsea. So in summary, Cirrus Logic delivered revenue towards the top end of our guidance for the Q2 and made Solid progress across each of the three key areas of our strategy. We're excited about the opportunities in front of us And we thank you for your continued interest in Cirrus Logic. In addition, I'd also like to thank the entire Cirrus Logic team Whose commitment to disciplined execution and to bringing innovation to bear on the challenges that our customers

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