Q2 2024 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 four financial results Q&A session at.
At this time, all participants are in listen only mode.
After a brief statement, we will open up the call for restaurants 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'd now like to turn the conference call over to MS. Chelsea Heffernan, Vice President of Investor Relations. Mr. Bruno you may begin.
Thank you and good afternoon, joining me on today's call is John birthday, Cirrus Logics, President and she said Chief Executive Officer, and think naphtha Muni Chief Financial Officer.
Today at approximately four P M. Eastern time, we announced our financial results for the second quarter of fiscal year 'twenty four.
The shareholder letter discussing our financial results the company company's earnings press release, the webcast of this Q&A session are all available at the Companys Investor Relations website. This call will feature questions from the 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 all available on the company's Investor Relations website.
Please note that during this session, we may make projections and other forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections.
Providing this information the company expressly disclaims any obligation to update or revise any projections or forward looking statements.
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 corporate filings registered with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectation.
Now I'd like to turn the call over to John.
Thank you Chelsea and thank you everyone for joining our call today.
As you've seen in the press release, the Chelsea referred to in the second quarter of fiscal 'twenty for Cirrus logic delivered revenue of $481 1 million near the top end of our guidance for the quarter.
In a moment I'll hand, the call over to <unk> to discuss those results in greater detail, but before we get onto that I'd like to provide some color on the progress that we've made during the last quarter regarding this strategy.
On prior calls.
Our first strategic priority is leadership in smartphone audio and this quarter. We received the first silicon of our next generation custom boosted amplifier and sampled it to our customer.
Like our customer we're excited about the performance the efficiency in the system cost improvements that he will deliver.
Alongside that products, we remain on track with our first 22 nanometer smart codec, which represents a significant step forward for audio sensing and other key signal processing applications.
Both of these products the amplify and Dakota are on schedule to be introduced next year.
And the general market side of our smartphone audio business. This quarter, we had multiple customers introduce new flagship devices, featuring our audio components and we anticipate more devices using our products to be introduced in the first half of the coming calendar year.
Turning now to the second pillar of our strategy. Our goal is to continue to broaden our high performance mixed signal content in smartphones.
<unk> in Q2 on this front included ramping shipments of our latest camera controller ahead of a customer's product launch.
Once again and that product launch we saw the cameras stand out as a key differentiating feature.
We are proud that our products help enable our customer to deliver outstanding innovations in this area.
We continue to maintain an exceptionally close engineering relationship with our customer in the camera space.
We anticipate partnering on further exciting products in the future.
Beyond the camera, we have also been investing in new intellectual property that aims to enhance overall battery monitoring health and performance.
Expanding the portfolio of technologies that began with the power conversion and control device that we introduced in fiscal 'twenty two.
We continue to be excited about the long term potential of these areas represent for further growth and diversification of our revenue.
The third element of our strategy is our focus on expanding into new applications and markets beyond smartphones.
Principally about the laptop space here given that it is the market, where we see our efforts coming to fruition soonest.
While we are still in the early innings of our strategic plan for this market today, we are shipping content in each of the top five laptop Oems.
And we are actively engaged with those same Oems on design win opportunities for next generation laptop models.
There are several favorable trends driving the adoption of our products in this space.
First the post pandemic desire desire for high quality audio, which had historically not been a focus area for most laptop Oems.
Second the desire for thinner and lighter devices.
That desire creates a need for better audio amplification for haptic, rather than mechanical track beds and for fabulist designs, whether thermal constraint spring demand for even greater efficiency and power conversion.
Finally, there is the architectural evolution towards sound what that we've spoken about previously which creates an opportunity for Oems to rethink their audio architectures and their partners.
Today, we have excellent product sampling to customers we have participation in the sidewalk compatible reference design from Intel and we are seeing great customer interest while.
While it will take some time for that momentum to flow through to meaningful revenue. We continue to be excited about these opportunities.
As an example of what can be possible at the higher end of this market during the quarter. We began initial shipments for a high end laptop model that features seven pieces of Cirrus logic Silicon <unk>.
Including several amplifiers multiple haptic drivers and a codec, resulting in multiple dollars of content.
We continue to believe this is a market where cirrus logic has an opportunity to increase both content per device and market share overtime.
Beyond the laptop market. We're also investing in new products for our general market business, which services a large number of customers across the professional audio automotive industrial an imaging end markets.
These components of a sustained differentiation with improved performance lower power consumption and new feature enhancements and we believe they can be important contributors to our profitability in the years to come.
In summary, we believe the company is well positioned for the future with new products in the pipeline for the coming year momentum building in our market diversification efforts and significant opportunities to expand our high performance mixed signal content.
And with that let me now turn the call over to <unk> to provide an overview of our financial results for our fiscal Q2, 24, as well as guidance for the third quarter.
Thank you John.
Good afternoon, everyone.
Start with our fiscal second quarter results.
Fiscal second quarter revenue was $481 1 million.
Which was near the top end of our guidance range due to higher than expected demand for products shipping into smartphones.
Revenue was up 52% quarter over quarter, driven primarily by higher volumes associated with new smartphone launches.
On a year over year basis revenue decreased 11%, which reflects the reduction in components shipping into smartphones as well as continued weakness in sales of general market products.
Turning to gross margin non-GAAP gross profit in the quarter was $247 million.
non-GAAP gross margin was 51, 3%.
This was above the high end of the guidance range we've provided.
On a sequential basis gross margin increased 90 basis points.
Reflecting lower supply chain costs, largely due to a reduction in freight cost.
On a year over year basis gross margin increased by 110 basis points due to lower supply chain costs and inventory reserves, partially offset by a less favorable product mix.
During the quarter, we completed the disposition of wafers associated with our new high performance mixed signal product that was previously expected to ship this year.
We work in close collaboration with our key customer and supply chain partner in resolving this issue.
And as anticipated the disposition did not have a material financial impact.
Turning to operating expenses non-GAAP opex in the quarter.
$114 4 million roughly flat sequentially and close to the low end of the guidance range.
Mostly due to product development timing as well as lower discretionary spending.
We will continue to control discretionary expenses, especially given the current environment.
non-GAAP operating income was $132 5 million in the second quarter or 27, 5% of revenue.
And lastly on the P&L non-GAAP net income in the second quarter was $101 6 million.
Or $1 80 per share as the higher than expected revenue and gross margin as well as the lower than expected operating expense flowed through to the bottom line.
Let me now turn to the balance sheet.
Our balance sheet continues to remain strong and we ended the second quarter of fiscal 'twenty, four with approximately $352 $5 million in cash and cash equivalents.
Our ending cash balance was down $73 6 million from the prior quarter as we built inventory to support seasonal product launches.
<unk> used cash to repurchase stock during the quarter.
We continue to have no debt outstanding.
Additionally, as noted in prior quarters, we have $300 million.
Undrawn on our revolver credit facility.
I would like to reiterate that our balance sheet remains strong with a solid cash position and no debt.
Turning now to inventory as we indicated in prior quarters, we've been building inventory to support seasonal product launches as well as fulfill our wafer purchase commitments are.
Our long term capacity agreement with Globalfoundries.
As a result inventory was $328 $9 million.
Up from $301 million in Q1 24.
However days of inventory declined 47 days sequentially and we ended the quarter with approximately 128 days of inventory down from 175 days in the prior quarter.
Looking ahead in Q3 fiscal 'twenty four we expect both inventory dollars and days of inventory to decline from the September quarter, as we draw down the inventory to support the ongoing seasonal product ramps.
While we expect inventory levels to remain elevated through this fiscal year as we balance anticipated product demand and wafer purchase commitments. We expect Q2 fiscal 'twenty four to have been the high point of inventory for the current fiscal year.
We will continue to actively manage our inventory position to meet customer demand, while fulfilling our purchase obligations.
Turning now to cash flow cash used in operations was $22 $7 million in the September quarter, and Capex was roughly $8 5 million.
Resulting in free cash flow for the quarter of minus 6%.
For the 12 month period, ending in the September quarter of free cash flow margin was roughly 7%.
On the share buyback front in Q2, we utilized $40 6 million.
To repurchase approximately 510000 shares of our common stock at an average price of $79 45.
As of the end of Q2 fiscal 'twenty four we had $422 million remaining in our share repurchase authorization.
Subsequent to Q2 fiscal 'twenty four we utilized $24 4 million.
To repurchase roughly 350000 shares at an average price of $69 40.
Under our rule <unk>, one share repurchase 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 onto the guidance.
For Q3 of fiscal 'twenty, four we expect revenue in the range of $510 million to $570 million.
And we expect gross margin to range from 49% to 51%.
non-GAAP operating expense is expected to be up sequentially in the range of $120 million to $126 million.
Primarily due to an additional week of salaries as well as higher variable compensation.
As a reminder, fiscal year 2024 is a 53 week fiscal year in our fiscal third quarter will spent 14 weeks instead of the typical 13 weeks.
Overall from an operating expense perspective, we will continue to control discretionary spending.
<unk> in the strategically in product development to drive our long term growth.
On the tax front as we previously discussed for fiscal 2024, non-GAAP effective tax rate will continue to be unfavorably impacted by capitalized R&D expense and as expected our foreign tax credits would be lower this year.
Our fiscal 2024, non-GAAP tax rate is expected to be approximately 24% to 26% consistent with our prior quarters guidance.
We continue to anticipate that the impact of capitalized R&D will become less unfavorable over time as additional years of R&D expenses are amortized for tax purposes.
In closing we had a strong Q2 fiscal 'twenty four 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, while we understand there is intense interest related to our largest customer in <unk>.
Gordon Smith <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. Thanks, Frank We will now start the Q&A portion of the earnings call. Please limit yourself to a single question and one follow up question. Operator, we are now ready to take questions.
This time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
Star then the number one on your telephone keypad.
Your first question comes from the lineup Ramsey Matthew Ramsay Your line is now open.
Hey, guys. Thank you for taking my question.
John.
For the first time in a long long time from our architecture and share perspective, there's a lot going on in the notebook market with the emergence of what Apple has done with the.
<unk> and now in three and obviously what <unk>.
Microsoft is going to do with copilot and sort of shaking up the ecosystem a bit and you guys have been.
Sort of hinting at opportunities in that space, So what I'm interested in it to sort of compare and contrast that to what you've seen.
The windows market and laptops versus the Android market in smartphones for your company you obviously have your largest customer in a really really strong relationship there but.
Do you have like legit opportunities in audio and other areas and sort of a windows part.
The notebook market and is it dependent on arm folks gaining share or do you feel like your opportunities with Intel platforms are equally strong.
Thank you Matt.
I agree with your observations I think there is a.
Number of dynamics that make this market the laptop market.
Really interesting again, and specifically interesting for us in a way that it hasnt been in quite a long time.
And there are multiple drivers for us that I think will help us gain customer adoption to answer your question specifically.
We have great relationships with customers across the windows side of the laptop market.
And our relationship with Intel and our presence in the Intel reference design that I referred to earlier is really help helping to drive customer engagement.
The new products that we have.
So we feel we're in very good position with regards to our engagement with the key market leaders in windows laptops today, where we're shipping to.
As I mentioned the top five Oems overall in the laptop market.
And we're engaged with each one of those Oems around future designs. So we're very excited about that and those conversations tend to be right now more focused on audio, but also including haptics and to some extent power products, which are coming a little a little behind the Oreo and haptic products for us.
But lots of great opportunity there and it's in no way limited to arm in fact I think.
Is potentially a tailwind for us given the experience we have integrating into arm based systems in the smartphone space and the degree to which notebook start architecturally looking more and more like smartphones, especially with the advent of arm based Soc.
But thats not a necessity I would just say it creates additional opportunity over time.
Thank you for that perspective, John as my follow up question I wanted to ask thank.
It was good to hear your comments on sort of the resolution.
The content and the product that Didnt ship this year.
Guys thought I wanted to ask a bit.
The technology and the IP that you developed for some of these <unk> opportunities.
And its applicability into the Android market I mean, when you guys made the big question did the Wolfson acquisition and tried to push into audio and Android.
With fits and starts and you had to kind of quote unquote break the bundle with Qualcomm and Mediatek, you announced markets and sometimes it was successful sometimes not but if you look at the haptics arena.
Technology you have IP.
And I wonder if the environment for the Android smartphone market around haptics, if theres an opportunity there and the Soc.
Riders that they have strong solutions or is this a new Tam that you could go into an Android. Thanks.
Thank you, Matt and haptics, we are shipping haptics today into flagship Android phones. The story of haptic adoption and Android has been somewhat different from the iOS world in that not every OEM values. It to the same extent.
And to begin with the platform support with somewhat limited we have seen in key flagship designs and appreciation for our high quality haptics and that's tended to win those sockets, but I think there's probably a bit of a long term headwind.
To the Sam for Us there given that.
It comes at a higher cost cost and Oems.
Perhaps comfortable putting high quality haptics in two flagship devices, but less so as they go down the tiers.
I would say that the.
The opportunity for us to continue serving flagship phones that with haptics continues.
And.
Well certainly aim to do that.
Question comes from the line of Christopher Rolland Christopher Your line is now open.
Guys. Thanks for the question I guess first of all can you talk about your inventory balance.
<unk> levels are done with this customer ramp.
Is that where youre going to want them to be and does the wafer supply commitments come into play or is that behind us at this point as well.
Yes, Chris Thanks for the question, Yes, as I said indicated in my prepared remarks, the inventory that we have been building in the last couple of quarters was just to come to balance with the.
Well the supplies that we had to fulfill in terms of our commitments to our partner, but in addition, also the ramp of the new products that we alluded to.
Now as you may recall prior to this.
Last two to three quarters, we were in a pretty.
Constrained position from the standpoint of inventory and living a pretty much hence most existing so we wanted to build inventory in anticipation of these product ramps and as I mentioned on the call earlier.
Expecting that the current.
Fiscal quarter, which is Q3 will see a meaningful reduction in inventory from what it was last quarter and we expect Q2 to be in the high point.
Obviously looking ahead, we still have some so blake requirements that we have to meet in terms of the purchase commitments to our partner, but we also see reasonable.
Demand with the next set of products and such so it will be something that we will carefully monitor as you've seen we've come down the inventory, but pretty substantially in the last.
Two quarters, and we expect that to be substantially better going forward, but we will.
Just guide one quarter at a time.
As it relates to this current quarter, we do expect inventory down from the prior quarter and just to give you. Some perspective in the last fiscal year. We would have about a 4.0 turns in inventory and that's our ultimate goal in terms of where we want to be from an inventory turns perspective.
Excellent. Thank you Frank and maybe following up just talking about the Android opportunity over the next year, where you think you could capture some kind of needle moving revenue.
It sounded like in the ladder audio you have some I would assume that their amps coming in the first half, but maybe you can talk to that.
Do you think anyone would ever.
Copy.
Your lead customers telephoto camera architecture for opportunities there.
How are haptics ramping.
Thank you said you had some battery products.
Efficiency products that youre trying to ramp as well.
All of the opportunities, particularly needle moving opportunities for Android.
So specifically around Android I'd say the market for us really split into two buckets, there's the China based Oems and then this Korean and North American based Oems and if you look at the China based Oems, we still have a good business there we're very much value our.
Business with Xiaomi vivo and major but we think that that environment long term has some headwinds for us it's become a more difficult environment to do business. So it's not a major area of investment. If we then look at the other bucket the other side of the Harrison Android and we've got great relationship.
With those Oems, we continue to invest in those and to support future designs.
Our business with Samsung was was up was bigger this year or has been biggest so far from last year, we feel very good about that and we're excited about that.
Supporting them further in the future, but the Android opportunity as a whole.
Is is something that I think for us is.
Not as large when we look further out as the potential of the laptop opportunity. So we can see as we look a few years out we can see a scenario where the laptop opportunity in our laptop business.
Exceeds that of our Android business and that's one where we have I think much more greenfield space for expanding content and gaining market share right. Now so that's the greater area of our focus when it comes to customer engagement and new product development.
Your next question will come from the line sorry Svanberg. Your line is now open.
Yes, Thank you and congrats on the results, especially getting to this wafer purchase commitment in light of the spread products.
Good execution on your side.
I had a question about the 22 nanometer products John.
You mentioned the word introducing them next year so.
Does that mean that there will be sampling in calendar 'twenty four and then we will see potential revenues the year after.
They are sampling today.
Thank you for.
Opening the door to that clarification, sorry that sampling today, they're 22 nanometer smart codec in particular is the product that we're talking about that's in our customers' hands, it's performing beautifully it's a marvellous product.
And we're very happy with it which means that we are working towards a market introduction.
In the back half of next calendar year.
Very good and as far as the timing and opportunity and laptop.
Understand you are in the top five today, but as far as this sort of bigger content ramp is that something that could happen already next year or is that more account that 'twenty five 'twenty six story.
Yes, that's a great question, obviously I've referred to the fact that we have a significant number of designs in development now.
And we need that but it's also important to have the rights being the right products at the right designs in development.
And enough of them to start moving the needle on revenue given where our overall revenue is today so.
I guess I'll try to frame that for you in broad terms. So you can get a sense of what we anticipate could happen here this year.
As I mentioned, we've got a number of designs coming to market within the remainder of fiscal 'twenty four.
Including the poster child device that I referred to in my prepared remarks, which we're very proud about.
But by definition anything shipping in.
The second half of the fiscal year and that really means in practice in the laptop space most likely in the early part of next calendar year.
Isn't going to contribute much during the current fiscal year. So think of the contribution of laptops in our fiscal 2004 as being pretty minimal.
However, there is there are designs coming to market now, which will start to contribute to revenue as we move into fiscal 'twenty. Five so we anticipate seeing a moderate step up in fiscal 'twenty five as more of those current design wins start going into production putting is likely in the range of the low <unk>.
Tens of millions revenue in fiscal 'twenty five.
But a lot of what's happening today around the reference platforms that I mentioned in the.
Prepared remarks will lead to customer product, that's launching early calendar 'twenty five.
So we would anticipate that that would likely lead to steeper growth.
And more meaningful revenue than in fiscal 2006 and beyond.
And as I mentioned previously I know that we don't break it out as such but to give you a sense of how we think about the opportunity. If Android stayed flat then somewhere beyond that we are.
We see the potential for a laptop revenues to overtake the Android business.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Again, its star followed by the number one on your telephone keypad.
Next question comes from the line of Blayne Curtis Lang Our line is now open.
Hey, Thanks for taking my questions I wanted to ask you you've been mentioning several quarters on a row diversification efforts and HTML.
I don't read too much into the language, but I guess the languages all different and you said there is some customer interest in power and battery can you just talk about this diversification efforts and maybe any kind of rough timing as to when we should think about maybe that impact in the model.
Yes, we certainly have customer interest.
And principally that's around the power space, So really stuff that sits around the battery is is an area that we believe we have significantly differentiated technology, we have that IP in silicon for the most part at this point, so we've been able to demonstrate IP.
Customers there and we're excited about that translating that into specific program design awards and design wins and so on.
I'm going to.
Limit what I say on this call.
That would be a little further out that's obviously beyond the audio products that we've got coming next year.
It's likely still some time before we see that come to fruition, but.
We believe there are meaningful opportunities so.
We're certainly investing in securing those.
Thanks, and then maybe a question for Greg I wanted to ask on seasonality for March obviously, the 14 week impact.
Opex I don't know if thats high customer concentration whether that matters for revenue.
Thoughts on March seasonality.
Yes, I mean, it's too early to talk about much but youre right I mean in terms of just the current December quarter, we do have that extra week of both revenue and expenses and that's kind of factored into the guidance.
What happens in March obviously is a big function of what happens to the top customers mean product. So I think we'll just reserve judgment on it but a typical <unk>.
<unk> between the December quarter, and March quarter is that seasonal decline.
We'll quantify it at the right time, but I don't see anything thats different this time around in terms of the seasonality.
The magnitude of it is what we will have to determine going forward.
And this will be our last question.
Our last question comes from the lineup Ananda Baruah.
Ananda Your line is now open.
Hey, yeah. Thanks, guys.
I appreciate the question questions I guess going back to the.
To the PC.
John would you.
Yes, it's sort of it it's not that there perhaps could be a little bit about the PC.
<unk> adoption.
In 2024, if that were to happen broadly wood.
Would you anticipate seeing an impact to your PC business.
That we may notice as well and then I have a quick follow up after that.
Sorry are you referring to headwinds in the PC market.
Hi, tailwind in the PC market tailwind instead of a PC cycle yeah yeah.
I guess, yes, although.
We're still we're still building design momentum. So we would certainly expect benefit from that and we think that when you do a comparison between laptops that have cirrus logic audio.
In haptics in them versus competitive products that do not the.
The difference is really striking.
It's really a night and day difference, we're very very proud of what we're doing there and we think it's really meaningful for the PC experience. So I would certainly hope to benefit from that next year, even if we're still building our design momentum.
And our pipeline today.
And then on the on the Tcf of kidney that you spoke about the chemo with to go.
Yes.
But like HP HP is talking about in the next handful of years.
40% is actually up there.
Their Pcs and laptops shipping with with their colleagues.
Enable.
Our AI enabled cross that.
Now, it's probably in the similar ballpark.
Do you with that is that captured there is that kind of the AI adopt AI capability in Pcs and laptops.
That already captured in your thought process.
With that provide incremental content opportunity with with that kind of.
AI enablement.
I'm not sure how that intersects quite with our current <unk>.
<unk> focused product portfolio.
It may be that it does we know of course that typical AI use cases burn a lot of power. So anything we can do to increase power efficiency across the system.
But what I would say more broadly as I think anything that makes laptops more interesting and more of a vector for innovation.
And more of a <unk>.
Social point for improving the user experience is likely to benefit us in general.
Is it that we will end the Q&A session I will now turn the call back over to John for his final remarks, Thank you Chelsea.
So in summary, Cirrus logic delivered revenue towards the top end of our guidance for the second quarter and made solid progress across each of the three key areas of our strategy.
We're excited about the opportunities in front of us and we thank you for your continued interest in Cirrus logic.
In addition, I'd also like to thank the entire Cirrus logic team, whose.
Whose commitment to disciplined execution and to bringing innovation to bear on the challenges that our customers are addressing is ultimately what enables us to deliver strong results.
Before we close I'd also like to note that we will be participating in the Barclays Conference on December six in San Francisco. Please check our investor website for the details. Thank you all for joining our call today.
This.
Today's conference call you may now disconnect.
Okay.
This concludes today's conference call.