Cirrus Logic, Inc. (NASDAQ:CRUS) Q2 2024 Earnings Call Transcript

Cirrus Logic, Inc. (NASDAQ:CRUS) Q2 2024 Earnings Call Transcript November 2, 2023

Cirrus Logic, Inc. beats earnings expectations. Reported EPS is $1.8, expectations were $1.54.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Second Quarter Fiscal Year 2024 Financial Results Q&A session. At this time all participants are in a listen-only mode. [Operator Instructions] 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.

Chelsea Heffernan: Thank you, and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's President and 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 second quarter of fiscal year '24. The shareholder letter discussing our financial results, the company's earnings press release, the webcast of this Q&A session are all available at the company's 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.

A worker assembling the inner circuitry of a semiconductor product.

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.

John Forsyth: Thank you, Chelsea, and thank you, everyone, for joining our call today. As you've seen in the press release that Chelsea referred to, in the second quarter of fiscal '24, 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 Venk to discuss those results in greater detail. But before we get on to that, I'd like to provide some color on the progress that we made during the last quarter regarding the strategy that I have outlined 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 and the system cost improvements that it will deliver. Alongside that product, 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 amplifier and the codec are on schedule to be introduced next year. In the general market side of our smartphone audio business, this quarter, we had multiple customers introduced 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.

Progress in Q2 on this front included ramping shipments of our latest camera controller ahead of a customer's product launch. Once again, in that product launch, we saw the cameras stand out as a key differentiating feature and 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, and 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 '22.

We continue to be excited about the long-term potential 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. I've talked 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 5 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 for high-quality audio, which has historically not been a focus area for most laptop OEMs. Second, the desire for thinner and lighter devices.

That desire creates a need for a better audio amplification for haptic rather than mechanical track beds, and for fanless designs where the thermal constraints bring demand for ever greater efficiency and power conversion. Finally, there is the architectural evolution towards SoundWire 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 SoundWire-compatible reference design from Intel and we are seeing great customer interest. 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 7 pieces of Cirrus Logic silicon, 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 over time. Beyond the laptop market, we are also investing in new products for our general market business, which services a large number of customers across the professional audio, automotive, industrial and imaging end markets. These components offer 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 Venk to provide an overview of our financial results for our fiscal Q2 '24 as well as guidance for the third quarter.

Venkatesh Nathamuni: Thank you, John. Good afternoon, everyone. I'll start with our fiscal second quarter results. Fiscal second quarter revenue was $481.1 million, which is 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 a 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 and non-GAAP gross margin was 51.3%, which is above the high end of the guidance range we had provided.

On a sequential basis, gross margin increased 90 basis points, reflecting lower supply chain costs, largely due to a reduction in freight costs. 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 a 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 was $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 '24 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 and used cash to repurchase stock during the quarter.

We continue to have no debt outstanding. And additionally, as noted in prior quarters, we have $300 million undrawn on our revolver credit facility. I'd 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 for 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 '24, 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 '24 to have been the high point of inventory for the current fiscal year. We'll 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, free cash flow margin was roughly 7%. On the share buyback front, in Q2, we utilized $40.6 million to repurchase approximately 510,000 shares of our common stock at an average price of $79.45.

As of the end of Q2 fiscal '24, we had $422 million remaining in our share repurchase authorization. Subsequent to Q2 fiscal '24, we utilized $24.4 million to repurchase roughly 350,000 shares at an average price of $69.40 under a rule 10b5-1 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 on to the guidance. For Q3 of fiscal '24, 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, and our fiscal third quarter will span 14 weeks instead of the typical 13 weeks. Overall, from an operating expense perspective, we'll continue to control discretionary spending but invest strategically in product development to drive our long-term growth. On the tax front, as we previously discussed, our 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 will be lower this year. Our fiscal 2024 non-GAAP tax rate is expected to be approximately 24% to 26% consistent with our prior quarter's 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 '24 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 accordance with Cirrus Logic company policy, we'll not discuss specifics about our business relationship. With that, let me now turn the call to Chelsea to start the Q&A session.

Chelsea Heffernan: Thanks, Venk. We will now start the Q&A portion of the earnings call. [Operator Instructions] Operator, we are now ready to take questions.

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