Cirrus Logic - Q1 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Q1 FY 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 Q&A 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 call over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thurman Case (CFO)

Thank you and good afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer, and Chelsea Heffernan, our Director of Investor Relations. Today, we announced our financial results for the Q1 FY 2020 at approximately 4:00 P.M. 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, are all available on the company's Investor Relations website at investor.cirrus.com. This call will feature questions from the analysts covering our company, as well as questions submitted to us via email at [email protected]. Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to the press release issued today, which is available on the Cirrus Logic website, 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 (President and CEO)

Thank you, Thurman. Before we begin taking questions, I'd 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 Q1 FY20 revenue of $238.3 million and GAAP and non-GAAP earnings per share of $8.35, respectively. Q1 FY20 sales were at the high end of guidance due in part to the success of recently launched products that utilize our components. During the quarter, the company continued to experience strong design momentum with new and existing customers across our product portfolio. We are delighted to be shipping with seven out of the top 10 smartphone OEMs and expect more devices incorporating our solutions to be incorporated over the next 12 months.

Moving forward, the company remains focused on delivering long-term growth through investments in innovative products targeting audio, voice, and other adjacent markets where we can leverage our expertise in low-power, low-latency signal processing. Before we begin the Q&A, I would 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're now ready to take questions.

Operator (participant)

At this time, if you would like to ask a question, please press star one on your telephone keypad. Again, that is star one to ask a question. Your first question comes from the line of Tore Svanberg with Stifel.

Tore Svanberg (Equity Research Analyst)

Yes, thank you and congratulations on the results. First question, Jason, you made reference to a new smart codec in your shareholder letter. I was just hoping you could elaborate a little bit on that particular product and is this something that you're shipping to pretty much all your customers at this point?

Jason Rhode (President and CEO)

No, no, thanks for the question. No, that's a targeted custom product. So no, it's not a broad market device.

Tore Svanberg (Equity Research Analyst)

Very good. And my second question is you're guiding your gross margin to be up sequentially. Seasonally, obviously, smartphone tends to be a higher percentage of the mix. Some surprise the gross margin is going up. Could you maybe elaborate a little bit what's going on there? Is it more your own cost controls or are you actually starting to see some benefits of price as well?

Jason Rhode (President and CEO)

There's certainly our own efforts to contain product costs. There's mix. There's a bunch of moving parts to it. So we're certainly pleased with that outlook from a margin perspective. We think our model obviously works at margins lower than that, so we would certainly be supportive of growing our revenue in a way that could conceivably not be that as high as what we're guiding for the current quarter, but we think that's a great result, a testament to a lot of great work from a bunch of our folks, from the folks designing new products, making them more efficient, as well as supply chain and other teams doing their jobs well. So pleased with the result and we'll just kind of take it quarter by quarter as we go from there.

Operator (participant)

Your next question comes from the line of Christopher Rolland with SIG.

Christopher Rolland (Equity Research Analyst)

Hey guys, congrats on the strong results and guidance.

Jason Rhode (President and CEO)

Thanks.

Christopher Rolland (Equity Research Analyst)

Let's see. In the presentation around headset codecs, just looking for maybe a little bit more color here, you mentioned a bunch of different functions. You mentioned USB audio, a DSP, continually adaptive ANC, and Hi-Fi DACs. Are we to think that all those are in the codecs that you're going to be shipping soon, or are there some functions that are eliminated from those?

Jason Rhode (President and CEO)

That's a great question. I appreciate it too because that does seem to be a common source of speculation out there, so it's good to be able to clarify what we mean, so that just is intended to highlight the types of value we're providing across the board in headsets, so not necessarily all of them. We have USB-C type codecs that support noise canceling. We have USB-C type codecs that support a more basic headset functionality, digital headset functionality. We have smart codecs that are shipping today. We're launched in wireless, what we call truly wireless earbud type devices that were launched this spring, so we're excited about that. That's been a really popular design win that we've been chasing supply throughout the bulk of last quarter, and we expect good things to continue to happen with those particular bud devices.

Then we have additional content that we can provide. Again, you need at least microphones, amplifiers, in some cases codecs, in every case a codec somewhere. You can need noise canceling and USB. We're very excited about the wireless form factor. We think that's kind of one of the steady drumbeats that we've got is our participation in new products that we haven't been in historically. So I think as we referred to in the shareholder letter, we expect to be in additional very popular wireless untethered earbuds later this fall. So we're excited about that. And that puts us that we expect that'll put us in a couple of the very most popular products of their type out there, so we're excited about that.

Just to be clear, since it kind of pops up now and again, there is content other than ANC that we can provide these devices. We don't license our ANC to other folks. Our ANC is typically targeted at very high performance, high noise cancellation type environments, so that isn't necessarily not that there's not interest in noise canceling in the untethered buds kind of products. There certainly is, generally speaking, given the battery constraints, it would likely be a lower performance type solution, but that's fine. There's other opportunities for us to gain content in these types of sockets, whether it's codecs, amplifiers, microphones, or in the case of wired ones, the USB-C stuff. It's good product lines. It's taken longer to develop than we maybe would have thought, but we're definitely on the cusp of some good things happening.

Christopher Rolland (Equity Research Analyst)

Understood and congrats on that win. In the presentation, you mentioned 1.3 billion in other edge processing in 2023, and that seemed like it was different from smart home or autos or wearables. Just wanted to be clear what we're talking about there. What comprises that, either end markets or end devices or your products?

Jason Rhode (President and CEO)

Sure. Well, so I mean, edge processing, just as the name sort of implies, is heavy-duty signal processing that we want to do at ultra low power in the end device. So rather than some competing solutions that could be implemented, for example, in a cloud, voice biometrics is a good example of that. So there are solutions that are on the market today for different functions, call centers and so forth, where they identify you via your voice, but that's done with the really heavy server-grade kind of signal processing done in a cloud somewhere. That's not what we're targeting. We're targeting being able to do these types of functions on ultra low power, always-on battery-enabled devices, handsets, and other things. So voice biometrics could certainly be applications like speech recognition or other kinds of audio or voice enhancements that are embedded in that.

So all manner of signal processing that is done locally, low power, low latency, it's kind of the thing that puts it in our wheelhouse. So we're really I mean, it's a big market today, but we see no end of the expansion of that over the next handful of years as well.

Operator (participant)

Your next question comes from the line of Charlie Anderson with Dougherty & Company.

Charlie Anderson (Equity Research Analyst)

Thanks for taking my questions and congrats on the results and some of the design win traction.

Jason Rhode (President and CEO)

Thanks, Charlie.

Charlie Anderson (Equity Research Analyst)

Wanted to just start with maybe the big picture question, Jason, just sort of addressing the year. I know you don't guide formally, but maybe just any qualitative thoughts on how we should think about the year and then I've got to follow up.

Jason Rhode (President and CEO)

Sure. So I mean, the good news, we're getting through the year-over-year comps where we're kind of lapping the much-discussed dongle inclusion or lack thereof. So from a year-over-year perspective, that's good. Obviously, we don't have insights about who's going to turn up and buy what handsets when they're new and being launched, so that's what makes it difficult for us to provide quantitative guidance in that regard. But from a qualitative perspective, we're pretty excited about things as time goes on increasingly. So there's a pretty steady drumbeat. We talked about continued growth with our audio amplifiers and haptics. We think we see good opportunities, as I mentioned on a previous question, to continue to expand our business in untethered earbud type devices, so that's exciting. We're poised to grow our business in tablets, which is meaningful.

That hasn't been a form factor we've had a lot of participation in for a significant amount of time, so that's a pretty meaningful share that we expect to take there. We expect to continue to grow longer term in other wearable type devices. That's a market that we've had some participation in, but we've been seeing that kind of on the horizon for a while, and we've got the devices out there and feeling very good about the expectations and the plans of record around our products for wearables, and then longer term, kind of this opportunity that we don't get into too much detail just because of the nature of who we're engaged with, but suffice to say, content we've not provided previously for functions that we've not addressed previously for some of our high-volume handset opportunities kind of in the roughly year-from-now timeframe.

So we see a steady drumbeat of increased content in all of the devices that people care about and matter and are clearly driving volumes for some of the world's best customers. So we're pretty excited about what that means qualitatively. Again, in this environment, I think it's not best for us to be guessing about how many people are going to turn up, wear, and buy what handset, but qualitatively, the story is really good.

Charlie Anderson (Equity Research Analyst)

Great. And then for my follow-up, I think you've mentioned now for several shareholder letters that there's a decent market and there's good customer interest there. You haven't named the product or the capability yet, but I guess what I would be curious in is, would this be a merchant product or would this be more of a custom-by-customer type of a product area? Thanks.

Jason Rhode (President and CEO)

Well, I mean, we tend to talk about things that are for the broad market. We're a little more or we're a little less cagey about those, I guess I would say. We try not to get too far ahead of our skis no matter what it is, but in this case, you're referring to what we very helpfully refer to as a closed-loop controller. It's just kind of a follow-on to we started with audio amplifiers, which became interesting for us once there started to be a lot of signal processing embedded in the amplifier involved with monitoring the voltage and current being delivered to the speaker to do protection and enhancement and other types of functions. That led us to really look at where else could we deploy that, which led to the haptics opportunity, which is quite similar to audio amplifier.

So this new stuff that we're addressing is, again, further types of what we're referring to as closed-loop controller technology, very low power, low-latency signal processing, but for other applications within some of the highest volume devices that we sell into. And so it's good content that we expect to see in kind of the roughly a year, a little over a year from now kind of timeframe. So details of what that is and whatnot, obviously, we don't get into ahead of when they're launching.

Operator (participant)

Your next question comes from the line of Matt Ramsey with Cowen & Company

Ethan Potasiewicz (Equity Research Analyst)

Hi there. Congrats on the quarter. This is Ethan Potasiewicz from Matt Ramsey. I was wondering, just big picture, a little while back, you guys were expecting a third 10% plus customer. I was wondering if you guys could discuss, given certain trade-related dynamics and the corresponding uncertainty regarding with who and what components are permitted to be shipped, how that picture is kind of shaping up to look like.

Jason Rhode (President and CEO)

Sure. So we were talking, I think, in the context of Huawei last quarter, as recently as last quarter, we were talking about the long-term potential for them to be a 10% customer. We think that's potentially still the case. We've gone through the same drama that I think everyone's seen play out in the news already, the SIA and politics and all this so forth. So initially, we did shut down shipments, worked with our export council, certainly reviewed the SIA's findings and so forth. So we've determined that the types of silicon we sell, we can resume sales there. Just to note, we're not in 5G type stuff. We're not in network equipment. It's handset-related stuff, so we don't see any certainly, our view is there's not some strategic threat posed by the sale of very low-power audio amplifiers for handsets.

We filed for export license in the very first days of that saga coming down the pipe, so we would hope, if the rhetoric is true, that we would hope to be among the early ones to get a license to do that. Obviously, it's not under our control. So I think in the short term, the very good news is they were not currently a very big customer at all. We were pretty pleased with the progress we've made in cultivating them as a good long-term customer, and hopefully, the politics will resolve in such a way that we can get back after growing that side of the business. We think it remains the case that we've got the most compelling technology of the type that we provide, and I think customers like that will continue to rally around the solutions that we're able to provide.

So I think the long-term story is intact. Short-term impact is relatively minimal.

Ethan Potasiewicz (Equity Research Analyst)

Got it. Okay. And then I guess just as a follow-up, specifically with regard to your opportunity in voice biometrics, I was wondering if you could expand on some of the longer-term progress you're seeing and sampling and what kind of feedback you guys are receiving?

Jason Rhode (President and CEO)

It's a lot of interest in the device. It was great to get the FIDO certification behind us. We're the first voice solution out there to receive that. That I think will give a lot of customers some comfort that if you implement our solution as intended, that you're not going to be subject to class hacks and things like that. That's the intent of that certification. So we're very pleased with that result and we're promoting it to customers. We've got people evaluating it, designing with it, giving us feedback. The feedback has been extremely positive. The capabilities of the device are very robust. It's a powerful technology that we see a lot of legs to. It's important to note this is the first product of its type from us.

Usually, for us to turn something into a big business, it has to be a product line, and we certainly see the probability of that in voice biometrics being quite good over time. This first device that we're targeting is for handsets specifically. For the application and specifically for hands-free use of handsets. We see the opportunities for us in whatever it might be, whether it's headsets of various sorts or any other thing with a voice interface as being very compelling over time as well. Not necessarily the same solution, but based on the same underlying technology, so we see really good opportunities for us. We see good feedback and results. The FIDO thing was a great milestone, and the team's doing a good job of just continuing to chip away at that.

Operator (participant)

Your next question comes from the line of Blaine Curtis with Barclays.

Thomas O'Malley (Analyst)

Hey, guys. This is Thomas O'Malley. I'm for Blaine Curtis. Really nice results. Congrats. I guess my first one. In the release, you guys talked about MEMS mics and you specifically referenced working with a lead customer. I don't remember that language being in the prior quarter releases. Can you talk a little bit about that relationship, and is that going to be a significant contributor here in the near future?

Jason Rhode (President and CEO)

We're still not telegraphing in the near term for it to be big revenue. We do, as you would imagine. We target working with the best customers in the order of importance. The pull that we've had from customers for us to be a supplier in microphones, I would regard as very, very high, like really kind of surprisingly strong pull from customers wanting us to be successful in that space. The details of what we ship and when, we need to be a little bit cagey about. And certainly, it is the case. As in most things we do, we want to be successful. We want to be reliable. We want to, frankly, ship in things that are or ship in opportunities that are still with very critical customers, but in lower volumes first. We don't want to leap right into the main stage. Microphones are hard.

My hat is off to folks that make them successfully, but we think in the long run, we can do it better, more reliably, and with the same kind of capabilities and timeliness that we do on the traditional silicon side. So continue to think that things are going to happen for that market. We have multiple customers that buy north of a billion microphones a year. So we're not targeting making microphones for toys and other stuff. We're targeting premium mics that can command a reasonable margin if developed properly. So continue to think we're in good shape there.

Thomas O'Malley (Analyst)

Great. That's super helpful. And then my other one is really just around the Android business. Clearly, you guys have had a lot of success with Samsung in the past couple of quarters, both on the AMP side and the earbud side. And that's been a pretty significant contribution to that revenue. Outside of that, you guys have talked about working with seven out of the top 10 Android guys. And then you also mentioned the release in terms of haptics. Next 3-12 months, you're going to see some more customers coming to the market. When is that inflection point for customers outside of Samsung? And when do we see that revenue really turning up and impacting that bucket as much as we've seen that other customer, Samsung, being for the last two quarters move the dial?

Jason Rhode (President and CEO)

There's not too many that are as big as the guys in Korea, so that's one thing. It does take aggregating up more and more base hits. We see good opportunities with our Korean customer base to continue to grow the product line there. It's not all as anyone that follows our industry knows. That particular customer can be pretty unpredictable, but we've got a great relationship there and a good opportunity over time to grow our content with other types of new devices. In the broader Android and China specifically, or actually even in North America, we've got a couple of good customers in North America Android at this point.

But the bulk of them out there, in particular, with the exception of our would-be third-largest customer in the longer run, you really do have to aggregate up a lot of wins to turn it into a large-dollar volume. So we see good progress on that front, but it isn't going to be a hockey stick type of growth curve there either.

Operator (participant)

Again, if you would like to ask a question, that is star one on your telephone keypad. Your next question comes from the line of Rajvindra Gill with Needham & Company.

Rajvindra Gill (Equity Research Analyst)

Yes. Thanks for taking my questions and congrats on solid momentum. A question on the amplifier market as well. Wanted to get a sense of kind of your traction in the China smartphone boosted amplifier market. You have a very compelling integrated DSP. There's been some small share that you've had in that market because of the overall weakness in the handset market in China, but wanted to see what your traction there is in China for mid-range amplifier products.

Jason Rhode (President and CEO)

I guess I would say that's the new development that's really contributed to the success in China has been amplifiers. They're of nearly ubiquitous appeal, whether it's mono or stereo. We think the haptic solution in the longer run will be adopted pretty broadly there as well. Certainly, getting to seven of the top 10 folks wouldn't happen without the amplifiers. Smart codec are of a more limited appeal in Android just because it's such a cost-sensitive market. But everyone that makes a phone wants their phone to be a better speakerphone, wants it to be louder, potentially replace things like little micro speakers and so forth with just using your handset. So it's been a big contributor to the progress we've made in Android this past year, and we expect that to continue, again, both with audio and with haptic.

Rajvindra Gill (Equity Research Analyst)

On your voice biometrics development, how do you think about the use of machine learning and neural networks on the training side, and how important is that in enhancing your technology and providing more value with respect to noise cancellation? How are you able to leverage your machine learning and neural network capability when you bought that company, Cipher, a couple of years ago?

Jason Rhode (President and CEO)

That's a good memory. It's a good memory. That's exactly why we bought them. They were directly bolted into the voice biometrics team currently, although we see the potential for machine learning to really have a significant impact for us in the long run, both as an algorithm implementation in and of itself or used as a training mechanism to tune a traditional algorithm. Really, it has the potential to be a big deal, and it dovetails really nicely into the very low-power, low-latency signal processing that we already deliver. So that's worked out well. It's a great team. They're, like I say, plugged in directly to some developments that are really important to us. So that's gone well overall.

Operator (participant)

And your next question comes from the line of Adam Gonzalez with Bank of America Merrill Lynch.

Adam Gonzalez (Equity Research Analyst)

Hi! Congrats on the solid results and execution. Just the first question on Samsung. Can you talk generally about the ramp that you expect to see there throughout the year? Just trying to figure out what the peak quarter will be. Will it be Q2? Was it Q4 last year? Just generally what your thoughts are?

Jason Rhode (President and CEO)

Relative to that customer's flagships, of course, there's kind of two big ones. I think the timing of those are pretty well known. We usually participate in both of those in a meaningful way. So that timing, I wouldn't expect to change. We have done a better job over time of penetrating other devices. We talked about the wireless buds that started shipping earlier this year. Of course, that lined up with a flagship launch, but that device seems to have some pretty strong ongoing opportunities. So hopefully, that maybe smooths things out a little bit. And then two, we've had more success over the last couple of years in penetrating some of their mid-tier sockets. And those are a little bit less, smaller volumes and scattered throughout the year. A little less dramatic kind of launch ramp type situation.

So again, that might help soften some of those quarter versus the rest of the quarter type timing situations.

Adam Gonzalez (Equity Research Analyst)

Got it. That's helpful. And then I know you can't really speak much about your largest customer, but just wondering if we exclude the whole dongle fiasco from last year, how you would characterize your visibility heading into the H2 of this year versus a more normal cycle?

Jason Rhode (President and CEO)

I mean, our visibility is and has been very good at that account. It isn't something we get into a lot. The question is just however many people turn up and buy which product, which we, of course, don't have a really great crystal ball for. But we're in the bulk, well, we're in everything from a handset perspective and increasing our penetration elsewhere. So it's a great relationship, as we referred to, and obviously about the best customer you could possibly hope to have. So continue to see good things happening there.

Adam Gonzalez (Equity Research Analyst)

Great. Thank you.

Operator (participant)

At this time, if you would like to ask a question, that is star one on your telephone keypad. There are no further questions at this time. I will now turn the call over to Ms. Chelsea Heffernan.

Chelsea Heffernan (Director of Investor Relations)

Thank you, Operator. There are no additional questions, so I'll turn the call over to Jason.

Jason Rhode (President and CEO)

Thank you, Chelsea. In summary, in the June quarter, Cirrus Logic continued to broaden our penetration of flagship and mid-tier smartphones while executing on new product development and strategic initiatives that we believe are critical for long-term growth. With a differentiated product portfolio, commitment to design and supply chain excellence, and increasing demand for innovation in the markets we target, we are optimistic about our future. I would also note that we will be hosting our annual meeting of stockholders on Friday, August 2nd, presenting at the Oppenheimer Technology Internet and Communications Conference in Boston on August 6th, and presenting at the KeyBanc Capital Markets Annual Technology Leadership Forum in Vail on August 12th. Live webcasts of the conferences will be available at investor.cirrus.com. If you have any questions that were not addressed today, you can submit them to us via the Ask the CEO section of our investor website.

I'd like to thank everyone for participating today. Goodbye.