Cirrus Logic, Inc. (NASDAQ:CRUS) Q4 2024 Earnings Call Transcript

Cirrus Logic, Inc. (NASDAQ:CRUS) Q4 2024 Earnings Call Transcript May 7, 2024

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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Fourth Quarter and Full 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.

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 P.M. Eastern Time, we announced our financial results for the fourth quarter and full fiscal year 2024. A Shareholder Letter discussing our financial results, the earnings 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 the analysts covering our company. Additionally, the results and guidance we 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 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 expectations.

Now, I’d like to now turn the call over to John.

John Forsyth: Thank you, Chelsea and thank you everyone for joining our today’s call. As you’ve seen in the press release, in the March quarter, Cirrus Logic delivered revenue of $378.1 million, above the top end of our guidance range due to stronger-than-anticipated demand for smartphone products. In FY 2024, Cirrus Logic delivered full fiscal year revenue of $1.79 billion, down 6% year-over-year due to a reduction of general market and custom components, primarily in non-smartphone applications. Despite those challenges, we are proud that our disciplined execution helped to grow both non-GAAP earnings per share year-over-year for the quarter and both grow GAAP and non-GAAP EPS for the full year. Venk will take the reins in a few moments to walk us through the details of the financial results for the quarter and for the year.

But before I turn the call over, I want to share an update on the progress we’ve been making on our strategy in the past four quarters. We’ve previously communicated that our growth strategy is based around three broad principles; number one, maintaining leadership in our core flagship smartphone audio business; number two, expanding into areas of high-performance mixed signal functionality in smartphones; and number three, leveraging our audio and high-performance mixed signal capabilities to penetrate new markets. This year, we have made exciting progress on all three fronts. In our flagship smartphone audio business, most notably in the past year, we completed our design work on and delivered to our customer two next-generation products; a Boosted Amplifier and a Smart Codec.

The Boosted Amplifier introduces an innovative new architecture, significantly improving system performance and efficiency, while saving valuable board space. The smart codec will be Cirrus Logic’s first 22-nanometer product and will similarly deliver meaningful advances in audio and mixed signal processing capabilities to our customers. Taken together, these devices represent a considerable engineering investment and the culmination of many years of work and close collaboration with our customer. We anticipate both products will launch in devices in the fall of this year. Looking beyond audio. We also made significant investments in certain HPMS areas where we believe our mixed signal design and signal processing expertise can enhance our customers’ products.

A core element of our HPMS strategy is camera controller products, where we shipped our third generation controller in the fall of 2023 itself a key enabler of marquee features in customer devices. Moreover, in the last quarter, we continued to develop our road map by taping out new camera controller IP on a new process node, an early investment, which we expect will pave the way for further Beyond camera control as we also continue to investment in feature and performance enhancements in the future. Beyond camera controllers, we also continue to invest in a number of power and battery-related technologies and innovations. And while new product introductions in these domains are a little further out, we are excited about the progress we made in the development of both key intellectual property and silicon in these areas in FY ’24.

We During the year, we also saw encouraging signs that our IP and audio and HPMS can be valuable and highly relevant as we reach into new markets, most immediately in laptops. In FY ’24, we sampled on designs with and shipped a new codec and a new boosted amplifier that were specifically designed for this market. We also won customer designs with a new power converter products designed for the laptop market and sampled a laptop-focused haptic driver product. Three of these devices, the codec, the boosted amplifier and the power converter were also featured as part of Intel’s Luna lake reference design. and their capabilities contribute meaningfully towards our customers being able to create better laptops. Compared to competitive alternatives, Cirrus Logic solutions sound better, play louder, conserve battery life and save board space.

While there is still a lot of work ahead of us in the laptop space, we exit the year optimistic about the momentum that we are building in this market. Against this backdrop of investment in supporting our customers and in future growth, we remain committed to disciplined execution. Throughout the year, we worked hard on increasing both our own operational efficiency, and the efficiency, competitiveness and diversity within our supply chain. Additionally, during the year, we returned $186 million of cash to shareholders in the form of share repurchases. And these combined actions, along with a decrease in our tax rate during the year contributed to a $0.17 year-over-year increase in non-GAAP earnings per share to $6.59. And with that, let me now turn the call over to Venk to provide an overview of our financial results for the fourth quarter and full fiscal year 2024 as well as the outlook for the first quarter of fiscal 2025.

Venk Nathamuni: Great. Thank you, John, and good afternoon, everyone. I’ll start with a summary of our financial results for both our fiscal Q4 as well as full year fiscal 2024 and then provide guidance for our fiscal Q1 2025. Revenue in Q4 was above the high end of our guidance range at $371.8 million as shipments remain robust throughout the March quarter. On a sequential basis, revenue was down 40% due primarily to a reduction in smartphone volumes, which follows a stronger-than-seasonal December quarter, which, as you recall, was a 14-week quarter. On a year-over-year basis, revenue was roughly flat. Fiscal year 2024 revenue of $1.79 billion was down 6% from a year ago. The decline was driven by a reduction in shipments of our general market and custom products, primarily in non-smartphone applications.

Turning to gross profit and gross margin. Non-GAAP gross profit in the quarter was $193 million, and non-GAAP gross margin was 51.9%. Gross margin was above the high end of our guidance range, due mostly to supply chain efficiencies and lower freight expense. On a sequential basis, gross margin increased by 50 basis points driven by a favorable year basis, gross margin increased 180 basis points due largely to lower supply chain costs, including freight. This was partially offset by a less favorable product mix. Non-GAAP gross profit for our full fiscal year 2024 was $917.5 million, and non-GAAP gross margin was 51.3%. Gross margin increased year-over-year due to a decline in supply chain costs, including the absence of wafer premiums, lower freight expense as well as a reduction in inventory reserves.

And all of this was partially offset by a less favorable product mix. Now I’ll turn to operating expenses. Non-GAAP operating expense for the fourth quarter was $116.5 million. On a sequential basis, OpEx declined $9.2 million, primarily due to decreased variable compensation, lower employee-related expenses, mostly due to one fewer week of salaries as well as increased R&D incentives. On a year-over-year basis, operating expense was down $3.3 million, largely due to an increase in R&D incentives and lower product development costs. This was partially offset by an increase in variable compensation. Non-GAAP operating income for the quarter was $76.5 million or 20.6% of revenue. For the full fiscal year, non-GAAP operating expense was $470.4 million, down $16 million from the prior year, primarily due to increased R&D incentives, a reduction in variable compensation as well as lower product development expenses.

This was partially offset by an increase in employee-related expenses. Non-GAAP operating income for fiscal year 2024 was $447.1 million, as a result, full fiscal year 2024 operating margin came in at 25%, up slightly from the prior fiscal year despite the revenue headwind we experienced in fiscal 2024. Turning now to taxes. For the March quarter, our non-GAAP tax rate was 17.6%. However, for the full fiscal year, non-GAAP effective tax rate was roughly 21%, which was in line with our previous guidance. And lastly, on the P&L. Non-GAAP net income in the fourth quarter was $69 million, or $1.24 per share as the higher revenue and profitability flowed through to the bottom line. And for the full fiscal year, non-GAAP net income was $369.3 million, or $6.59 per share, up $0.17 from fiscal 2023.

The increase in non-GAAP earnings per share was driven by our disciplined execution, share repurchases, as well as a decrease in tax rate that I alluded to earlier. Let me now turn to the balance sheet. Our balance sheet continues to remain strong, and we ended fiscal 2024 with nearly $700 million in cash and cash equivalents. Our ending cash balance was up $182.6 million from the prior year, primarily due to strong cash flow from operations, which was partially offset by stock repurchases. We continue to have no debt outstanding and have $300 million undrawn on our revolver. Inventory balance at the end of the fourth quarter was $227.2 million, down from $256.7 million in Q3 2024. Days of inventory was up 38 days sequentially and we ended the quarter with approximately 116 days of inventory.

Looking ahead, in Q1 fiscal 2025, we expect inventory to increase from the prior quarter as we begin to build ahead of seasonal product launches in the second half of the calendar year. In fiscal 2025, inventory is expected to be elevated as we continue to support customer demand and fulfill our wafer purchase commitments in accordance with our long-term capacity agreement with GlobalFoundries. Turning now to cash flow. Cash flow from operations was $170.5 million in the March quarter, and CapEx was roughly $7.7 million, resulting in non-GAAP free cash flow margin for the quarter of roughly 44%. For the 12-month period ending in the March quarter, cash flow from operations was $421.7 million, and CapEx was roughly $38.3 million, resulting in non-GAAP free cash flow margin of roughly 21%, a 500 basis point improvement compared to free cash flow margin of 16% in fiscal 2023.

On the share buyback front, in Q4, we utilized $50 million to repurchase approximately 548,000 shares of our common stock at an average price of $91.3. For the full fiscal year, we returned $186 million of cash to shareholders as we repurchased 2.3 million shares at an average price of $80.68. At the end of Q4 fiscal 2024, the company had $315.1 million remaining in its share repurchase authorization. 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 Q1 of fiscal 2025, we expect revenue in the range of $290 million to $350 million, reflecting seasonal weakness in the general market product sales and lower smartphone units.

We expect gross margin to range from 49% to 51%. I’d like to point out that we expect gross margin during the current quarter to be towards the lower half of the range as we incur costs to ramp production of our new 22-nanometer codec, as well as the new boosted amplifiers. Non-GAAP operating expense is expected to range from $118 million to $124 million, up sequentially due to an increase in product development and employee-related expenses. I’d note that with the start of a new fiscal year, our annual merit increase takes effect during the June quarter. This is partially offset by lower variable compensation expense. We’ll continue to control discretionary spending while investing strategically in product development to drive long-term growth.

We expect our fiscal 2025 non-GAAP tax rate to be approximately 22% to 24%, which is slightly higher than our tax rate in fiscal 2024. You may recall that we had a large one-time tax benefit last quarter from applying new IRS guidance to our capitalized R&D amounts. We do not expect to have a similar one-time benefit in fiscal 2025. In closing, thanks to the collective efforts of the entire Cirrus Logic team over the past year, we increased operating efficiencies and exercised fiscal discipline, which contributed to year-on-year earnings per share growth. We are pleased with the progress we have made this year, and we’ll continue to focus on the best opportunities to enable the company to grow both revenue and profitability over the long-term.

And before we begin the Q&A, I’d like to note, that we understand there is intense interest related to our largest customer, in accordance with Cirrus Logic’s company policy, we will not discuss specifics about this business relationship. With that, let me now turn the call over to Chelsea to start the Q&A session.

Chelsea Heffernan: Thanks, Venk. We will now start the Q&A portion of the earnings call. Please limit yourself to a single question and one follow-up. Operator, we are now ready to take questions.

Operator: Thank you. The floor is now open for questions. [Operator Instructions] And your first question comes from the line of Matt Ramsay with TD Cowen.

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Q&A Session

Matt Ramsay: Thank you very much, everybody. Good afternoon. I wanted to start on the gross margin stuff. You mentioned in your script maybe being a little bit below the middle of the range for June, and that’s all fine. I wanted to ask, as you roll through the next 12, 15 months, you’re going to be introducing the new codec on 2022, the new boosted amplifiers, you would think that the laptop business becomes a little bit more material to the company. If you could just kind of walk us through how you’re thinking about things on the gross margin front, given all of those variables, I don’t really care that much about one quarter, but just over this product cycle, if there’s anything new that we should consider and just kind of the puts and takes on margins? Thanks.

Venk Nathamuni: Yes. Thanks for the question, Matt, and good afternoon. Yes. So in terms of just the overall gross margin, as you correctly pointed out, with the current quarter, we do expect to see it slightly below the midpoint, primarily because of the ramp costs that I alluded to in the prepared script. But as you’ve seen over the last several quarters, we have made significant strides in terms of improving our supply chain efficiencies and lowering freight costs and so forth. Our long-term gross margin model continues to be 49% to 51%. That’s the range that we’re still comfortable with. Now obviously, we’ll continue to improve the efficiencies as we go forward. But I think we’ll just provide guidance later on as we get more visibility into the gross margin performance.

And then as it relates to your question about the mix as things progress, as you pointed out, we are making some good strides in the PC space today. It’s still — I think we talked about this on the previous earnings call. We expect in fiscal 2025 PC contribution to be somewhere in the low tens of millions of dollars. So as it becomes a bigger portion of our revenue in the future years, it will have some impact on gross margin. But right now, think of it as being in line with our corporate average and we’ll provide updates as we get further along.

Matt Ramsay: Got it. Thank you for that. I guess just as my follow-up, it’s a new market for you guys in notebook and you’ve sized it in the near-term. John, maybe you could give us a little bit on how the early strides have gone in notebook? I mean, can this be a much bigger market over time? I mean, what’s — relative to where you thought you’d be as you sort of start down this path, I mean, what’s been the early experience and sort of the breadth of interest across the different platforms at the PC OEMs. Is this niche for now and growing over time? Or are you sort of pleased with the early progress and maybe it’s potentially a bit larger than you thought?

John Forsyth: Thank you, Matt. We’re certainly pleased with the early progress. It’s going to take time to grow it to be a real needle mover for us, but we see a great opportunity there. And when we look a few years out, we see over $1 billion of SAM there for us to attack as I’ve mentioned previously. If you look back over the past year, in particular, I think we’ve hit a number of really positive milestones, both with sampling our new Codec and Boosted Amplifier design for the laptop market and then seeing those launch in customer products and then now since the last quarter’s report, seeing them actually shipping into end users’ hands. So, that’s great. And alongside that, of course, we had the integration of that Codec, that Boosted Amplifier along with the power converter product in the Intel Lunar Lake reference design.

And that we do believe can be a great engine for further design wins and growth in the coming years. So, Lunar Lake will be something that makes more of a difference to us in calendar 2025. So, that’s in the hands of a lot of OEMs right now. We’re certainly working with, as we said, with the top five OEMs and they are all in various stages of evaluating Lunar Lake and building Lunar Lake designs. And we’ll see those come to market during calendar 2025, which means that the bulk of the impact of that on our P&L will be from FY 2026 and going forward. And our view on what we expect in FY 2025 is unchanged. As Ben said, we think of that as low tens of millions, but with a great opportunity to grow it as we look further at.

Operator: Your next question comes from the line of Christopher Rolland with Susquehanna.

Christopher Rolland: Customer of this question. Can you hear me?

Chelsea Heffernan: Chris, we couldn’t hear you. Can you start over?

Christopher Rolland: Yes. Can you hear me now?

Chelsea Heffernan: Yes.

John Forsyth: We can, Chris.

Christopher Rolland: You can. Okay. I was saying despite my interest in your largest customer, this question will be about all of the revenue not related to that customer. So, I think last year, it was about $232 million total. And I’m wondering, as we enter this next fiscal year, how should we think about growth there? Is like the 30% area with these laptop and other handset games, is that like a reasonable expectation? How should we think about that? Thanks.

Venk Nathamuni: Yes, Chris, thanks for the question. So, I’ll split the non-top customer revenue into a couple of smaller buckets just for some additional clarity. So, if you look at the composition of that business, it can vary anywhere from 12% to 15% at the high point, is probably about 20% of our revenues. And I’ll break it into 3 components. So one part of it is what we call the general market catalog business that is not very dissimilar to what you’ll see in a general purpose, high-performance analog portfolio. And that business is sold predominantly to distribution. We’ve seen just as our peers have, that business has been fairly weak for the last several quarters. And we are seeing some signs of stabilization there. In the last couple of quarters, we’ve seen distribution inventory be fairly stable and such.

And I think that will recover as the economy improves and as general market conditions improve. So that’s very tied to the overall macro. The second piece of that business is the Android business, and I would say, non-big customer, smartphone business. And I would say we’re doing fairly well in the Android space today. We’ve had some good wins there and we’re participating in whatever is happening there in that market. And then the third piece of it is the PC space, and with PCs, as John just alluded to, we’ve made some really good progress in terms of design wins. There’s a lot of momentum across multiple OEMs, and we’re seeing more adoption, especially with Intel Lunar reference design wins and so forth. But it will take a few quarters, maybe even a few years for that to be a needle mover.