Cirrus Logic Q2 2025 Earnings Call Transcript

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Provided by Quartr
November 4, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Second Quarter Fiscal Year 2025 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 Porsytes, Cirrus Logic's Chief Executive Officer and Ulf Haberman, our Interim Chief Financial Officer. Today, at approximately 4 p. M. Eastern Time, we announced our financial results for the Q2 fiscal year 2025.

Speaker 1

The shareholder letter discussing our financial results, the earnings press release and the webcast of this Q and A session are all available at the company's Investor Relations website. This call will feature questions from analysts covering our company. 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.

Speaker 1

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

Speaker 2

Thank you, Chelsea, and welcome to everyone joining today's call. As you've seen in the press release, Cirrus Logic delivered record revenue and earnings per share for the September quarter. Revenue was $541,900,000 near to the top end of our guidance range due to strong demand for products shipping into smartphones. In a moment, I'm going to hand the call over to Ulf to discuss the financial results for the September quarter in greater detail, as well as our outlook for the December quarter. But before we get to that, I'd like to make a few remarks regarding our recent progress.

Speaker 2

As many of you are aware, our long term strategy for growing the company is based around 3 broad principles. 1st, maintaining leadership in our core flagship smartphone audio business 2nd, continuing our expansion in areas of high performance mixed signal functionality in smartphones and third, leveraging those audio and high performance mixed signal capabilities to penetrate and grow in new markets. In our flagship smartphone audio business, this past quarter, we were particularly excited to begin shipping our next generation custom boosted amplifier and our first 22 nanometer smart codec in recently launched smartphones. The new amplifier provides significant power and efficiency improvements, while the smart codec, in addition to being Cirrus Logic's first 22 nanometer product of any kind, delivers meaningful advances in audio and mixed signal processing capabilities. Together, these components showcase years of engineering dedication and close collaboration with our customer and they contribute meaningfully to the power efficiency and extraordinary audio quality of our customers' new products.

Speaker 2

We anticipate that both components will ship for multiple smartphone generations and in doing so provide us with an enduring and substantial revenue stream in the years ahead. Looking beyond audio, we're enthusiastic about the potential to grow content in smartphones with our high performance mixed signal solutions. Our progress in this area is evident in the continued success of our camera controller product line. Since the introduction of our first camera controller in calendar year 2020, our camera content has continued to increase in value over time. With the recent smartphone launch, we are benefiting from a more favorable overall mix of smartphones on the market that include our camera controllers.

Speaker 2

We see considerable potential to add further value in this area as we identify more opportunities to enhance system performance and help enable advanced camera features. Beyond camera controllers, we also believe that advanced power, sensing and battery related technologies represent excellent opportunities for us, and we continue to invest in a number of R and D programs that are focused on these areas. We anticipate that the investments that we are making in this space today will contribute to product diversification and expand our footprint in these product categories in the future. The 3rd element of our strategy is focused on expanding into new applications and markets outside of smartphones. In this area, we continue to be excited about the opportunities we see in our laptop business.

Speaker 2

While we are still in the early stages of revenue contribution from our recently introduced laptop components, we were pleased with our progress during the September quarter. That progress included securing our first high volume mainstream design win with our latest PC codec, which combines cutting edge hardware with advanced algorithms for superior audio playback. We're also proud to ship our 1st power product designed specifically for laptops in multiple Tier 1 customers' devices. Additionally, during the quarter, we saw the introduction of a new laptop from a top tier laptop OEM that exemplifies the breadth of our content opportunity in this market. In that it features 8 Cirrus Logic components, including a codec, multiple audio amplifiers and multiple power converter chips.

Speaker 2

We anticipate many more customer product introductions in the laptop space in the coming months and are excited about the opportunity this market represents. And with that, let me now turn the call over to Ulf to provide an overview of our financial results as well as the outlook.

Speaker 3

Thank you, John, and good afternoon, everyone. I will start with a summary of our financial results for our Q2 fiscal 2025 and then provide guidance for Q3 FY 2025. In Q2 FY 2025, we delivered record revenue for the September quarter of $541,900,000 near the high end of our guidance range. On a sequential basis, revenue was up 45% due to higher unit volumes associated with new smartphone launches. On a year over year basis, sales were up 13%, driven by higher smartphone unit volumes and increased revenue associated with next generation products.

Speaker 3

Also as we indicated in Q1 FY 'twenty five, in our shareholder letter, when comparing our September quarter to the equivalent quarter last year, we would note that in FY 'twenty five, our September quarter began and ended 1 week later. Therefore, it encompassed 1 week more of higher volume production associated with typical seasonal product ramps. Turning to gross profit and gross margin. Non GAAP gross profit in the quarter was $282,900,000 and non GAAP gross margin was 52.2%. On a sequential basis, the gross margin increase of 160 basis points was mostly driven by favorable product mix.

Speaker 3

The 90 basis point increase year over year was largely due to favorable product mix. This was offset in part by higher supply chain costs. Now I'll turn to operating expenses. Non GAAP operating expense for the Q2 was $126,800,000 On a sequential basis, OpEx was up $8,800,000 primarily due to higher variable compensation and product development costs. This was offset by a reduction in employee related expenses.

Speaker 3

On a year over year basis, operating expense was up $12,300,000 largely due to higher employee related expenses, increased payable compensation and higher product development costs. Non GAAP operating income for the quarter was $156,200,000 or 28.8 percent of revenue. Turning now to taxes. For the September quarter, our non GAAP tax rate was 23.8 percent in line with our previous guidance. And lastly on the P and L, non GAAP net income was $125,300,000 resulting in a record earnings per share for the September quarter of 2 point $2.5 as the higher revenue and profitability flowed through to the bottom line.

Speaker 3

Let me now turn to the balance sheet. Our balance sheet continues to be strong and we ended the September quarter with $706,600,000 in cash and investments. Our ending cash and investment balance was down $38,000,000 from the prior quarter, primarily due to cash spent on share repurchases, partially offset by cash generated from operations. We continue to have no debt outstanding and have $300,000,000 undrawn on our revolver. Our inventory balance at the end of the second quarter was $271,800,000 up from $232,600,000 in Q1 FY 2025.

Speaker 3

Days of inventory were down slightly sequentially and we ended the quarter with approximately 96 days of inventory. Looking ahead, in Q3 FY 'twenty five, you could expect a slight increase in inventory dollars from the prior quarter. We would also note as we move through FY 2025 and into FY2026, we expect inventory to increase as we continue to fulfill demand and manage our wafer purchase commitments per long term capacity agreement with GlobalFoundries. Turning to cash flow. Cash flow from operations was $8,200,000 in the September quarter and CapEx was roughly $2,700,000 resulting in non GAAP free cash flow margin of roughly 1%.

Speaker 3

For the trailing 12 month period, cash flow from operations was $579,600,000 and CapEx was roughly $30,400,000 This resulted in non GAAP free cash flow margin of roughly 29%. On the share buyback front, in Q2, we utilized $50,000,000 to repurchase approximately 356,000 shares of our common stock at an average price of approximately $140 At the end of Q2 FY 2025, the company had $224,100,000 remaining in its share repurchase authorization. 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. Now onto the guidance. For period 3 of FY 2025, we expect revenue in the range of 4.80 $1,000,000 to $540,000,000 I would like to take a moment to highlight a couple of factors influencing our revenue guidance.

Speaker 3

First, when comparing our December quarter outlook to the equivalent quarter last year, guidance reflects one last week of revenue as FY 2024 was a 53 week fiscal year. And second, as a result of the additional week last year, the timing of the end of our fiscal quarters in FY 2025 has shifted. Therefore, the September quarter included 1 more week of higher volume production associated with typical seasonal product ramps. Moving on to gross margin. GAAP gross margin is expected to range from 51% to 53%.

Speaker 3

Non GAAP operating expense is expected to range from $124,000,000 to $130,000,000 On a sequential and year over year basis, guidance reflects increases in product development costs, which are partially offset by lower variable compensation and a reduction in employer related expenses. We'll continue to control discretionary spending, while investing strategically in product development to drive long term growth. We expect our FY 2025 non GAAP tax rate to be approximately 22% to 24%, unchanged from our previous guidance. This range is slightly higher than our FY 2024 tax rate, which was impacted by a favorable catch up benefit related to updated IRS guidance on the R and D capitalization rules. In closing, we delivered outstanding results for the September quarter.

Speaker 3

We are pleased with the progress we have made this year, remain focused on executing our strategy that we believe will enable the company to grow both revenue and profitability during the long term. Before we begin the Q and A, I would 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 now turn the call to Chelsea to start the Q and A session.

Speaker 1

Thanks, Ulf. We will now start the Q and A portion of the earnings call. Please limit yourself to a single question and one follow-up. Operator, we are now ready to take questions.

Operator

The floor is now open for questions. Your first question comes from the line of Christopher Rolland of Susquehanna. Your line is open.

Speaker 4

Hey guys, thanks for the question. So I do think I understand the extra week in September and the effect there, but still this is for December a larger than typical seasonal decline. I guess maybe you can talk about the interplay there between content, your content expectations, what was actually delivered versus like build patterns, whether you had ship ahead there versus just unusual weakness in units? And then as we think about March, I know you don't want to guide a quarter ahead, but given that seasonality is all messed up for December, March is typically down high 20s. How should we think about that just given the messed up December?

Speaker 4

Thanks.

Speaker 2

Thanks, Chris. I think the various kind of moving pieces make sense on December, but there's a bit of unpacking to do. So let me just do that and then circle around to the rest of your question. So there are at least three factors when we look at the December year on year comps. So first, this September quarter that we're reporting had one more week of the higher volume production that is associated with the kind of peak ramp period for us.

Speaker 2

As a consequence of it coming later in the year because FY 2024 was a 53 week fiscal year for us. So that's one factor just meant there was a week of higher volume, higher value stuff in September than we would normally see. Then the second thing to think about when comparing year over year is that of course the December quarter in fiscal 2024 was a 14 week quarter. So that also influences the comps. And then a final point, which I think I talked to on the last call is that in the December quarter last year, we saw more Android production than we would normally see in that period.

Speaker 2

That was due to a large Android customer ramping their product earlier than they normally do. So there were various factors that contributed to record breaking December last year and then obviously to the comps that were faced this December. But I think when you look across the sequence of obviously, the quarter boundary is different as it relates to the ramp, but the numbers taken together kind of look fairly robust. So if you take the first three fiscal quarters of this year using the midpoint of our December guide, then that compares that's slightly up on the 1st 3 fiscal quarters of last year, for example. So, as you say, the seasonal picture is somewhat different, but more than anything, that's a function of these factors that I've outlined.

Speaker 2

So when it comes to the March seasonality and our expectations there, yes, to your point, as you know, I need to make the obligatory comment that we don't guide more than 1 quarter out. And the December quarters and the March quarters are the hardest to guide for us because they really depend on what the demand looks like as we go through the holiday period for the various key products that have been recently launched. So as a consequence of that, as you allude to, historically, there's been a fairly big spread of seasonality there. We've seen anything from down 11% to down 40%, I think, over the past several years with probably an average shaking out around 30%. But we really have no color to give on March at this point.

Speaker 2

So I'll have to leave it there for now and obviously update you with much more detail when we get around to reporting the December quarter.

Speaker 4

Understood, John. Maybe the next one for Alf. So on the wafer obligations, I think they're like mid-500s in 24. You get some relief next year, I think, high-300s. The inventory that you're building, that's I imagine on that 24 number just as it's higher.

Speaker 4

As we move into next year, would you expect any inventory build or are we all out of the clear there on that side? And then anything else, any other pain points or things to think about on the wafer obligations? Thanks.

Speaker 5

I mean, yes, so we have

Speaker 3

to fill those wafer obligations as you stated and you can see our minimum commitment schedules out there as well in the case. But yes, we expect to build inventory into early Q into early FY 'twenty six as well. But that's all inventory that we expect to sell long term, right? That's all long term selling products that we're building in that with Global.

Operator

Thank you. Your next question comes from the line of Tore Svanberg of Stifel. Your line is open.

Speaker 5

Yes. Thank you. So, Jonah, I appreciate you can't talk a lot about your largest customer, but it is a bit of an unusual time where they're kind of updating their operating systems and their product cycles kind of on the go, right? So I'm just wondering if that has created any unusual linearity for you, whether it's staging inventory or lead times, because it is a bit unusual. So I'm just wondering if that has created anything unusual for you as a supplier.

Speaker 5

I think it's a little hard

Speaker 2

to judge that, Tore. The biggest impact I think for us that shapes this September, December transition is really the fact that September comes our September quarter ended a little later. We think that's the major factor there. Obviously with new content coming online this year and as I referred to in the in my opening remarks, more favorable mix regarding camera controllers. There was a lot of build over the past few months.

Speaker 2

Obviously, it's a significant amount of material on content, which we ramped there. But I think we're still in the very early innings of those products. There's obviously still actually some very exciting features yet to be launched and we've yet to go into the holiday period. So I wouldn't want to call it more than that until we're on the other side of that period, Tarek.

Speaker 5

No, that's fair. And just as a follow-up and I'll use sort of what's happening in the laptop to try to understand what could potentially happen in the smartphone. I know it usually happens the other way around, but you did talk about selling in a new laptop now basically a codec amplifiers and power conversion ICs. And I'm a little bit intrigued about the power conversion ICs. Is this something that you expect to expand on in the smartphone market in 2025?

Speaker 2

That's a great question. So let me talk about that product in particular and then and maybe also just put it within context of all the product offerings that we have in the laptop space right now. We're shipping today audio codecs, amplifiers, haptics drivers and now in this quarter we began shipping power conversion chips as well. So those 4 different product categories, which we're really excited about. I think on a previous call, I highlighted when, one of our customers launched a product with 7 Cirrus Logic chips in it, which included haptics drivers, amplifiers and a codec.

Speaker 2

It did not include power chips. So now I'm talking about 8, which includes codec amplifiers and power chips, but no haptics. So hopefully one day we will be here talking to you about a laptop that contains all of these. But of course, we are very excited about the range of opportunities that having all these products represents. The power chip itself has its origins in some of the IP that we acquired as part of the the power chip itself has its origins in some of the IP that we acquired as part of the Lion Semiconductor transaction a few years ago.

Speaker 2

It's a switch cap DCDC converter with very, very high efficiency compared to income legacy products and architectures for DC DC conversion. What that really translates into is less power being lost through heat and less heat being generated within the laptop and needing to be dissipated. So very attractive both from the user perspective and the industrial design perspective. And that's really a big part of what got it on the Luna Lake reference design. And that's driving these some of these initial design ins that we've seen.

Speaker 2

It's not always necessarily a one to one attach rate. We've seen in that case that I talked about with the OEM that launched a product with 8 chips in it. There are 3 of our power conversion chips in there. And there that represents a significant quantity of revenue in ASP for us. As to whether or not that kind of chip finds its way into smartphones, we do sell power related products in smartphones today, both some one custom chip, as you know.

Speaker 2

It's not a classic power conversion chip like this one. And in the general market, We are by and large focused on I don't think we'll see quite this chip coming to smartphones. By and large in the smartphone space, we're focused on a couple of things, really high precision stuff either side of the battery. And then in the general market, we're typically focused on selling products that we have today, given that the R and D dollars that we are deploying in the power space, we feel a better deployed targeting the laptop market as we see that as being a larger overall opportunity for us.

Operator

Your next question comes from the line of Thomas O'Malley of Barclays. Your line is open.

Speaker 6

Hey, guys. Thanks for taking my question. My first one is just on seasonality into the last fiscal quarter as well. I know you guys want to stay away from guiding there. But just if I take kind of the better end of the historical seasonality, kind of down 11% in the March quarter and I look at where that puts you as a business, like you're still kind of growing mid single digits in fiscal year 2025.

Speaker 6

So I don't think you've updated really your expectations on the content side for this year. And I think that you had a couple of really nice upgrades there. So what would explain the difference, I guess, between the initial outlook of a strong content year and kind of that fiscal year even at the best type of seasonality in March not being up kind of high single digits, low double digits?

Speaker 2

Well, we really just guide based on what we see, Tom. I'm not going to guide further out, but we really just base that on what we see in terms of backlog from our customers and our conversations throughout the supply chain. So we really just have to see how we go through this holiday period. We certainly are delighted with the execution, the ramp and the quality of the products that we've brought to market on this cycle. And then of course, we have a more favorable mix in the camera space.

Speaker 2

But yes, we'll just have to see how that translates into results as we go forward and get on the other side of the December quarter.

Speaker 6

Helpful. And then on the PC side, you had talked about tens of 1,000,000 of dollars kind of exiting this year. Could you maybe talk about how that's been tracking so far? And then as you look kind of into next year, are you still in kind of the tens of 1,000,000 of dollars range? Or do you think that you have more confidence kind of sitting here today versus where you were 3 or 6 months ago on that side?

Speaker 6

Thank you.

Speaker 2

Thanks, Tom. Well, the phrase tens of 1,000,000,000 obviously encompasses a fairly broad range. My comment about this fiscal year was that we were tracking to we were targeting low tens of 1,000,000. We're tracking to that, I'm very pleased to say. And we do think we're in the very early stages of seeing our kind of PC focused products, this generation of products that we've developed across the different domains that I talked about.

Speaker 2

We're in the early stages of seeing them come to market now, but we are seeing them come to market. And I anticipate early in the coming calendar year, we'll see a really great range of product launches from customers incorporating more Cirrus content. So those will land in terms of revenue impact more in they'll have more greater impact on fiscal 'twenty six obviously. So we'll give more color on that in due course as we get closer to fiscal 'twenty six. But so far, it's certainly tracking with our expectations.

Speaker 2

And the momentum we have is really exciting. So we're anticipating a meaningful step up in fiscal 'twenty six from where we've been tracking in fiscal 'twenty five.

Operator

Your last question comes from the line of Ananda Baruah of Loop Capital. Your line is open.

Speaker 7

Yes. Thanks guys for taking the question. Yes, I guess just one for me. Is there any context or useful way any context you can provide or sort of useful way to think about as you think forward with on this business on the smartphone side. If the growth coming forward and this is big picture, this is not next year, but it will be driven both from, I guess, the content side or the unit side more disproportionately.

Speaker 7

I guess, really trying to think about where the bigger opportunity is for the company. Thanks. If there if one is bigger than the other. Thanks.

Speaker 2

Thank you, Ananda. Well, we run the company on the basis that we want to be able to grow and be positioned for growth if units are flat. That's our objective. Obviously, if there's a unit tailwind, so much the better. If there's a significant upgrade cycle because of features our customers are delivering, then that's great.

Speaker 2

But we want to be positioned well even if smartphone units remain flat. And although that won't mean necessarily content additions every year, we do on a second cycle obviously get a tailwind because multiple generations of phones are on sale at any given time and we get into the 2nd cycle of new content. But we also believe when we look forward that there are significant opportunities for both incremental additions to sockets that we have today, which add more value and for the capturing of new sockets that we haven't served before. And so when I talk about some of our R and D investments in those areas and obviously some of that is for example cameras, some of that is in the power space and there are others beyond that then that's the kind of thing I have in mind. So we do believe there are great opportunities out there where we can lead on technology, lead on architecture, deliver better solutions than our customers have had in the past and obviously bring our execution to bear on that as well.

Speaker 2

So I think the opportunity even in a flat units world remains very constructive for us over the long run.

Speaker 7

That's really, really useful context. I really appreciate it. Yes, that's it for me. That's great. Thanks so

Speaker 1

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

Speaker 2

Thank you, Chelsea. In summary, in Q2 fiscal 2025, Cirrus Logic delivered record revenue and earnings per share for the September quarter and continued our solid progress in each of the three key areas of our long term strategy. We remain very excited about the opportunities in front of us and we thank you for your continued interest in our progress. I'd also like to thank all of our employees for their incredible dedication and commitment. Before we close, I'd also like to note that we will be participating in Barclays 22nd Annual Global Technology Conference on December 12th in San Francisco.

Speaker 2

Please check our investor website for the details on that. Finally, I'd like to thank everybody for participating today. Goodbye.

Operator

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

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