Cirrus Logic, Inc. (NASDAQ:CRUS) Q3 2020 Earnings Conference Call January 29, 2020 5:00 PM ET

Company Participants

Thurman Case - CFO
Jason Rhode - CEO
John Forsyth - President
Chelsea Heffernan - Director IR

Conference Call Participants

Tore Svanberg - Stifel
Matt Ramsay - Cowen
Tom O'Malley - Barclays
Christopher Rolland - Susquehanna International
Charlie Anderson - Dougherty & Company
Adam Gonzalez - Bank of America Merrill Lynch
Ari Shusterman - Needham

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

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 investor.relations@Cirrus.com.

Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information. The company 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

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 begin sampling new devices, several new devices and continue 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 or expect to 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 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 and 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.

Question-and-Answer Session

Operator

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

Tore Svanberg

Yes, thank you and congratulations on the strong results, and the 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 in these timelines or the types of products that will be using that next generation node?

Jason Rhode

Yes, sure happy to. Yes, it's, 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 very different dynamic them then a fully digital piece of silicon in that analog component, we generally doesn'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 be a real 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 and the amount of processing power that we can bring to bear in 22 nanometer is really remarkable. So, it's a great result that we've got our first test chip back a while ago, this fall, really remarkable performance out of the box, of course there's things to work through and such, but that's the bulk of our IP down to 22 nanometers, so that we'll be able to do things like really even more 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 about 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 that we've got going on this year, we've got further new content that we're excited about for the following year and most likely the 22 nanometer stuff would be beyond that.

Tore Svanberg

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

Jason Rhode

Yes, I mean we've -- the only thing we've really talked about is just kind of they haptic example of where we've taken our existing technology and broaden that out beyond audio. The closed-loop controller we don't, we definitely don't have anything further we want to say about that, other than that that 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 in that would be in the year beyond. So, I think that's about as good a lineup as I can ever remember is having and continued get and as kind of the 22 nanometer. The answer to the 22 nanometer question implied there's kind of other good things in audio and voice as well long-term.

Operator

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

Matt Ramsay

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 -- and it was in the discussion around haptics and amps is a portion to I think the top four Android OEMs and I know you guys had mentioned significant traction with 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 or 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

Well, certainly the most traction we've had in China is with the audio amps followed by the haptic device -- devices. There is -- 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 they are home runs and we've been shipping to the bulk of the top 10. So, there is always some movement, both with enough within the ranks of who composes the top 10 for you guys move up if you guys moved down a little bit noisy but we're doing quite well into the bulk of them. It's definitely not the same kind of dynamic as we would have with our larger customers, for example, where there is kind of a much more logical long-term kind of plan that we can march to. 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 and let our teams adding new functions via software support and tools and of course tuning and so forth is a critical element of a number of those devices both for audio, acoustic kind of tuning, as well as have to kind of what's the feeling of the device is going to be. So, that's all been well received in China, there is a wide array of customers there. They, well, kind of got their own drummer that their marching to, and then of course the biggest guy in China's got its own complexity to it. Obviously, this past year.

Matt Ramsay

Got it, got it. Thanks for that. I guess as my follow-up. I wanted to, to ask Thurman about OpEx. There is a the chart that you guys always put in the shareholder letter around head count and OpEx and it looks like headcounts down, I don't know 100, 150, 160 people over the last seven, eight quarters, there is 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 the guys have been talking about quite a bit of investment for new products going forward. That'd be helpful. Thank you.

Thurman Case

Yes, with a real we've reallocated those resources. But that is as Jason's 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 mean should remain relatively flat for us. Our infrastructure is good and we don't see a lot of investment on there. So, in terms of how does it look on a year-over-year basis. When you're looking forward to next year. Just in general, we don't expect it to grow significantly because it will still be catching up from the effects of what has happened over the partial pieces of this year that will be reductions that will show up for the entire year next year. So, with that happening, you won't see us just because we're hiring or things like that to increase revenue increased expenses on a quarter-over-quarter basis, significant.

Jason Rhode

I would add to that, we've talked about the MEMS thing a little bit last on the last call. And at this point that 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 disappointed to not follow-up on the carry-on following up on the microphone stuff that moved on to one of these new, these kind of new things that we're talking to response to, sorry, towards these question and this is really tricky fancy mixed signal stuff they're excited to be working on it. It's got a very good prognosis of success. And I think that was probably you never want to stop activities like that, but the redeployment of a very large percentage of those folks is particular highlight in my opinion.

Operator

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

Tom O'Malley

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 opportunity elsewhere for products like the closed-loop controller in particularly where in the Android ecosystem you may target?

Jason Rhode

I mean 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 there are many things that we sell that haptic for example or audio amplifiers that are in fact closed-loop controllers that obviously we do see opportunity. Again, that particular level to take on a little bit of a life of its own that wasn't entirely intentional. But that particular thing that we've been talking about ramp later this follows. It's not, it's not really intended to be an android thing at this time.

Tom O'Malley

Okay. And then just on the same chart, just 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 billion bucks is still a pretty big SAM there?

Jason Rhode

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

Operator

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

Christopher Rolland

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 is 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 10s of millions of units over the next 18 months or so, or is this just really starting with a small volume went. Thank you.

John Forsyth

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 haptic beyond the simple button replacement. So, it's when we talk about gaming and media consumption, where we're talking in the first instance about enhancing the smartphone experience that can for sure extend beyond that, but that's the primary area that we're talking about. And to give examples of that. We've seen customers very interested, for example in in technologies we've developed which provides haptic feedback during playing video games, even if the game developed didn't necessarily incorporate those functions within their products, The end user, when they're playing the game still get a lot of tactile physical 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

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, if it 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 car investors by surprise in the past. Are there any changes there in ASPs or margins. Thanks.

Jason Rhode

So, I would generally there is always ebbs and flows from a margin perspective. I generally would I -- my usual answer on that is not to think about no changes there has being margin drivers, one way or the other. They can be to a minor degree, but it shouldn't be a primary impact the, 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, that would generally make it more expensive on the 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

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

Charlie Anderson

Yes, thanks for taking my questions. My congrats on the strong results and my congrats 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. So, I wonder maybe if you had 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

Well, yes, I do actually. So, as you know, I mean we don't, we don't provide annual guidance. There is a lot of moving parts, of course, it's harder, probably impossible for us to know how they would lead 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. And I'll just say here's some of those probably forward-looking statements that Thurman mentioned earlier. So, 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 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. So, we should be able to benefit from those during the year and going forward, a lot of that's completely new content from us. And those are form factors that are getting a lot of attention as well. So, we continue to expect to deliver new content in the handsets later this year. Further opportunities we've kind of refer to that over the last couple of questions. 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, 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. Obviously, 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 its 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 this Coronavirus issue, trade wars, the overall economy and terms of other things that are out of our control and beyond our ability to forecast.

So, we take a conservative view of what will happen and plan accordingly. And 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 Coronavirus. So, I'll just add a reminder for investors to have a look at those.

Charlie Anderson

Excellent, thank you so much for all the color. And then sort of it for my follow-up, you've identified the closed-loop Controller. I think going into calendar '20 and then there is other opportunity is sort of sounds like potentially 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 plan this long-term. Thanks.

Jason Rhode

I think that's just kind of how it fell out, I mean we would certainly and those are incidentally, both of these kind of new things that we're talking about our platforms that we would expect it to be very strategically important and things that we will be able to continue to build around, in the long run. So, you may be, I mean this is actually just be speculating, but that's the kind of thing that we would expect to get onto a continuous improvement curve of being able to adapt and modify them and improve them kind of like we do with the audio codec amplifiers, which is to say, not every year, but the cool thing. One of the many cool things 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 with such led to add new value for customers. And then kind of not always be on the same part to the same customer year-end and year-out, which has got obviously some good dynamics to it from a pricing perspective.

Operator

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

Adam Gonzalez

Hi guys, thanks for taking my question and congrats. 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 do does your visibility extent at this point. Thanks.

Jason Rhode

So, yes, that's our current level of investment is definitely heavily focused at the top tier of our of our customer -- of our customer base. As far as visibility, the bulk of -- the bulk of our business. I think it's probably one of the least well understood things or maybe it's understood that not believe there is something about them 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 and that's a big investment by customers in us. There is a lot of back and forth and supervision and making sure everything is lined up I's are dotted and the T's are crossed and so forth. Customers generally are actually pretty good about not wasting our time but are always very meticulous about not wasting their own time. So that it's generally much the bigger moving pieces for us are generally much more, one of the design in phase rather than the shipment phase, which means we've got quite a lot of visibility of a particular sort. And what I mean by that is we know we're working on important things and we sometimes 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 actually know what end feature of the customer is going to enable with it, especially with our devices where there's a lot of programmability involved. And then of course we never know the customers, marketing decisions that they're going to be able to make or promote more heavily or in this market or bundles or things like that that we don't always have that we don't have any long-term visibility because they can change their mind on a much shorter timeline than say a new audio codec we come in -- if you designed your falling around an audio codec, we kind of know you're going to need one, for example, and so forth. So yes, I would say we've got great visibility and a big picture sense there is definitely some moving pieces that that we often don't know until quite late in the game, but relative to most semiconductor companies, I would say it's that's definitely a strength for us.

Adam Gonzalez

Great, that's really helpful color. Appreciate that. And then my second question, I noticed in your corporate presentation that I think you added a slide which put some context around the market opportunities you're addressing and it looks like you put it in the context of a $45 billion mixed signal opportunity, I'm just hoping maybe if you can explain the rationale behind doing that. Is it just a signal that there could be opportunities beyond the $1 billion in adjacent mobile that you unidentified across the near-term. Thanks.

John Forsyth

Yes, that's exactly right. This is John here. That's exactly right and is really just reflective of increasingly how we see our range of growth opportunities within the business, you will see within that that picture that we're portraying there that we see no shortage of opportunities for growth within audio and voice itself, but as we've, as we've gone through the past few years, we've expanded initially into haptics as a beyond audio application of our core IP. We've made it clear that what we refer to as the closed-loop controller is kind of again fits into that category of being leveraging a lot of our core advanced mixed signal capability into a new domain.

As Jason indicated, we have reasonable line of sight of some additional opportunities, very much following the same pattern. But again, in new domains beyond those we've spoken about previously, and you can expect to see us continuing that progress. I think it's certainly trying to, as we move forward as we are increasingly seeing the opportunities around bringing low power, advanced low latency, mixed signal and signal processing to a variety of product types. It was the case. If you go back three or four years ago, I think we were fully occupied just serving the audio demand in the market as the company has grown and as we've engaged with customers more broadly in new areas that range of opportunities is has grown into other mixed signal areas. So, we see there is being pretty significant opportunity to continue that progress and that evolution as we go forward in the coming years.

Operator

Your next question comes from Ari Shusterman with Needham. Your line is open.

Ari Shusterman

Hi, this is Ari, I'm taking the question for Rajiv Gill. And my first question is about ANC adoption in the unfettered headset market. Can you kind of talk about what you've been seeing in that. What do you view this trend moving forward. Thank you.

Jason Rhode

Well -- so, we do have headsets overall that Bluetooth headset specifically that ship with our ANC, the untethered ear buds that are out there currently, still do not the performance that we targeted. When we originally developed our ANC was targeted at being the absolute pinnacle from a performance perspective. And the issue with untethered ear buds is, you really got to constrained battery life and so, customers are much more focused on what do they need to do to get the useful battery of the product to be something sensible. And so, it's a pretty different approach to noise canceling. Longer-term, we do think that's something of interest. We've got some activities there. We see a wide array of things that we can continue to focus on, from a content expansion in the untethered ear bud space. I wouldn't say that, that's the primary one of them, but it's potentially something we can work on over time.

Ari Shusterman

And as a follow-up, what you've been seeing in gross margins and how do you expect them to trend throughout 2020. So, kind of a rough idea would be very helpful?

Jason Rhode

I mean, we don't see a ton of major drivers, one way or the other. There just continue to model it. We got a quarter at a time. So that is what it is, but I would just kind of take that as the middle of the fairway and I might be looking for a lot of excitement on that front.

Operator

Your next question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg

Yes, thank you. Just two quick follow-ups. First of all, we talked about sort of OpEx to support the opportunities in signal processing, but what about CapEx requirements. Are you sort of fine with what you have right now or will do some new CapEx spend especially for fiscal ' 21?

Thurman Case

No, I don't see this year seeing an uptick in our CapEx. We don't spend a whole lot. There might be some tools that will buy for certain groups that are working on certain things. But beyond that, now you wouldn't expect a big uptick in our, in our capital expenditures.

Jason Rhode

Yes. And I would think too. Just from a run rate perspective of our various businesses, the MEMS stuff was probably a little bit more CapEx intensive than their estimates, so that piece, obviously is a tailwind for us from that perspective, but as usual, it's not a, not a big driver. It's usually a really good opportunity, if we find areas where if you do see our CapEx tick up, but I would generally regard. That is a good thing because it's us upturn on cash into something that is hopefully a sustainable long-term advantage like the failure analysis and reliability lab.

Tore Svanberg

That's helpful. Last question, and correct my perception here, but it just sounds like you, you kind of bit more certain about getting more traction in the wearables, is that perception correct. And if so, is that primarily for boosted apps or something else?

Jason Rhode

We kind of -- I think we're -- I mean things again forward-looking statement things can things going to always go wrong, but I mean plan of record. We should have some good progress in wearables something we're really excited about. I don't want to get into real specifically exactly what we're doing there, but things that are within our wheelhouse. So yes, there is definitely a clearly an exciting segment of the market that's getting harder as time goes on, and I think there is multiple cases where I can point to in the past where whatever it is we might not be in the very first generation. But usually by the time it gets real interesting then we've trained our custom silicon deliver on time really excellent execution machine on the opportunity in and start picking these things off as they get ready for prime time.

Tore Svanberg

Very good. Thank you.

Operator

[Operator Instructions] There are no further questions at this time, I will now turn the call back over to Chelsea Heffernan.

Chelsea Heffernan

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

Jason Rhode

Thank you, Chelsea. In summary, Q3 FY '20 results exceeded guidance as we experienced higher than anticipated volumes for component shipping and 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. Good-bye.

Operator

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