Cirrus Logic : Transcript Q1FY2024

Corrected Transcript

03-Aug-2023

Cirrus Logic, Inc. (CRUS)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

Christopher Rolland

Analyst, Susquehanna Financial Group LLLP

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic First Quarter Fiscal Year 2024 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. Ms. Heffernan, you may begin.

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Chelsea Heffernan

Vice President-Investor Relations, Cirrus Logic, Inc.

Thank you, and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's Chief Executive Officer; and Venk Nathamuni, Chief Financial Officer.

Today, at approximately 4:00 p.m. Eastern Time, we announced our financial results for the first quarter fiscal year 2024. The shareholder letter discussing our financial results, the earnings press release and 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 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. 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 and 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 expectations.

Now I'd like to turn the call over to John.

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John Forsyth

President, Chief Executive Officer & Director, Cirrus Logic, Inc.

Thank you, Chelsea, and thank you, everyone, for joining today's call. As you've seen in the press release, in the first quarter of fiscal year 2024, Cirrus Logic delivered revenue of $317 million towards the top end of our guidance for the quarter, driven by products, shipping and smartphones. In a moment, Venk will discuss the results in greater detail. But before we get on to that, I'd like to provide some color on how we're doing against the strategy that I've outlined on previous calls.

The first pillar of that strategy is to maintain and build our leadership in smartphone audio. And to that end, this quarter, we taped out our next-generation custom boosted amplifier, a component that we believe will deliver significantly increased performance and value to our customer and which we anticipate will ship next calendar year.

We also completed product validation of our first 22-nanometer smart codec, a new product, which is also on track for introduction next year. This new codec represents a significant technology transition for Cirrus Logic and again, we'll deliver meaningful feature and performance benefits to our end customer.

In our general market smartphone business, we also secured several next-generation Android sockets. And as a consequence, we anticipate seeing many great smartphone products featuring Cirrus Logic, audio and haptics being launched in the market in the coming year.

Moving on to the second pillar of our strategy. We're excited about the opportunities we see to continue to grow our high-performance mixed signal content in smartphones. The cameras are a marquee feature of every major smartphone launch. We're proud of the progress that we've made in this area since we introduced our first camera controller product in calendar 2020.

We're currently ramping production of our latest camera controller product for a smartphone that is expected to be introduced later this year. And looking forward, we believe there's still significant potential to continue to grow value in this area, and we are today investing in a roadmap of further products and features in pursuit of that goal.

Beyond the camera, we've also previously indicated that we believe advanced power and battery-related technologies represent great opportunities for the company. And today, we have a number of R&D programs underway related to high-efficiency charging, battery management and system side power delivery. We believe that the investments we are making in this space today will continue to drive product diversification and revenue growth in the future.

Turning to our third strategic vector. We're increasingly leveraging our strengths in audio and high-performance mixed signal to diversify into additional applications and markets. Most recently, we are focused on expanding into the laptop market, where we see significant greenfield opportunity for the company in the coming years.

Today, we have well-established relationships with the top-five laptop OEMs who together account for a significant majority of all laptop unit volumes, and we are shipping content with each of them.

While we're still in the early stages of our entry into this market, we already see significant customer demand and engagement around our amplifier and codec products that have been specifically optimized for laptops and we expect end devices incorporating these new components to come to market in the next 12 months.

During the June quarter, we also secured our first business laptop win with our new amplifier, highlighting the growing importance of audio quality in this key segment, and we anticipate this device will begin shipping next year. Additionally, we're delighted that both our new amplifiers and Kodak have been selected as part of the sound wire compatible reference design from Intel, which will accelerate time to market and enable adoption of our components across more OEM platforms.

Beyond the laptop market, we also continue to invest in further products and customer engagements that we anticipate will expand both our revenue and market diversity in the long-term. These include gaming, augmented and virtual reality, automotive, industrial and professional audio applications. The latter illustrated by our recent launch of a range of industry-leading professional audio ADC products.

We're excited about the number of ways in which we believe we can leverage our outstanding engineering talent and best-in-class intellectual property to grow our business in these areas and beyond.

Finally, I would like to discuss briefly the difficult decision we took in July, resulting in a workforce reduction of approximately 5% of our global employee base. This action was taken in order to better align our overall cost structure with our revised revenue expectations. In light of both a previously discussed change in customer plans regarding HPMS product that we have been expecting to be introduced this fall and the current general market softness. We remain committed to disciplined execution of our strategy and believe that following this action, we are well positioned to invest in the many opportunities we see to drive future growth.

And with that, let me now turn the call over to Venk to provide an overview of our financial results for our fiscal Q1 2024 as well as guidance for the second quarter.

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Venkatesh R. Nathamuni

Chief Financial Officer, Cirrus Logic, Inc.

Thank you, John. Good afternoon, everyone. I'll start with a summary of the fiscal first quarter results and then provide guidance for fiscal Q2. Fiscal first quarter revenue was $317 million, which was close to the top end of our guidance range as unit volumes were higher than expected.

Revenue was down 15% quarter-over-quarter and down 19% from a year ago due to lower volume of components shipping into the smartphone end market and, to a lesser extent, continued weakness in general market sales.

Turning to gross margin. Non-GAAP gross profit in the quarter was $159.7 million, and non-GAAP gross margin was 50.4%, which is slightly above the midpoint of the guidance range we have provided. On a sequential basis,

gross margin increased slightly, while on a year-over-year basis, gross margin declined by 110 basis points due to higher inventory reserves and a less favorable product mix.

I'd like to provide an update on the high-performance mixed signal product that John alluded to earlier. As we mentioned in the shareholder letter, we have removed the revenue associated with this component from our internal model. But during the quarter, we made good progress with both our customer and foundry partner on the disposition of wafers associated with this product, and we do not anticipate the disposition to have a material financial impact.

I'd also like to reiterate that our customer relationship remains strong as we continue to collaborate on a range of technologies and programs and pursue opportunities for both the next generation of our existing components as well as new products.

Turning to OpEx. Non-GAAP operating expenses in the quarter were $113.8 million, down $6 million sequentially. I'd note that operating expenses came in below the low end of our guidance range due to product development prioritization as well as controls on discretionary spending. Restructuring costs associated with the cost actions John referred to earlier are not expected to be material and are reflected in the Q2 fiscal 2024 GAAP operating expense guidance.

I'd note that we're continuing to invest in products and technologies in order to pursue opportunities to drive our long-term revenue growth. And overall, non-GAAP operating income was $45.8 million in the first quarter or 14.5% of revenue.

And lastly, on the P&L, non-GAAP net income in the first quarter was $38 million, or $0.67 per share as the higher-than-expected revenue and the lower 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 first quarter of fiscal 2024 with approximately $426 million in cash and cash equivalents. Our ending cash balance was down $91.1 million from the prior quarter as we built inventory to support seasonal product launches in the second half of the calendar year and also used cash to repurchase stock during the quarter.

Specifically, cash used in operations was $39.8 million during the June quarter, which is about 13% of revenue. We continue to have no debt outstanding, and also, we have $300 million undrawn on our revolver.

Now turning to inventory. As we indicated in prior quarters, we've been building inventory to support seasonal product launches in the second half of the calendar year, and fulfill our wafer purchase commitments for our long- term capacity agreement with GlobalFoundries. As a result, inventory was $301 million, up from $233.5 million sequentially, and days of inventory was approximately 175 days in Q1, up 60 days sequentially.

Let me add some additional color on our GlobalFoundries agreement. While a portion of the capacity associated with this agreement was originally intended to support our new HPMS component, the agreement allows for wafer allocation flexibility within our product portfolio. As a result, these wafers are being reallocated to other products that use the same underlying 55-nanometerhigh-voltage process technology, including amplifiers, haptic drivers and battery and power ICs.

Looking ahead, in Q2 fiscal 2024, we expect inventory dollars to increase from the prior quarter. However, days of inventory are expected to decline due to seasonal product ramps. While we anticipate increased inventory levels