Cirrus Logic Inc (CRUS) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic first-quarter fiscal year 2016 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 Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thank you and good afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer and Chelsea Heffernan, our Manager of Investor Relations. Today, we announced our financial results for the first-quarter fiscal year 2016 at approximately 4:00 PM Eastern. The shareholder letter discussing our financial results, the earnings press release, including a reconciliation of non-GAAP financial information to the most directly comparable GAAP information, along with the webcast of this Q&A session are all available at the Company's Investor Relations website at investor.cirrus.com. This call will feature questions from the analysts covering our Company as well as questions submitted to us via email at investor.relations@cirrus.com.

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 undertakes no 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 issued today which is available on the Cirrus Logic website and the latest Form 10-K and Form 10-Q as well as other corporate filings made with the Securities and 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 Jason Rhode, our President and Chief Executive Officer.

Thank you, Thurman. Before we begin taking questions, I'd like to make a few comments. For a detailed account of our financial results, please read the shareholder letter posted on our Investor Relations website.

We were pleased with Cirrus Logic's performance in the June quarter as we delivered solid revenue, operating profit, and earnings per share results. Strong demand for our Smart Codecs and amplifiers pushed revenue above the high end of our guidance. As we move into Q2, we continue to expect FY16 to be an excellent year as content expansion and share gains with existing customers drive meaningful revenue growth.

We are delighted with our progress over the past several quarters as we successfully began shipping a new 65-nanometer Smart Codec in volume, and we are on track to ramp our new 55-nanometer Smart Codec in the second half of the calendar year. Customer interest in our ultra-low-power components is gaining momentum as the ability to differentiate end products with innovative audio and voice features becomes more essential. As a key enabler of this technology, we believe we have positioned the Company for sustained growth in FY17.

Our first priority is to further strengthen our relationships with our existing customers and increase content including cross-selling boosted amplifiers, Smart Codecs, and ultimately microphones. Second, building on this momentum, we are working to expand our market share in smartphone OEMS 3 through 10 while driving a subset of the audio and voice features currently found in flagship devices into the mid-tier. We are very encouraged by the progress we have made with these initiatives.

We are particularly excited to be ramping a Smart Codec over the next few quarters in another top Android smartphone OEM. Longer term, our strategy is to leverage the technology we have developed for mobile devices into adjacent markets including wearables, smart accessories and the connected home. With an outstanding portfolio of products on the market today, a compelling roadmap that targets the rapidly growing audio and voice market, and an exceptional customer base, we are very confident in our future success.

Before we begin the Q&A, I would also like to note that while we understand there is intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationships. Operator, we are now ready to take questions.

(Operator Instructions)

Blayne Curtis, Barclays.

Thanks.

Good afternoon. Nice results.

Maybe first one for Thurman. If you could just look at June, and you had made some comments last quarter about a flattish September. Looking for growth now. Just curious how the quarter played out, if this was what you were expecting?

And then, in the shareholder letter, there is some mention about the September/December quarters -- things could move around. I just wanted to understand what you meant by that comment. Do you take some extra conservatism in September? Or is that comment more related about December? Thanks.

I'll go ahead and take a crack at that. As we indicated on the last call, there were a number of moving parts in play last quarter. We've got new customers to us. We saw some signs that things might just play out a little bit differently from a seasonal perspective than they would typically do. As it turned out, things got better than we expected at the time, which was already a pretty good set of expectations. They went up from there. And, as well, the seasonality fell more in line with normal trends.

And then, on the September/December comment, I think we've made that same comment most years in the September/December timeframe and occasionally at other times of the year. It's really common leading into the Christmas season that customers have got ramps that are pretty steep at that time frame. And so things can change by a week one direction or the other that have nothing to do with the health of our business and yet move our financial results -- that skew them from one quarter in either direction.

And so, we just like to put that in there to note that it's obviously something that the investment community pays a lot of attention to, but actually doesn't really have a whole lot to do with the actual health of our business. We just like to put that cautionary note in there. Obviously, whenever we see things that are potential gotchas out there, we like to be conservative on that front. That's where that tagline came from.

Thanks, Jason.

Then, as you look in the June quarter, you talked about in the letter the 55-nanometer part really contributing in the second half of the calendar year. By that, should I assume that any contribution in the June quarter was small?

Yes, that's a perfectly reasonable assumption.

And then just finally, looking forward, you mentioned several of your growth drivers in the letter. What kind of visibility do you have into the amps? It seems like the most near-term opportunity for you in terms of regaining that attach with the Codec? And, as well as your thoughts on stereo amps in the smartphone ecosystem over the next couple of years.

I don't want to comment on specific design wins that we are pursuing. But generally speaking, people are doing lots of creative stuff with our amplifiers. It's a big and growing product line, like we've noted in the shareholder letter. We're extremely confident that we're going to continue to be able to grow that going forward. Obviously, that is not 100% up to us, but we see very good opportunities to continue to do that.

There are a bunch of sockets where there is an amplifier of some sort, or the potential to be an amplifier, right alongside one of our Smart Codecs out there. And that's an area where we think we should have a significant strategic advantage because we can throw a lot more DSP horsepower at it than someone else might via our Smart Codecs.

As things continue to move in the direction where a Smart Codec adds value in a socket, I think that gives a significant advantage to our amplifiers. And, again, there are just a number of trends in the market that we think continue to make that a pretty attractive subset of our market that we serve.

Ruben Roy, Piper Jaffray.

Thank you.

Nice job. Congrats on the nice results.

Jason, I wondered initially if you can maybe characterize your continued expectations, as you've cited for a couple quarters now, for significant growth this fiscal year. In light of some of the macro headwinds in Europe and elsewhere, foreign currencies, et cetera. Obviously, you have a lot of Company-specific positives here with some new products shipping and new wins. But in terms of the macro, has your outlook for the fiscal year changed much relative to three months ago?

No. I would say if anything, it has gotten better in terms of the things that we can control. I would say that, obviously, we don't have any ability to impact how many of a particular device one of our customers sells in Greece or China or whatever. So that part is no more known to us than it is to you. But I would say in terms of the things that we are involved in, the demand for our products, the sockets that we are winning -- I would say that environment continues to get better.

For the most part, FY16 is what it is; and it does depend on how well our customers' products sell. But generally speaking, we are cognizant of all the scary stuff and headwinds that you mentioned; and we try to take that into account. So I think we're in good shape relative to that in our growth expectations.

Some years, we really are at the mercy of -- like last year, for example, really was not a big year of new product introductions for us. And as it turned out, we're partnered with the right customers; and they did an incredible job of knocking the cover off the ball.

This year, we've been telegraphing for a long time is a significant year of new product introductions on a bunch of fronts. Big transition to 55 nanometer. Which the only reason for us to do that is to increase our content, add a lot more digital functionality and capabilities that hopefully help our customers make their products even more successful than they've already been.

While we are coming off a pretty amazing base from last year, we've got a number of Company-specific things going our direction as you indicated. I don't view us as a story that is very macro. There's probably a little bit of less correlation with our success this year and what the general macro is doing overall. Obviously, it scales things; but we're not dependent on the macro being amazing for us to have a really good year regardless.

Thanks, Jason. That is really helpful.

And I just had a quick follow-up for Thurman. On the OpEx, another quarter of a pretty material pickup. Understandable, and you talked about some of the drivers behind that: development costs, employee expenses, et cetera. I'm just wondering, can you characterize -- is that some of these real-time design wins in activity you are seeing that's driving that? Or is this part of the plan, and maybe how you think that trends into the second half of your fiscal year? Thanks.

It really is part of the plan. And we would expect to continue to invest in R&D. If you look at where we ended for this quarter, we would really see R&D growing somewhere between 2% and 3% per quarter for the rest of this year.

We would note though that when you look at R&D, we can have a certain amount of tape outs and mask sets in one quarter, and so you can see some fluctuation in that number. Additionally then on the SG&A side, we would expect that to be very flat going through the year; and we don't expect any growth in that.

I will just add to that. On the R&D line in particular, our view is that in order to continue to deliver the growth that we would like to see, we think it's pretty important to keep ourselves somewhere in the range of 17% R&D on an annual basis.

Obviously, as Thurman just indicated, that moves around a bit on a quarter-to-quarter basis. It always seems like you get a bunch of tape outs one quarter and maybe none the next quarter. So it can be a little bit lumpy on a quarter-by-quarter basis, but that's where we need to be. And our big concern, frankly -- much like happened in 2012 -- is that if we don't have our foot to the floor on the hiring front, then we have the potential to get behind where we are on the model. And that's not a good place because we've got some pretty lofty aspirations as far as growth goes in the future. And that stuff needs to be staffed in order to happen.

That makes sense. Thanks.

Christopher Longiaru, Sidoti & Company.

Congrats on the results.

You were a little bit higher on the gross margin line, but it sounds like it wasn't a whole lot of the progression to 55 nanometers. Can you just give us a little bit of color into why the gross margin was higher? And what your ideas are to put you at the low end or the high end of the range in terms of the guidance?

We came in at the high end of the range. A big piece of that was supported by supply chain improvements. That was offset a little bit by a higher mix of portable product sales. Between those two, we did see some improvement in the margins going to the higher end of what we expected.

I would say, a plus or minus 1% range on OpEx is actually fairly aggressive in terms of being a pretty tight range for us. It can easily move around a percent or so on mix. So it's not terribly surprising for us to be at the high end. We gave you the range we gave you because we think the prudent thing to do is to model the center of it, but moving a percent one way or the other doesn't usually mean much.

And then just in terms it looks like you paid down about $20 million in debt. Do you guys have an annual goal or what your expectations are for using the cash?

Yes, from cash usages, our number one goal is to invest in R&D and to fuel the organic growth. And that is to Jason's point that he made earlier, that we would like to keep our R&D at a healthy level of 17% or so. After that, we've been looking at acquisitions. We certainly did the Wilson acquisition recently. We look at tuck-ins that would help us in terms of boosting technology, whether it be in hardware or software.

Beyond that, the next two categories are the paydown of debt and share repurchases. We look at both of those as something we will do on an opportunistic basis. Every quarter, we look at how we want to utilize cash and what our best path is to return some value to the shareholders. And that's how we do it.

That is helpful.

And then just in terms of the LED asset sale, is there a lot more there that you guys still have? I know that you've talked about trying to monetize some of that. Could you just talk to that?

Well, it was a sale of not all of the LED patents, but we had an opportunity to monetize something that we weren't using. Didn't have an expectation that we were likely to need. And patent sales are something that we approach -- it's not a core business for us, so it's not something we're real aggressive about. We always end up with concerns about do you end up selling patents that end up in the hands of a patent troll.

In this case, it was somebody that actually practices the art and is in that line of business; so we didn't have concerns there. So it just seemed like a good home, where somebody could get some value out of the hard work that our creative engineers have done over the years and put some money back in the coffers that we can deploy more effectively. It's not something that we really pursue actively all the time.

That is helpful. Thanks, guys. I will jump out.

(Operator Instructions)

Tore Svanberg, Stifel.

Thank you.

My first question is you say in your shareholder letter you're targeting share gains with the smartphone OEMS 3 through 10. I'm just wondering, is that going to be more custom parts or would that be more standard parts?

No. We really see the best opportunity to grow our business in that segment of the market with general market products, such as what the UK team has been developing. It's not that many customers where you can be confident two or three years in advance that you can work with them and develop a custom piece of hardware that's going to fit what they want because a lot of them don't know that far in advance exactly what they're going to want.

So the strategy that we have is to develop a general market product that is very programmable; features the best analog of mixed signal inputs and outputs, and all of the various bells and whistles that go with one of our Smart Codecs. And then provides a lot of flexibility in terms of the software customization that we can do.

And so that is pretty typical of what our approach will be across the Android market, is to really try to provide a great platform via the chip. And then provide a lot of customization in terms of our own IP, third-party IP working with our partners that are coming up with neat and clever ideas all the time. And then, of course, all of the customers out there that we typically do business with have got ideas of their own or algorithms or EQs or you name it that they want to integrate.

So we provide tools and support and everything else which enables our engineers to be in a really good position to assist with the system integration and bring all that together to achieve the goal. So it's pretty different than I guess you would call the traditional -- the Cirrus business from before, which is custom chip-based. But it's a really great approach to the Android market because it enables us to deliver customers' differentiation, but do it on a time scale that they can actually realize.

That strategy is working out great. It has been working really well on the flagship. And we're starting to see that get more traction in the mid-tier and then across the 3 through 10 accounts.

A number of those accounts are still, like we said in the shareholder letter, going to be more focused on add-ons -- amplifiers and maybe a high-performance D-to-A converter. But over time, we continue to expect more and more of those accounts to be able to make their own decisions about what sort of audio devices they want to use and come up with neat and clever ways to differentiate their products in the pursuit of trying to have a little bit of margin they can keep for themselves.

That is really helpful. Without getting too technical, you mentioned the always-on voice functionality and that you intend to market that more meaningfully. What does that really mean for your content per unit here?

And again, I'm not trying to get too complex on the technology side of things. But it just seems like that is something that could potentially expand your content quite a bit.

It's interesting. Actually, the support for that function has been in the line of devices we've derived -- this is really a general market statement. Obviously, I don't talk too much about the other side of things. The support for that function has been in the UK team's Smart Codec, even the one that shipped last year.

The thing about always-on voice is that it is just such a unique intersection of really difficult things. You've got to be able to do the high fidelity, audio, and voice A-to-D conversion that we are well-known for. But by always on, historically I think there has always been an asterisk by always on. But what we are hearing from a lot of the Android market is they really want always-on to not have an asterisk, they want it to really be always on, not just when it's plugged in. And to do that requires an incredibly low power front-end.

So obviously, there are algorithms that go along with that; and we support those. We've got elements of our own software that get worked in with third parties or with software from our customers to enable the full always-on voice feature. But we really view it as something that our hardware can provide meaningful value to by being incredibly low power and interfacing to the system in a way that can really add value.

Long term, incorporating -- obviously microphones are a neat investment for us. They're not a huge part of the business today, although they are growing in volume. But in the long term, we see the design of microphones and Smart Codecs in tandem as a system as being something that adds a lot of value in a number of applications. Always-on voice being at the front of the list. The more smarts we can cram into the microphone up front of the system, then that gives us more opportunities to control the power consumption through the whole signal chain.

Great, thanks.

One last question. If you look at the inventory, it's obviously up quite significantly. And you tend to do that ahead of big product ramps. It just feels like this time around, it's a little bit higher ahead of -- meaning the September quarter unit growth doesn't seem as high. Is that because you have some completely new products with much higher dollar content here? Or has it even something to do with getting ready for 55 nanometer and just making sure you will not have any yield issues and anything like that?

It's really less about yield. But obviously, we have telegraphed that we expect to ramp 55 nanometer. And we've said pretty directly that that is about increasing content. I would say the relative change from say the beginning of Q1 to what we are telegraphing going forward is it is definitely saying good things about what we expect. Obviously, we expect to grow this year; so that would imply we've got to grow our product inventory.

But also, we've been in a situation this last spring where it was definitely a challenge to keep up with demand. And that drove our inventory levels to significantly lower than we would normally like to see.

So one of the great things about moving from 180 nanometer to 55 nanometer for the workhorse node for our product line is we were a very large percentage of a fab worth of 180 nanometer. As we move our workhorses from those older geometries into 55 or 65 nanometer, our spend with our vendor goes up; so that is good. Our importance with the vendor goes up; and consequently, our selling prices out go up as well. But our fraction of a particular fab's capacity goes down quite a lot, which is really great news. That gives our supply chain team a lot more flexibility and ability to grow inventory when we need it, rather than living hand to mouth like we have been doing a lot this spring.

That is very helpful. Thank you. Great quarter.

Tom Sepenzis, Northland Capital Markets.

Thanks.

I will echo my congratulations on the quarter and the guidance. I was just wondering if you could give us any color. You mentioned you have a new Android customer. You mentioned it was a top customer. Is that meaning top tier one provider or just top as in unit volumes? Any color around whether this is a mid-tier device or a high-end device?

I don't want to telegraph anything more than we have in terms of what account that is. It's their business to launch their products. It's obviously somebody we're excited to be working with. And I think we noted in the shareholder letter, it's with a Smart Codec; so that is a big decision on a customer's part. It's a large integration effort, and those are the stickiest sockets that we sell. We're very excited to see that technology taking hold elsewhere in the market.

Great, thanks.

In terms of the June quarter, with the mobile products, can you talk about the ASP trends that you're seeing right now on a blended basis overall for the Company?

We have said that going forward we do expect to grow our content through the course of the year. The products that we've ramped in 65 nanometer earlier this year were certainly a step up from what the UK team have been shipping before. And we've talked a lot about 55 nanometer being all about delivering more value for our customers going forward. I don't know looking at it on a quarter-by-quarter basis. But on the whole, certainly our blended ASP, I would expect to continue to go up.

Great, thank you.

And then, last question from me. In terms of the tax rate, you mentioned that given that a lot of the sales will be counted overseas, you could see it drop down from the 30% level. What should we be thinking out a year? Mid-20%s? Or high 20%s? How do you see that?

For FY16, we would expect the effective global tax rate to be around 30% for this year. If you look out into 2017 and maybe the next couple of years after that, the best way to look at it for right now would be a reduction of around 2% per year.

That's great. Thanks so much. I appreciate it.

(Operator Instructions)

There are no additional questions on the phone line. I would now like to turn the call over to Ms. Chelsea Heffernan.

Thank you, Operator.

The questions submitted via email this afternoon were answered during the Q&A. So I will now turn the call back to Jason.

Thank you, Chelsea.

In summary, Q1 was another great quarter for Cirrus Logic. We are extremely pleased with our financial results, as strong demand for our Smart Codecs and amplifiers drove revenue above the high-end of our guidance. With a comprehensive portfolio of products, a compelling strategic road map, and outstanding customers, we are excited about our outlook for growth in FY16 and FY17.

I would also like to note that we will be holding a virtual annual shareholder meeting on Wednesday, July 29 at 11 AM Central Time.

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 would like to thank everyone for participating today. Goodbye.

This concludes today's conference call. You may now disconnect.