Q1 2023 Cirrus Logic Inc Earnings Call

Thank you John .

Fiscal first quarter revenue was $393 6 million.

And a record for the June quarter.

Revenue was up 42% from a year ago and about the high end of our guidance range.

Our strong results were driven by high performance mixed signal content gains and to a lesser extent higher asp's.

non-GAAP gross profit in the quarter with $202 9 million.

And non-GAAP gross margin was 51, 5%.

And exceeded expectations due to favorable product mix.

On a sequential basis gross margin was down as cost increases that took effect in January were fully reflected in product shipments during the June quarter.

This was partially offset by a favorable product mix.

The year over year change in gross margin reflects the favorable impact of higher asps.

Our general market products.

Going forward, we expect gross margin to be more in line with our long term model and I'll cover this topic more in the guidance section.

non-GAAP operating expenses in the quarter were 119 5 million.

Down $3 6 million sequentially.

Operating expenses came in slightly below the midpoint of our guidance range despite higher revenue.

And the sequential decline was primarily driven by a reduction in variable compensation and employee related costs.

This was partially offset by higher product development expenses.

non-GAAP operating income was $83 4 million in the first quarter.

21% of revenue.

non-GAAP net income in the first quarter was $64 5 million or $1 12 per share.

Let me now turn to the balance sheet.

Our balance sheet remains strong.

And we ended the first quarter of fiscal year, 'twenty, three with approximately $454 million in cash and cash equivalents.

This was up roughly $9 5 million from the prior quarter.

Due to strong cash flow generation, partially offset by stock repurchases during the quarter.

I would note we have no debt outstanding.

Inventory was $174 million.

$36 million sequentially and.

And days of inventory was 83 days in Q1 up 28 days sequentially.

I would note. This is in line with normal seasonal trends as we began building ahead of product launches needed this year.

Turning to cash flow.

Cash flow from operations was $74 4 million in the quarter and.

And free cash flow for the quarter was $67 1 million.

In Q1, we utilized $56 $4 million to repurchase roughly 725000 shares of our common stock at an average price of $77 78.

As of the end of Q1 fiscal year 'twenty, three we had $136 1 million.

Remaining in our 2021 share repurchase authorization.

Furthermore, the board of directors last month authorized the company to repurchase up to an additional $500 million of the company's common stock.

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 onto the guidance for.

For the fiscal second quarter of 2023, we expect revenue in the range of $450 million to $490 million.

On a year over year basis, our expected revenue growth is largely driven by higher asps.

And to a lesser extent increased high performance mixed signal content in smartphones.

As I alluded to earlier, we expect gross margins to be around our long term model of 50% due primarily to product mix.

As a result in the September quarter, we expect gross margin to range from 49% to 51%.

non-GAAP operating expense is expected to be up sequentially in the range of $123 million to $129 million.

The sequential increase is expected to be driven primarily by higher product development costs.

We expect SG&A to remain flat sequentially.

On the tax front as we mentioned in our Q4 fiscal 'twenty two earnings release.

Due largely to a tax rules effective this year that requires companies to capitalize and amortize R&D expenses.

Rather than deduct them in the current year, we expect our fiscal 'twenty non-GAAP effective tax rate to be approximately 23% to 25%.

We continue to anticipate that under this rule our effective tax rate will decrease and may return to a normalized range in about five years.

As additional years of R&D expenses are amortized for tax purposes.

Absent any changes to the legislation.

However, there appears to be legislative support for delaying or eliminating this rule, which we're watching closely.

I'd note that without the impact of this through our non-GAAP effective tax rate would be in our more typical mid teens range.

In closing we had a strong Q1 fiscal year 2023.

Going forward, we will focus on the best opportunities to enable the company to continue to grow both revenue and profitability over the long term.

And before we begin the Q&A I'd like to note that while we understand there is intense interest related to our largest customer in.

In accordance with Cirrus logic company policy, we will not discuss specifics about this business relationship.

With that let me turn the call to Chelsea to start the Q&A session.

We will now start the Q&A question of the earnings.

Please limit yourself to a single question and one follow up operator, we are now ready to take questions.

At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.

If you are also listening via the webcast. Please mute your computer speakers prior to asking your question.

Your first question comes from the line of Matt Ramsey with Cowen Your line is open.

Thank you very much John Bank, good afternoon, and congratulations on the results.

I just wanted to ask one question John in the script you were I think much more specific about the number of engagements and the number of potential wins and.

And the trends in the business that you might have an audio going into the notebook market.

And I think we're all aware of some of the challenges in notebook units globally, but this is all greenfield for you guys. So I wonder if you might characterize how large that opportunity could be for serious in the long term sort of relative to the smartphone business and I'll. Just go ahead and ask my follow up while I'm on it's a bit unrelated but.

I noticed that the Android piece of your audio business down pretty sharply, which I guess, there's no surprise given what's gone on in the China smartphone market in the mid tier I just wonder if you guys steel going into the latter half of the calendar year that that business has been de risk. Thanks guys.

Thank you Matt I appreciate it.

<unk> works there.

Let me talk about the laptop market first yes, we are.

Specific on the radar.

Design activity, we see there because we think it's very exciting I appreciate it.

There are some.

There are headwinds in that market right now with something of a slowdown but.

If there is a demand pull is that doesn't really change what we see as being the fundamental drivers.

<unk> strategy, which are based around.

As I mentioned secular factors to do with an evolving audio architecture.

And alongside that potential opportunities in haptics and power as well. So so all of those really excited us about <unk> <unk>.

Laptop market given as you say the fact that it's it's really greenfield opportunity for us.

And we we tend to do well when we've got good relationships with with a small number of big customers of where today were.

Engaged in shipping with four out of the top five laptop Oems.

So again that positions us well in terms of the overall size.

I'm not going to.

What we can do but from a.

From a Sam perspective, we see this within our strategic planning horizon is getting to one.

$1 billion, Sam or higher across audio haptics in power so.

It's a very attractive market for us and you can see the momentum that we're building there today.

I'm going to move on from that to your question about Android.

I am going to refer back to comments I made I think last time around that really.

Our business today and this year has really been supply constrained.

And one of the impacts of that as having to be very selective.

About which sockets, we chase within smartphones and elsewhere, but that has had an impact on.

On our Android business. So it's not a question of.

Being short to customers in a given month, it's just not it's a question of not committing to sudden designs. If we didnt feel confident we have the supply.

We anticipate our Android business.

Still being supply constrained through the rest of fiscal 'twenty three.

Said, where we are well embedded in the flagship tier of that of that market.

And so far as we can expand supply, we'll we'll look to do that and look to continue to build on the momentum that we have there.

Your next question is from the line of Cory Svanberg with Stifel. Your line is open.

Yes.

Congrats on the results.

First question is on the new Smart codec.

Typically this.

Chip changes every two to three years or so.

I was just wondering.

About the dynamics, there as far as pricing.

I assume that you have some new features and things like that so.

Is that an opportunity to perhaps get some better prices on there I wonder sort of latest and greatest smart codec.

Yes, Thank you Tara.

First of all on the on the timing that the.

The time in market over the lifespan of both codex and boosted amplifiers has been elongated over the years.

That's <unk>.

Heartland productive relative product maturity.

So.

So it certainly backed off a bit from the cadence win win when they were.

<unk> every every couple of years.

But it is yes. It is a significant update to two a significant product for us I'm not going to speak to pricing specifically this far out but.

As you know when we make.

A large investment of effort.

That it takes to migrate a lot of mixed signal circuitry to a new process node that typically because we see an opportunity and a requirement to pack in a lot more digital processing, that's really the logic that drives you down from in this case from 55 nanometer to 22 nanometer.

And that increased processing represents more features and capabilities and so you do typically expect to see some ASP accretion on.

In line with that.

Great. Thank you for that and that's my follow up.

Mentioned in the shareholder letter that given the tightness of especially 55 nanometer you do intend to.

Moving down to lower geometries, I was hoping you can expand a little bit on that because obviously there's.

There is more capacity there, but it's also more leading edge, which could be more expensive. So I just wanted to make sure that I understand this correctly you want to go there because there is more capacity that you are not going to go really really well.

Advanced where perhaps.

The nodes or the.

Significantly more expensive than at the 65 nanometer node.

Yes, I think you hit the nail on the head.

It is different depending on the product line, whether or not that's the right thing to do.

Just to back up a little on that topic as you know last year. We took this important strategic step of putting in place a long term agreement.

With global foundries to help support our growth and our customer's plans.

And I think on every call. Since then I've said, if we could get more supply we would take it that's partly because of the strong demand.

Demand environment that we see immediately around us in.

In the near term, but its also partly because we see a pipeline of further opportunities to grow dollar content ahead of us and we need both capacity and new technologies.

In order to capitalize on those opportunities in some cases.

That may be.

Those may be technologies available on 55 nanometer in some cases 22 nanometer in some cases, there may be other options.

But youre right the economics are different depending on.

And the suitability of a given process.

Of note, we will depend on the nature of the exact product, but I will say driving high voltage high precision mixed signal to ever more advanced geometries has been a key part of where a lot of our competitive advantage lies.

So expect to see us continue to do that.

Obviously, our investment in the 22 nanometer codec is it is a great case in point.

Your next question comes from the line of Christopher Roland with Susquehanna. Your line is open.

Hi, guys. Thank you for the question.

My guess I guess my question is around power and some of your mixed signal.

Capabilities, there first I guess.

Traction or an update for lion and how thats going and then secondly.

Can you talk about your power conversion roadmap.

And.

Any capabilities, we might see there.

The increase in that in that roadmap over time. Thanks.

Thanks, Chris while we continue to be excited about.

Both what the Lyon team and the line IP can bring to us in terms of both product and market diversity.

Obviously at the time of the acquisition the Lions team at align teams sole focus was really on the Chinese smartphone market.

You may have heard has experienced some headwinds.

But our vision for those technologies.

Always went well beyond those those products.

So it happens that since that acquisition the team has made some.

Great progress in some.

Notable gains in smartphones outside of China, which we're delighted about.

But.

Today that at least the major part of that team is focused on developing products for other markets.

<unk>, the laptop market, which I referred to a little earlier is having some meaningful power opportunities for us there as well. So so we think that market diversity is going to be a good part of where that where that team's.

Future lies.

And regarding our.

Oh, sorry go ahead.

Power market.

You asked about the roadmap there.

I'm not going to go into specifics, obviously, the power conversion and stuff we've done to date has been cut.

Custom silicon.

<unk> focused on battery health and longevity, we think there is.

A significant opportunity for further innovation around around the battery. So we're investing in that that's a big focus of.

Our R&D efforts over the past year and in the coming years.

So that will.

I'll leave it there given the custom nature of those products.

Great. Thanks, Shannon and I think you did mention Android that's really my follow up here.

I guess first of all how would you describe the state of the state in the Android market now and then beyond maybe inventories or sell through or whatever the downside. There is would love to know what youre seeing in terms of design and your best opportunities.

As you see them.

Looking forward in Android.

Cirrus.

Yes, I think the.

The China based Android smartphone slowdown is.

Well covered and I think we first started talking about that in the December when we were covering the December quarter last year, given that we saw it.

We saw at the beginning then.

Outside of their in Android, we continue to be very well engaged obviously with.

Yes.

Samsung and other top tier Android vendors.

And I think top tier is probably how I would characterize it given.

Current supply constrained environment, I think theres no doubt that.

The first choice for flagship audio in Android smartphones, we make the best mobile amplifiers on the planet.

And we have very very good relationships with the customers there.

To the extent that we can expand supply we would expect to be able to sell more over time.

Okay.

Again, if you would like to ask a question press star followed by the number one on your telephone keypad.

Your next question is from David Williams with the Benchmark Company. Your line is open.

Hey, good afternoon, and thanks for taking the question.

I guess first you talked a little bit about the supply constraints, but just kind of wondering if you could maybe elaborate on that a bit just what are you. How are you seeing things generally.

Is it improving stable and maybe just from the consumer electronics kind of softness that we've seen do you do you think that you will get a little better maybe available capacity.

Well we've seen.

In certain areas.

Limited incremental capacity upsides, but I think it's important to keep in mind that the majority.

Charity of our revenue is based around a couple of processes and process nodes at major foundry partners, which is still under <unk>.

We are experiencing very very high demand.

So we haven't seen we haven't seen significant movement there as yet.

Okay, and I think maybe just around the Opex, if we think about it for the year just from the investment in this if you have how should we think about opex trending for the year and maybe longer term.

Yes. Thanks for the question this is bank so.

As we look at the Opex, we've seen over the last couple of quarters, we have.

Tended to increase our R&D, primarily because we see a good funnel and good pipeline of opportunities for us to grow the revenue or the long term and so it will be very deliberate about our investments in R&D, but as it as it relates to SG&A will be.

Actually guided for it to be flat. So we're not going to give full year guidance at this point, but it's.

Probably a fair guess that will be very thoughtful about our investments going forward. We will continue to invest in R&D for the long term.

But wherever it makes sense for us to control hiring for non critical functions and such we will do so.

Yes.

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

Hey, guys. Thanks for taking my question. This is Tom O'malley on for Blayne Curtis I just wanted to ask on the seasonality into September obviously earlier in the year, you had kind of a cautious outlook into June it ended up being a bit better but as you look into September compared to the past couple of years. It looks slightly less seasonal your commentary has really been around increased content better asps. So could you.

Two whether that's conservatism or if youre seeing some slowdown just because from the broad perspective, particularly your large customer things seem pretty good. So just on the September guidance and why that's a little less seasonal than in prior years.

Yes, let me take that one so as you pointed out our March and June quarter numbers were pretty strong.

<unk>.

Clearly.

There's lots of shifting with as it relates to the macro and such as it relates to our specific bookings in booking patterns, we don't see anything thats different from what we've seen in prior years.

But one thing to expect as that.

The order pattern should be more linear.

Towards the rest of the year, primarily because of the significant upside that we saw in the March and the June quarters, but overall I would say that the order patterns are as expected clearly for this particular quarter, we see our one of our lead customers actually built for their product launch and Thats kind of driving.

Our shipments as well.

But we would just not read too much into that at this point and we think that the linearity for the rest of the year should be a little more pronounced than it has been in prior years.

Helpful. And then just on the Android market, obviously, the weakness that you've seen in the near term.

It was pretty severe as there is there any hope that there is a bounce off the bottom into the September quarter, just any color on if you see a slightly improving market. There. If you expect things to further deteriorate. Thank you.

Okay.

I don't think we have any additional color on the Android market, specifically in the coming quarter Tom.

Yes.

I wish I did.

Clearly, there's just a lot of macro uncertainty there and we.

We're obviously shipping a lot of silicon into products were.

Within the smartphone market, where the demand has been really very good resilience.

As you know the Android market.

Seemingly a lot more uncertainty around it.

And then if I can add to it and as just Dan pointed out.

Clearly.

We are shipping to the slice of the market that seems to have a little more robustness around it and we're all reading the same science in terms of what's happening in China as it relates to Android and also the rest of the world.

<unk>.

As the macro situation develops we will keep an eye, but most of our focus has been primarily driven by the.

The shipments that we've made into the into the high end of the market.

And as John pointed out earlier those are still supply constrained.

Yeah.

Our final question comes from the line of Ananda Baruah with loop capital. Your line is open.

Hey, guys. Good afternoon. Thanks for taking my questions two if I could.

This may be stating the obvious but on.

On the Io constrained.

Assuming that there is no real inventory built up.

Sort of throw out your ecosystem or at least not significantly so.

Sort of that.

Sort of seasonality over the next couple of quarters.

Probably ebb and flow more with <unk>.

True demand is.

There is a fair assumption that I have a quick follow up as well.

Yeah. Thank you Anna.

Obviously, our view of that is is imperfect but.

Ship based on the demand signals that we see from from our customers.

But given the quantity of our silicon that goes into.

Smartphones, where our customers have publicly commented on the robustness of demand.

And the fact that really on the supply side, we've spent the whole year with the team.

Just just working as hard as it can just to keep up with demand for those products.

I think the.

The likelihood that there is a significant.

A significant buffer of silicon out there is comparatively low.

That's super helpful and just a quick follow up on the laptop.

Mentioned in the shareholder letter.

You can kind of work from home remote work being a catalyst.

No.

Is that to say that there is a.

Sort of in the 40 laptops towards commercial exposure as opposed to consumer exposure.

That is certainly a meaningful part of it yes.

Thats one of the.

One of the secular drivers that.

I don't think is.

Is going to change suddenly from conversations I've had with very senior people running.

Laptop businesses within some of those.

Four out of the top five Oems that I talked about.

Dave.

They will admit that that audio did not use to be a feature that was very high on the.

On the spec list and it absolutely needs to be.

First class now.

<unk> experience and.

That's really driven by the pervasive nature of hybrid working.

So that's going to be true in consumer of course, but we do see that as being highly relevant in the enterprise segment as well.

With that we will end the Q&A session I will now turn the call back to John for his final remarks.

Thank you Chelsea.

In summary in the June quarter, Cirrus logic delivered record first quarter revenue driven by strong execution across our three strategic drivers.

<unk> our leadership in smartphone audio broadening sales of audio components and key profitable applications beyond smartphones and applying our mixed signal expertise to expand into new adjacent high performance mixed signal market.

We're more excited than ever about the opportunities that we see ahead and we thank you for your continued interest in Cirrus logic.

Before we close I'd also like to note that we will be participating in the Keybanc conference on August eight in Vale, Please check our investor website for the details.

If you have any questions that were not addressed you can submit them to us via the ask the CEO section of our Investor website.

I'd like to thank everyone for participating today. Thank you goodbye.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.