Q2 2023 Cirrus Logic Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the Cirrus logic second quarter fiscal year 'twenty to 'twenty three 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 call over to MS. Chelsea Heffernan, Vice President of Investor Relations. Mr. Heffernan, you may begin.
Thank you and good afternoon, joining me on today's call is John Forsyth, Cirrus Logics, Chief Executive Officer, and bank not to Muni Chief Financial Officer today at approximately four P. M. Eastern time, we announced our financial results for the second quarter fiscal year 2023.
The shareholder letter discussing our financial results the earnings press release, along with the webcast of this Q&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 exclude certain items.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release and are also available on the company's Investor Relations website.
Please note that during this session, we may make projections and other forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections.
By providing this information.
The company expressly disclaims any obligation to update or revise any projections or forward looking statements, whether as a result of new developments or otherwise. Please refer to the press release in the shareholder letter issued today, which are available on the Cirrus logic website and the latest Form 10-K as well as other.
Filings registered with the Securities Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from our current expectations.
Now I'd like to turn the call over to John .
Thank you Chelsea and thank you everyone for joining today's call.
As you've seen in the press release Cirrus logic delivered record second quarter revenue and earnings per share. The September quarter also marked the fifth consecutive quarter in which we have set a revenue record for the corresponding fiscal period.
I'd like to thank all of our valued customers our partners throughout the supply chain and the entire Cirrus logic team for their hard work and collaboration.
Keeping these outstanding results.
Before we discuss the results in greater detail I'd also like to provide a progress update on the key elements of the strategy that is currently driving our momentum.
The three pillars of our strategy.
First maintaining our leadership position in smartphone audio by delivering world class products and outstanding execution to the leading customers in the market.
Second expanding the reach of our audio components and technologies in key profitable applications beyond smartphones.
And third leveraging our world class mixed signal engineering expertise to build a growing footprint of products outside of audio and what we call our high performance mixed signal product lines.
This quarter, we continued to execute successfully on all three of these strategic vectors in audio against the backdrop, where demand for amplifiers in codex remains strong and in excess of big available supply we not only continue the development of our next generation 22 nanometer smart codec, but also began.
Initial development of the next generation custom boosted amplifier.
These are exciting and vitally important products for us and for our customers.
Two nanometer codec development will bring a new level of performance and power efficiency to audio sensing and other signal processing use cases.
And our next generation boosted amplifier will bring significant performance efficiency and architectural advantages to our customers products.
I'd also like to point out that given that these types of products typically enjoy a long lifespan in production. We believe these new product development initiatives helped to provide us with good longer term visibility regarding our business and optimism about the potential for sustained revenue contribution.
Yeah.
Looking beyond smartphones, we spoken previously about the laptop market and its potential as one of the areas, where we see an opportunity to expand the reach of our audio components profitably.
I would like to distinguish between the near term softness in the PC space that we're well aware of and the secular drivers that we believe are meaningfully expanding our service available serviceable available market and laptops in the long run.
These include a greatly increased emphasis from our customers and end users on high quality audio experience is due to the growth of promote and hybrid working.
A transition to thinner and lighter form factors drive for greater power and thermal efficiency and an evolution towards more smartphone like audio architecture that leverages multiple boosted amplifiers.
This quarter, we engaged with multiple customers and design activity around our first amplified designed specifically for this market and we also started sampling our first sound wire enabled Kodak specifically designed for laptops. We continue to believe this area can represent a valuable expansion of the market for our audio products and technologies.
Moving onto our high performance mixed signal products. We're proud of the progress we've made growing H P. M. S revenue, which represented 38% of total revenue in the September quarter.
With the launch of a new generation of smartphone devices. This fall. We've also been delighted to see an increase in adoption of our camera controllers, which play a vital role in helping to deliver outstanding camera experiences.
I have spoken previously about the consistent year on year expansion of value that we've seen in the camera space since the introduction of our first product and looking forward. We believe we have opportunities to deliver further innovation and continue this trend in the future.
Turning to power. We are currently also developing new power related products and technologies that will expand our range of solutions and battery health metrology charging and other areas and we believe these investments can position the company to expand our footprint in the power area in the coming years.
In summary, we made exciting progress this quarter on strategic initiatives that we believe will contribute to sustained multi year growth.
Our engagement with key customers around future products and opportunities remained extremely strong.
With both a compelling lineup of existing components shipping today and continued investment in innovative audio and high performance mixed signal products. We believe we are well positioned to drive further growth and product diversification in the coming years.
And with that let me now turn the call over to bank to provide an overview of our financial results for our fiscal second quarter of 2023 as well as guidance for our fiscal third quarter 2023.
Thank you John .
Fiscal second quarter revenue was $546 million.
Which was the September quarter record and as John mentioned earlier represents the fifth consecutive quarter of record revenue for the corresponding fiscal period.
Revenue was up 37% quarter over quarter and up 16% from a year ago.
Our strong performance during the quarter resulted in revenue above the high end of our guidance range.
It was driven by higher smartphone unit volumes associated with our customers' new product ramps.
On a year over year basis, the revenue performance was driven by higher Asp's.
An increase in smartphone unit volumes.
And high performance mixed signal content gains.
I'd like to highlight the outstanding execution by the supply chain organization and the entire suite of steam and helping deliver these strong results.
Turning to gross margin non-GAAP gross profit in the quarter was $271 6 million and non-GAAP gross margin was 52%.
This was roughly in line with the midpoint of the guidance range, we had provided.
On a sequential basis gross margin was down primarily due to higher reserves product mix and increased supply chain costs.
The year over year change in gross margin reflects an increase in supply chain costs that came into effect in January 2022.
To a lesser extent higher reserves.
non-GAAP operating expenses in the quarter with $123 9 million up $4 $4 million sequentially.
I'd note that operating expenses came in below the midpoint of our guidance range. Despite higher revenue as higher variable compensation was more than offset by lower product development costs and employee related expenses.
We intend to continue to invest strategically in new product development, while controlling discretionary spending.
non-GAAP operating income was $147 7 million in the second quarter.
27% of revenue.
And finally on the P&L non-GAAP net income in the second quarter was $114 $5 million.
Or $1.99 per share.
Let me now turn to the balance sheet.
Our balance sheet continues to remain strong and we ended the second quarter of fiscal year 'twenty, three with approximately $428 million in cash and cash equivalents.
And we had 300 million undrawn on our revolver.
Our ending cash balance was down roughly $25 $8 million from the prior quarter, primarily due to cash flow from operations offset by stock repurchases during the quarter.
Specifically, we generated cash flow from operations of $36 million during the September quarter, which is a seasonally slower quarter for cash generation due to the timing of product ramps.
We have no debt outstanding.
And inventory was $165 million.
Down $10 million sequentially and days of inventory was 56 days in Q2 down 27 days sequentially as we shipped product to support our customers new product ramps.
And turning to cash flow.
As I mentioned earlier, our cash flow from operations was $36 million in the September quarter.
Free cash flow for the quarter was $25 7 million.
In Q2, we utilized $50 million to repurchase roughly 583000 shares of our common stock at an average price of $85.78.
As of the end of Q2 fiscal year 'twenty, three we had $586 $1 million remaining in our share repurchase authorization.
We executed an additional $25 million and stock buybacks subsequent to the quarter and to repurchase roughly 376000 shares at an average price of $6 to $6.46 as part of a <unk> one trading plan.
We expect to continue to return capital in the form of stock repurchases, which we believe will provide a long term benefit to shareholders going forward.
And now on to the guidance.
For the fiscal third quarter of 2023, we expect revenue in the range of 520 million to $580 million.
We expect gross margin to range from 49% to 51%.
non-GAAP operating expense is expected to be flat sequentially in the range of $120 million to $126 million.
Higher product development costs offset by lower SG&A expense.
We will continue to control discretionary spending, but invest strategically in product development to drive long term growth.
On the tax front as we have previously discussed.
<unk> 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 continue to expect our fiscal 'twenty, three non-GAAP effective tax rate to be approximately 23% to 25%.
We maintain our expectation 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 strong legislative support for delaying or eliminating this rule, which we're watching closely.
I note that without the impact of this rule, our non-GAAP effective tax rate would be in our more typical mid teens range.
In closing we had a strong Q2 fiscal year 2023, as we executed well to deliver these results.
Going forward, we will continue to focus on the best opportunities to enable the company to grow both revenue and profitability over the long term.
And finally 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 accordance with <unk> 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&A session.
Bank, we will now start the Q&A portion of the earnings call. Please limit yourself to a single question and one follow that upper operator, we are ready to take questions.
At this time, if you would like to ask a question press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
Your first question comes from the line of Brexit Vendrick Gill with Needham Your line is open.
Yes. Thank you for taking my questions and congrats on really strong results in a tough environment.
Just a question on the seasonality in the business, it's been quite volatile this year and kind of deviating from from normal patterns.
Just wondering.
You know how we're thinking about.
Seasonality on a go forward basis.
We're also thinking about.
<unk> supply.
Supply chain.
Volatility.
With your with your top customer just just in general so any thoughts on kind of seasonality and supply chain delivery would.
It would be helpful to understand thank you.
Yes.
Thank you all I'll add a few comments and invite bank to add a little more color if.
If he wishes.
I think one of the characteristics of the climate. This year on the supply side has been that most of the supply chain has been running pretty close to capacity and so that has meant I think that the things are being a little more linear than they would be typically obviously, we have big.
Seasonal ramps and builds for product launches.
And that just hasn't been the headroom in the supply chain to to have that kind of acceleration of production. So I think that has led to.
The linearity.
Coupled with the fact that just demand is relative is very high and has continued to remain high relative to the available supply in general.
Released you'll have that.
It looks as we go further out beyond Dakota, we're guiding.
I would say that from the supply chain perspective, we still regard our sales and the situation in the supply chain is being supply constrained primarily around wafer supply.
And that's suddenly going to persist the rest of this year, we see that persisting well into calendar 'twenty three as well.
Yeah. Thanks, John you answered most of the.
The question Rajeev.
Rajeev. This so let me first of all thanks for your nice comment so in terms of just the seasonality question that you asked.
As you know over the last several years, especially the last couple of years, it's been difficult to predict what is normal seasonality and what's not just given the changes in customer ordering patterns and the economy overall.
Hey that perhaps in the last few months, there's probably some semblance of normalcy coming back, but then of course now we have to deal with the macro uncertainty and so forth. So in general it's hard to call out in the specific seasonal patterns.
And clearly as Don alluded to earlier, we are seeing good demand, especially as it relates to the new product launches from our customers and we're fulfilling that demand and I would just take it one quarter at a time as it relates to seasonality going forward.
Yeah. Thank you for that and just for my follow up.
Wondering John how youre thinking about some of the.
The trends that have been helping your business, namely your expansion into the SaaS charging market.
Number two kind of increased attach rates for camera controllers and kind of and then lastly, your expansion into the midrange audio amplifier.
Im just wondering if you could talk a little bit about those kind of.
Segments end markets. Thank you.
Thank you yes.
There are a number of strings to that though I think the big picture is that we've been doing content expansion rather than relying purely on whatever happens with the units and that's been on multiple fronts. So both.
Expanding our expanding within audio I mentioned.
The growth we've had in the laptop market, there and the opportunity that we see.
But also significant expansion of the range of products that we are bringing to mobile devices. So are those.
Those include yet.
Charging products as he said in fact, a number of technologies around the battery so.
We brought to market our power conversion and control chip last year, which is additional technology focused on battery health.
And and then going forward, we've signaled that we have we believe we've got multiple other opportunities to expand content.
Outside of the audio space in the high performance mixed signal area and that's that's something where.
We believe that gives us visibility and reasons for believing that we can deliver year on year growth as we go forward.
Okay.
Your next question comes from the line of Christopher Roland with Susquehanna. Your line is open.
Hey, guys. Thanks for the question.
Ah.
There's a couple of new products that you guys mentioned in the letter I think you.
You continue to engage with a strategic customer around a new H P. M S component.
Also Additionally, you guys continue to develop your 22 nanometer new Kodak as well I guess first of all I mean any more detail around.
The HP EMS component and then kind.
Kind of the economics around this how does that change in terms of ASP or cost.
Overall for you guys as well.
Yes, it's a little early to give much color on the additional H B M. S contact because I will say that.
I think we referred to.
Another category of new product as well, so obviously the 22 nanometer Kodak.
Additional H P. M S content, but also kicking off the development of our next generation custom amplifiers. So.
We have that's what we're talking about we have other stuff in the pipeline as well as you would hope and expect.
Those are you know it.
It'll be a little while before those come to market. We have signaled that we are working towards the timeline of bringing some additional H BMS content to market in the back half of next year and the long road between now and then so as you'd expect we will give more color as we get closer to the time and plans get locked.
And if I may John just to add to what you just said.
I think one of the things that's evident in our results and also in our guidance is the fact that we are continuing to increase our content in this.
And customers' products.
And we've talked in the past about having some good long term visibility and multi year visibility in terms of content gains. So that a lot of that is coming in the high performance mixed signal area and we feel good about.
But where we stand relative to increasing content over time.
Great and as a follow up.
And given the kind of weak Android background that we have out there.
I was surprised that your percentage of revenue from your non biggest customer out there was as strong as it was.
I was wondering if maybe you can talk to that kind of strength, where you might be seeing strength as this all amps or is this new products I know you've been talking up some custom PC products as well where is that strength outside of your largest customers are coming from.
Well I'm not going to tell you that the Android market is strong.
We're all well aware of the challenges around around different parts of that market, but I will say that our approach in general is always to work.
With what we see as being the strongest customers with the strongest products.
And so we have seen.
Seeing content gains in in Android this year.
In flagship phones and that that's meant that we've.
We've done better than perhaps some have in the in the current climate.
And that's specifically around getting haptic solutions into.
Into flagship phones in addition to our audio devices.
So we've been doing well there it's a it's a tough market but.
As I said, we continue to focus on.
Customers and products and sockets, where we believe.
They are the strongest and the demand is going to be the most resilient.
In the current climate.
Okay.
Your next question is from the line of Torrey Svanberg with Stifel. Your line is open.
Yeah.
Hi, Good afternoon. This is Jeremy corporate Tory, let me add my congratulations on the record results here.
I guess first question it would be and the like.
The new laptop content.
And I.
I noticed on the presentation.
Asps were in the range of $2 50 is there is there a reason.
<unk>.
I guess can you can you call out any differences between that and maybe their smartphone counterparts.
Is it maybe just early integrate the early stage of the integration cycle here.
You can call it would be helpful. Thanks.
Thanks, Jeremy and thanks for the nice comment there, it's actually to do with the multitude of different socket opportunities that we see over time in the laptop market and.
I will reiterate this is very much greenfield space for us so.
We see our Sam expanding significantly in the coming years, even with a very conservative set of assumptions around what happens to the market overall in terms of units.
But to give you some color to that.
Kinds of sockets that we see as representing.
Constituent parts of that are of that addressable market would be on the audio side, we've got boosted amplifiers and codex, but you may see a two four or in some cases, even more four boosted amplifiers. So you have multiple opportunities.
Opportunities for <unk>.
Content expansion there in addition to that our.
SaaS charging related IP has given us opportunities for sockets really either side of the battery there.
In the laptop so again, we see potential.
Potential for multiple sockets around that.
And then of course as devices get thinner and lighter the trend will be more towards haptics and moving away from mechanical touch pads and the like and again that that provides a content opportunity.
So if you look five years out or four years out I guess calendar 'twenty six we see a.
Sam there based on those opportunities that I've outlined is somewhere north of $1 billion I would say about two thirds of that is probably in the audio space.
And roughly a third of it in the <unk> space.
Great. Thank you that's very helpful.
The other question would be I think thank you might have mentioned.
Our results were driven by Harry unit and each P&L gain.
I was wondering if you could maybe give us.
Rough breakdown of the various impacts.
Specific numbers arent.
Available could you maybe rank order those those impact thank you.
Okay.
Yes, Jeremy again, thanks for your nice comment and yes. It is.
The year on year.
The change was.
Driven primarily by those are the three factors of dimension. We have stated in the order of significance. So.
In general.
Fair to assume that.
We benefited from the increase in unit volumes and over time, we will also see a content gain story, but I think.
It's consistent with what we've stated.
Your next question comes from the line of Matt Ramsey with Cowen and company. Your line is open.
Yeah, Hey, guys. This is actually Ethan Potassa gone from Matt.
Wanted to kind of piggyback on that on the prior question, maybe ask it a little differently here.
I guess going into the back half of the year I think we had the expectation that results at your primary customer.
It would be primarily driven by unit growth rather than any socket or content expansion. So given the results and guide is that how we should still think about it.
Where there may be additional wins, either within the phone or maybe other products at your largest customer.
That drove the upside here.
I think the story is primarily around around phones.
To your latter question there.
We are I would say, it's worth keeping in mind that when we have a significant content expansion as we did with the.
Addition of the.
Power conversion and control solution that came into the at the generation of devices launched last year.
We do have a tailwind from that as we go into the second generation of devices as well so.
So it continues to contribute to.
To the revenue growth.
Okay understood and then as my follow up Jim.
Just wanted to get a little more clarity on visibility on the state of demand.
Through the remainder of <unk>.
Fiscal 'twenty three here.
If I recall correctly you guys had previously said.
Constant growth expectations might be more modest.
Is that how we should think about it.
The remainder of the year.
Yeah, Hi, this is bank so.
At a high level, obviously given.
What we just announced and the guidance. We have provided takes into account a couple of factors that we clearly have a good indication from our lead customer in terms of what the demand partners, but there's also the other element of the business, which is more tied to the general market and such.
And so.
Given some of the macro concerns we have taken that into account as we provided the guidance, but at this point, we want to stick with this guidance for the current quarter.
Now looking beyond we'll certainly update you at that time, but it's.
Probably fair to assume that.
We do see the content gain that Don alluded to that's something that we see as a multiyear story, but we'll give you more specific guidance on the next earnings call.
Your next question is from the line of David Williams with the Benchmark Company. Your line is open.
Hey, good afternoon. Thanks, so much for taking my question and congrats on the excellent results.
First I wanted to ask maybe just on the revenue side, just kind of curious what maybe the puts and takes were this quarter.
Just trying to understand maybe if the surprise was more on the supply side or maybe on the demand side.
And maybe any color you can provide on the ability to kind of flex up and down as we think about the business going forward.
Okay.
Suddenly the demand.
For the components going into smartphones in particular.
Was was strong stronger than we were forecasting back when we guided.
And and that and that demand did tend towards more devices, which had a greater amount of our content.
In them.
We expected when we guided so so really very strong demand story.
I will say that on the supply side the the.
The team has worked incredibly hard with our supply chain partners to kind of try to try to catch up and keep up with that.
And keep bringing in shipments, but the majority of the impact here was that relative to our guide was was demand led.
Thanks for the color there is certainly helpful.
And then I guess secondly, as a follow up for me is just are you seeing anything in Asia or China, specifically in terms of some of the Covid restrictions and and that's one thing. We're hearing there is there anything you are concerned with as we kind of think about the December quarter.
Yes, yes.
<unk> been reading all the reports about the Covid restrictions in China, and such and we are constantly in touch with our contract manufacturers as well as our entire supply chain.
And.
Clearly what we have provided you in terms of guidance takes into account some of those uncertainties, but we are constantly.
We are monitoring the situation, but we don't have any special insight into it beyond what we just heard from our contract manufacturers as well as our entire supply chain and we've taken that into account as we have guided towards the December quarter.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
This will be our last question.
Your final question comes from the line of Blake Friedman with Bank of America. Your line is open.
Hi, Yeah. This is Blake on for Vivek. Thanks for taking my question, just maybe as a follow up to a question earlier.
Now just looking at the data that you are kind of your Android and other physical so has that been surprisingly resilient what seems like versus the broader market, but I was just curious.
It's kind of still a weaker demand environment in general can this change the tone or.
Timeline of implementation of engagements.
I mean, the the demand environment, there certainly has been a bit softer, but I would may be reference.
Some of the color I've given on previous calls regarding the nature of our engagement with Android because I think that might that might be a key to what youre seeing there and the results as well.
We've been supply constrained through.
All of last fiscal year, and this and this fiscal year to date.
That's meant that we've been very selective out of necessity about which sockets and customers we've been able to chase and so we don't want to let anybody down.
So we have been we just had to be very selective there.
And given the products, we're providing into smartphones are generally the performance leaders in that class.
Been at the at the top end of the market.
And have typically been shipping into sockets, where the customer is very committed to having flagship.
Leading performance in their flagships.
So I think the fact that we've been doing anything but over serving that market over the past year, just because of the supply constraints has meant that there has been a resilience there.
As the weather has changed.
Great and then just kind of quickly focusing on your cash balance I know kind of following the line semi acquisition, what kind of back at those you know those.
Similar level. So just kind of curious how you think about M&A in this environment when valuations are lower mark or more focused maybe throughout through cash return sell through buybacks.
Yeah.
Yes, thanks for the question so.
Essentially our cash balance as I mentioned in the prepared remarks is in pretty good shape.
And we've stated all along that our primary uses of cash number one is to drive the growth in the business through investment in R&D.
And then number two is to do M&A and three is to use it for share buybacks and thought so.
Specifically to your M&A question.
Lately the market is now in a situation where there's a lot of.
Price discovery aspects that are still uncertain just given.
How the market has performed.
And for US we want to be very selective about what M&A, we pursue and we will do it.
Basically.
More on strategy as opposed to just purely from from the standpoint of what the current market conditions are and so we continue to look at M&A opportunities on a regular basis.
But we'll pull the trigger for the appropriate opportunity at the right time, but our primary uses of cash are.
And that order number one to invest in R&D M&A, and then to do cash buybacks and as you've seen over the last few quarters, we have been very regular buyers of our stock and will.
We will continue to use that as an additional tool in terms of how we deploy our cash balance.
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.
So in summary in the September quarter, Cirrus logic delivered record second quarter revenue and earnings per share driven by strong execution across our three areas of strategic focus.
And those are continuing our leadership in smartphone audio broadening sales of audio components increase in key profitable applications beyond smartphones.
And applying our mixed signal expertise to expand into new adjacent high performance mixed signal areas.
We're more excited than ever about the opportunities that we see in front of us and thank you for your continued interest and Cirrus logic.
Before we close I'd also like to note that we will be participating in the Barclays Conference on December eight in San Francisco, 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.
I would like to thank everyone for participating today goodbye.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Yes.
[music].
Yeah.
Yeah.