Thurman K. Case - Cirrus Logic, Inc. Jason P. Rhode - Cirrus Logic, Inc. Chelsea Heffernan - Cirrus Logic, Inc..

Tore Egil Svanberg - Stifel, Nicolaus & Co., Inc. Matthew D. Ramsay - Cowen & Co. LLC Rajvindra S. Gill - Needham & Company LLC Blayne Curtis - Barclays Capital, Inc. Christopher Rolland - Susquehanna Financial Group LLLP Adam Gonzalez - Bank of America Merrill Lynch Charlie Lowell Anderson - Dougherty & Co. LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Second Quarter Fiscal Year 2019 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 Director of Investor Relations. Today, we announced our financial results for the second quarter of fiscal year 2019 at approximately 4:45 p.m. 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, the latest Form 10-K and 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 current expectations.

Now I'll turn the call over to Jason..

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. Cirrus Logic reported revenue of $366.3 million in Q2 of FY19.

Revenue exceeded the high end of guidance as orders for certain portable products moved into late Q2 from early Q3. Predicting revenue for these quarters can be particularly challenging, as we are typically ramping heavily at the quarter boundary and our customers can and frequently do change individual orders on short notice.

While our guidance for the December quarter reflects this shift in orders, we note the company's expectations for this six-month period remain relatively unchanged.

With respect to the company's overall expectations for the remainder of FY19, the primary drivers of variability include end customer demand for handsets that utilize our products and timing of new smartphone launches expected late in the fiscal year.

We are pleased with our progress in Q2, as design momentum across our portfolio was strong and numerous new devices were announced that use our components. In the smartphone market, we expanded our share with existing customers and began shipping two audio amplifiers and a haptic driver in a new North American flagship Android handset customer.

During the quarter, company increased penetration of boosted amplifiers in flagship and mid-tier smartphones and ramped a new 55-nanometer amplifier with a leading customer.

Further, after our initial win in a single smartphone model last quarter, we expanded our footprint with one of the largest Android OEMs and are now shipping boosted amplifiers in multiple models. We expect additional flagship devices utilizing our technology to launch over the next six months.

In haptics, we're delighted with our team's execution since Cirrus Logic began investing R&D resources in this product line in calendar 2017. As I mentioned, we're now shipping a haptic driver in our first flagship Android smartphone.

While design activity with our first-generation haptic driver is robust and we expect new devices to come to market over the next 12 months using this component, we also plan on taping out our first product design specifically for haptics in the spring of calendar 2019.

With an extensive portfolio of products and a compelling road map, we are encouraged as we continue to see increased demand for products that capitalize on our expertise in ultra-low-power, low-latency and mixed-signal processing.

As we look to FY 2020 with a solid pipeline of products and meaningful customer engagements, we remain confident in our ability to return to year-over-year revenue growth.

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 relationship. Operator, we're now ready to take questions..

Your first question comes from the line of Tore Svanberg of Stifel. Please go ahead..

Yes, thank you. First topic is haptics. So, it sounds like you're going to be offering a haptic-specific solution in the spring of 2019. I was just hoping, Jason, you could elaborate a little bit on what that means for you as a company, especially when thinking about the integrated DSP and what that can offer customers for flexibility and so on..

Sure, yeah, it's a great question. Yeah, I would say it's kind of more – the theme would be more of the same. It's kind of building on the success we've had.

Any time you come out with a new device and you first engage our broad market, you learn about things where we could sweep in more and more of the system and just try to make it as turnkey of a product as possible.

And in particular, relative to the Android ecosystem, they really prefer to have self-contained devices that are not having to do a lot of the development across multiple devices whenever possible. So it's really just kind of a little more purpose-built, little more integrated type of device..

All right, great, thanks. And my other question was on voice biometrics. You mentioned in your Shareholder Letter that everything is progressing there.

But could you update us on timing on when this could be more of a revenue driver for you? Is it going to be fiscal 2021 or could it be earlier than that?.

I mean, we could see some contribution before that, but that's probably a reasonable placeholder for when the potential is for it to be meaningful. It is one of the further-out things on our – the layers to our growth strategy.

I think obviously, the short term is being driven significantly by progress in amplifiers and haptics, in particular, broadening out our penetration into more and more of the Android ecosystem.

Increasingly, we feel like haptics is a really good poster child for where we can take our audio technology and apply it to other areas that maybe aren't as audio- and voice-related.

But that mixed signal capability to embed high processing power in an integrated mixed-signal device, maybe with higher voltage capabilities, is a little bit unique and something we're seeing a lot of pull for from the market.

So we remain really excited about voice biometrics, but as you point out, it's further out than some of these other growth vectors for us. Feedback from customers has been good. We've done a number of demos with various interesting customers for the technology and continue to look for ways to broaden out the appeal into other devices.

Obviously we're targeting handsets first, but there's a lot of interest in it for other markets as well..

Thank you. Your next question comes from the line of Matt Ramsay of Cowen. Please go ahead..

Thank you very much. Good afternoon. I guess, guys, maybe you could talk a little bit about you'd given some commentary over the last couple of quarters about visibility to returning to growth in fiscal 2020. Maybe you could just expand on that a little bit, if that's definitely still the case and just kind of forward commentary would be helpful.

There's just a lot of moving parts here from a macro perspective, which don't really affect the wireless market per se, but we just want to make sure we have things calibrated. Thank you..

Sure, yeah, I mean, so just to be clear, we don't have any magic crystal ball as it relates to the macro situation and trade wars and all of that.

So the commentary about return to growth is definitely not reflective of us being overly rosy as it relates to what the general market's going to do, but it is reflective of content gains that we expect to see.

With customers we've already had, we do expect in the Q4 timeframe to get back to having a second customer that is north of 10%, so sorry for the challenge. Everybody's going to have to pay attention to more than one customer of ours. But we're excited about that and that should drive a good result for us through the year.

So the return to growth is really based on things where we know what we're shipping and we know the content we have and the content gains that are associated with that, the progress the team's made penetrating an increasing number of accounts in China, some of which are smaller and we have to aggregate up a larger number of wins, but some of which are not so small either in China or Korea, I'll just highlight the comment from the last Shareholder Letter where we were pretty excited to be now shipping to the top 3 handset manufacturers overall.

And as we kind of alluded to earlier, we've made some progress with some of the bigger guys in China. So that's what the guide or the outlook, I guess I should say, for FY 2020 is based on, there's not any miraculous growth in the market or overly rosy outlook in that perspective; It's just based on content gains and continued expansion..

Got it, got it. That's helpful.

And then I guess as a follow-up completely unrelated, one of the – a couple of the trends we've been following in smartphone space are, I guess, OEMs' push to just have completely flat glass faces with no real holes or buttons and additional wrinkle of potential folding phones and flexible phones and the like coming down the pike.

Maybe you talk a little bit about some of the challenges around audio from microphone and speaker placements, et cetera, for some of those type of designs. Is that an area of R&D that might differentiate your product, if you see that as a driver? Or am I sort of going down a rabbit hole I shouldn't be going down? Thanks..

No, I think that is – it is already a driver of a lot of what we're doing, particularly as it relates to the boosted amplifiers and then also in a different way to some of the haptic stuff we're investing in.

So the analogy I always use is probably everybody remembers back when they were in college and they had a cheap set of stereo speakers that were the size of a refrigerator, but they sounded pretty good. It's easy to make things sound good when you've got big speakers and lots of air to move around.

But as things get really compressed, it seems like the acoustics folks are always last in line when it – when space in a handset or volume in a handset or microphone or speaker placement is decided, it's always the IT guy first and get what they need.

And so it becomes increasingly difficult to make these handsets and other products sound good as they get smaller and have less air to work with or less ideal placement of the transducers, either on the input side or the output side.

So that's a lot of what we've done with the boosted amplifiers, for example, is just trying to make them sound – continue to sound good and especially be louder in an environment where the speakers get smaller and the air volume they have to work with gets smaller.

So you're spot on that that's already driving a meaningful amount of the business for us for the boosted amps, and that's certainly an area that we're investing in to try to make such things sound better and better and especially louder over time..

Thank you. Your next question comes from the line of Rajvindra Gill of Needham & Company. Please go ahead..

Yeah, thank you for taking my questions and congrats on the good execution on the boosted amplifier.

So staying with that theme, can you talk about the share shifts that are happening in the amplifier market, particularly in the Android market, your competitive advantage there and the fact that you are ramping with more models? How do we think about that as the total TAM and as a growth driver going into next year?.

Sure, yeah. So it's a key part of our growth – well, has been a key part of our growth over the last however many years since we got into that market. We definitely expect it to be a meaningful part of the growth through shipping amplifiers to folks we haven't shipped amplifiers to previously.

It's a little bit of a mix of taking share from other suppliers or competitors of ours and also selling amplifiers into handsets that either didn't have an external boosted amp at all or just had a basic amplifier that was built into, say, a PMIC or so forth in somebody's chipset.

So as these – kind of to the question earlier, to the point that we were making there, it's gotten harder to either maintain the amount of output volume that you've previously had and also there's a real desire to have them be much louder in the first place.

People have as a use case, they'd really like to be able to set the handset on the passenger seat of the car and use the speakerphone without monkeying around with a bunch of Bluetooth and trying to get everything to work right. Just set the phone down and use it in speakerphone mode. And that really does need to be pretty loud to pull that off.

So that's why you've seen the migration to boosted amplifiers and then also the addition of stereo, which yes does provide some degree of stereo separation, but in large part is just making the overall handset to be much louder.

So, specifically to your question, it's a bit of growth through addition of amp – to separate boosted amps that didn't have them before that changed to stereo and some of that's come at competitors' expense. Some of it's come via devices that just didn't have this product in them before at all..

And we're seeing some Chinese OEMs start to adopt voice activation, voice trigger for – that includes always-on voice. What's your positioning there? It seems that's a market where there's going to be a need for always-on ultra-low-power voice processing type of applications..

Sure. Yeah, we agree, and that's certainly an interesting trend. We expect to benefit from that. Certainly, more voice activation means that you need to be even more conscious about power than handset manufacturers already are. So, that creates good opportunity for us. We certainly ship in some of those models today.

Generally speaking, it's a little higher-end play.

And therefore while the flagship wins, have got a lot of panache and flash to them, they maybe don't drive as big of a business as the amplifiers might over time simply because while not everyone wants to differentiate on some of these more esoteric functions, everybody wants it to be a better phone and a better speakerphone.

So, I would say the – still in rank order, the amplifiers and haptic are probably a bigger – we expect them to be a bigger driver of revenue growth in the China market over the near term..

Thank you. Your next question comes from the line of Blayne Curtis of Barclays. Please go ahead..

Hey, guys. Thanks for taking my question. Jason or Thurman, I was just curious, you haven't updated the fiscal guidance for two quarters here. I think December's down a little over 20%. If you have any thoughts, I know you've talked about an Android win, but is there any update to the fiscal guide? That's question one..

Yeah, well, just, yes, December is down significantly. But that's because Q3 was kind of a significant beat. Again, the sum of the two quarters, Q2 plus Q3, is largely in line with our previous expectations and I think pretty consistent with consensus. As it relates to Q4, there's a lot of moving parts in that timeframe.

I would say whenever that happens, we like to be really conservative. And so, I would say in that context, maybe consensus is a little bit high relative to if we had our druthers and we were drawing up everybody's models, we'd probably lower that a bit just to give ourselves a little bit of space.

But there's a lot of moving parts between now and then. The primary drivers, as I said in the opening remarks, are just end-customer handset demand, which we don't necessarily know yet. And then, also in the Q4 timeframe, we expect to get back to having a second customer that's over 10%.

And so the timing of that launch is – also adds some variability as it relates to Q4 versus Q1 of FY 2020. And so, those are kind of the remaining bits of variability and given all of that, we would just, as usual, try to be conservative and maybe drop it a bit. But any range of things is possible.

I think depending on how things go, we could potentially be significantly higher. We could potentially be significantly lower. Maybe not lower than your number, but consensus, at least..

Right. So, you did talk about this a little bit, but I wanted to just follow up on haptics. You mentioned taping out a specific part for it.

Can you just walk us through the competitive landscape for haptics drivers? And then, your visibility in maintaining the sockets you have, and then where do you see opportunities for this new chip?.

Yeah, it's been pretty – the concept has been pretty well-received. I would say that the device we already have has been tremendously well-received. It's Korea. It's China. It's really – and as we mentioned in the release, North American customers are interested in it. The competitive landscape is pretty limited at the moment.

Because of the needs for ultra-low latency and some of the other real, kind of, nitty-gritty details, it's really helpful to have the DSP integrated into the amp. And so that's less, if I think about our audio amp competitors, that's more in the NXP wheelhouse versus Maxim.

Maxim stuff generally is the amplifier by itself and you'd need to do the signal processing elsewhere. And there are certain customers for whom that's an appealing architecture. But for haptic, given the ultra-low latency and the feedback, it's really helpful to have the integrated DSP. So that kind of narrows it down a little bit to us and NXP.

TI's got some products that are out there. It doesn't seem like all of our competitors focused on it early enough. It is I think the case that certainly one of our amplifier competitors had a bit of a circus going on over the past couple years on the M&A front, which I think maybe had their eye off the ball on this particular market.

But yeah, it's a very compelling opportunity and I'm certain everyone else won't ignore it. But at the moment, that isn't the primary concern.

When we roll in with customers, they are – customers worry about, well, if I go to a proper haptic actuator that does add cost not through our chip so much as just a good haptic actuator is more expensive than an old school vibration motor, provides a completely night and day different experience, but not everybody in the Android space is willing to pay for, well, much of anything.

But nonetheless, we're seeing that kind of customers across the board are very, very interested in it, and then that just leads us to try to address things like overall system cost through integration of more of the capability – more of the things that are needed on the boards, lowering passive component costs, being able to do more in DSP, such that you can use a less-expensive haptic actuator, those are kind of some of the competitive trends in that space..

Thank you. Your next question comes from the line of Christopher Rolland of Susquehanna. Please go ahead..

Hey, guys. Just quickly on the second customer, over 10%.

Are you providing them enhanced or better features that you're already supplying, or are these totally new features for that customer?.

It's kind of new functionality for us to ship them..

Excellent. And then on amps, if you win one amp, are you typically winning all of the amps and haptics in that phone? And then also, the amps that you're shipping now, kind of where are we in the 55-nanometer ramp? It kind of reads like a lot of the amp wins that you have might have been older stuff.

Is that right?.

Well, okay, I'll try to do that in reverse order. We didn't have this new 55-nanometer amp with the integrated DSP for the Android market. We didn't have that until about a year ago. So certainly some of the wins in Android were with one or two of the older devices, but frankly, they really weren't architected that well for Android.

So we're really seeing an uptick in Android design-ins following the launch of the 55-nanometer product with the integrated DSP. Shoot, I forgot what your first question was. Sorry, my crack team of IR professionals reminded me the first question was do we usually win both of them.

I'm unaware of any case where if somebody's actually doing stereo, where the amplifiers would get split even among models of our own amps, let alone across two different vendors. That would really be complicated to manage.

There are cases where customers do what we call receiver-assisted stereo, which means they use a traditional receiver speaker for the earpiece, like, when you hold the phone up to your head kind of speaker.

And they'll play – they'll filter out the bass and play a little bit of the high frequency stuff through that in speakerphone mode to try to give you a pseudo-stereo experience. And in that case, we would only have one amp, but it's a pretty uncommon solution today.

The haptic isn't necessarily connected from one competitive – in a competitive situation, but certainly the more content you're shipping, that gives you a lot more opportunity. Most customers really like to have as few throats to choke as possible when it comes to developing their products.

So if we're winning a stereo amplifier saga, I would say that gives us a leg up on the haptic slot and vice versa, but they're not as directly connected as the stereo amp pair..

Thank you. Your next question comes from the line of Adam Gonzalez of Bank of America Merrill Lynch. Please go ahead..

Hi, guys. Thanks for taking my question. Just based on your disclosures, it looks like revenues outside of your largest customer implied down mid-teens or so year-on-year, and this is despite easier comps from last year. Just wondering if you could remind us why that's still the case and when we can expect this to rebound.

Is it when that second 10% customer comes back on line in Q4 or could it be before that? Thanks..

Yeah, that's the dynamic. It's largely related to that same customer and it's difficult to really get any visibility about it, given that they're not currently a 10% outfit.

So, yeah, it's largely related to that, related to some of the larger Android customers that we've had have not had the most superb past couple years, which has been a little bit of a challenge there..

Got it. And then, just my second question.

Can you just talk about some of the progress you've made in digital headsets? Just to remind us what some of the milestones you've hit and anything that's on the horizon that we should be looking out for?.

Well, we're shipping in more models as – it seems like a new one here and there over time. The Android space did not rush to the adoption of USB-C-only or dropped the headphone jack nearly as quickly as we thought they might.

We do have some thoughts that over time, the 5G transition might actually impact that a bit because it does get pretty complicated from an antenna and a radio perspective, and turns out at those kind of frequencies, having analog ports in your phone, and in particular wires that are three-feet long sticking out, is not great from an antenna perspective.

So, we might see some catalysts there as that category of customers figure out like why that actually mattered a number of years ago. But it has been slower to progress than we expected.

But nonetheless, we remain feeling pretty good about the product line that we've got and the offerings that we've got out there, which are broader than they've ever been. And we are seeing good uptake of that from the customers that are choosing to launch such products.

So, it's probably, I would say relative to expectations a year or so ago, amps and haptics are better than our expectations in that timeframe and headsets, probably a little bit lower. But we're still working on trying to shore that up..

Thank you. And your last question comes from the line of Charlie Anderson of Dougherty & Company. Please go ahead..

Yeah, thanks for taking my questions. Jason, I think we're starting to see a few Chinese OEMs adopt these so-called smart mics with a single DSP core. I guess, voice activation is sort of the thought there.

I'm just sort of curious, over the long-term what you see as that trend and the interplay between that and the codec, what capability they're looking for from the codec versus what they want to do out at the mic level. I know you certainly have a mic business and (27:58) to some degree.

So just long-term trend, architecturally, what are you seeing there?.

Well, frankly, that architecture doesn't make a lot of sense to us and the feedback we've gotten from most of our customers it doesn't make a lot of sense to them either.

In most of these cases where you are wanting to do any of that voice activation function, it's not a single mic system, and so why you would embed the DSP content there where it actually – there's no value particularly in adding it there, I suppose unless you don't have a chance of winning the codec.

So, I would characterize the wins that we see in that business for them as – they are really pretty nichey and to develop something in 55-nanometer to go opportunities [Technical Difficulty] (28:39) We have made a lot of progress on the microphones.

We do see a lot of opportunity to innovate in mics and turn them into something that's far less of a commodity product. But it's not along those lines in particular. I mean again, there's always an interesting niche here and there.

It's a pretty broad market and so forth, but it's not a major driver that we're likely to go pursue, at least not as far as the way they've differentiated that particular product..

Okay, that's all I had. Thanks so much..

Well, thank you..

And there are no further questions in the queue. I turn the call back over to Chelsea Heffernan..

Thank you, operator. There are no additional questions today, so I'll turn the call back to Jason..

In summary, we are pleased with our accomplishments in the September quarter as we ramped shipments in numerous new devices and expanded our footprint in Android. With a robust portfolio of products and innovative roadmap, we believe in our ability to expand our share in our target markets and return to year-over-year revenue growth in FY 2020.

I would also note that we will be presenting at the NASDAQ's 39th London Investor Conference on December 4. Live webcasts of the event will be available at investor.cirrus.com. If you have any questions that were not addressed today, you can submit them to us via the "Ask the CEO" section of our investor website.

I'd like to thank everyone for participating today. Goodbye..