q3 fy20 shareholder letter final...q3 fy20 letter to shareholders 2 january 29, 2020 dear...

Q3 FY20 Letter to Shareholders January 29, 2020

Q3 FY20 Letter to Shareholders 2

January 29, 2020

Dear Shareholders,

Cirrus Logic delivered Q3 FY20 revenue of $374.7 million, as higher-than-anticipated volumes of boosted amplifiers, haptic drivers and smart codecs shipping in smartphones drove revenue above guidance. GAAP and non-GAAP earnings per share were $1.13 and $1.41, respectively. During the quarter, the company was actively engaged with a variety of customers and development activities were robust across new and existing product categories. We began sampling several new devices and continued to execute on key strategic initiatives. As we move through the next 12 to 18 months, we are excited to have a number of new products coming to market that we expect to bolster our leadership position in audio and voice and establish a strong foothold with other signal processing components beyond these traditional domains.

Figure A: Cirrus Logic Q3 FY20 Results

GAAP Adj. Non-GAAP*

Revenue $374.7 $374.7

Gross Profit $197.5 $0.3 $197.8

Gross Margin 52.7% 52.8%

Operating Expense $124.8 ($21.6) $103.2

Operating Income $72.7 $21.9 $94.6

Operating Profit 19.4% 25.3 %

Interest Income $2.4 $2.4

Other Expense ($0.6) ($0.6)

Income Tax Expense $6.0 $4.8 $10.8

Net Income $68.5 $17.1 $85.6

Diluted EPS $1.13 $0.28 $1.41

*Complete GAAP to Non-GAAP reconciliations available on page 12 $ millions, except EPS

Revenue and Gross Margins Revenue for the December quarter was $374.7 million, down 4 percent sequentially and up 16 percent year over year. Revenue exceeded guidance, as we experienced higher-than-anticipated volumes for certain components shipping in smartphones. The sequential decline in revenue reflects a typical seasonal reduction in sales to certain Android customers ahead of new product launches in the first half CY20. The year-over-year increase in revenue was primarily driven by


increased unit volumes and content for smartphones, including higher sales of boosted amplifiers in Android. In Q3 FY20, one customer contributed 83 percent of total revenue. Our relationship with our largest customer remains outstanding with design activity continuing on various products. While we understand there is intense interest in this customer, in accordance with our policy, we do not discuss specifics about our business relationship.

Figure B: Cirrus Logic Revenue Q1 FY19 to Q4 FY20 (M)

*Midpoint of guidance as of January 29, 2020

In the March quarter, we expect revenue to range from $250 million to $290 million, down 28 percent sequentially and up 13 percent year over year at the midpoint. Guidance for the quarter reflects strong demand for certain components shipping in smartphones, which is being offset by normal seasonal trends. As we continue to move through FY20 and into FY21, the company is focused on execution, new product development and expanding share with new and existing customers.

GAAP gross margin in the December quarter was 52.7 percent, compared to 53.5 percent in Q2 FY20 and 50.3 percent in Q3 FY19. Non-GAAP gross margin in Q3 FY20 was 52.8 percent, versus 53.5 percent in the prior quarter and 50.4 percent in Q3 FY19. The sequential decline in gross margin reflects a shift in product mix and higher reserves versus the prior quarter, which was offset somewhat by supply chain efficiencies. The year-over-year increase was primarily driven by a favorable product mix and cost reductions on certain products and, to a lesser extent, a benefit of

$254

$366

$324

$240 $238

$389$375

$270*

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

Q1/FY19 Q2/FY19 Q3/FY19 Q4/FY19 Q1/FY20 Q2/FY20 Q3/FY20 Q4/FY20


lower reserves versus Q3 FY19 and supply chain efficiencies. In the March quarter, gross margin is expected to range from 51 percent to 53 percent.

Operating Profit, Earnings and Cash Operating profit for Q3 FY20 was approximately 19.4 percent on a GAAP basis and 25.3 percent on a non-GAAP basis. GAAP operating expense was $124.8 million, up $3.6 million sequentially and $5.9 million year over year. GAAP operating expense included $14 million in stock-based compensation and $6.5 million in amortization of acquired intangibles. Non-GAAP operating expense was $103.2 million, up $2.2 million sequentially and $2.9 million year over year. The primary drivers of the changes in GAAP and non-GAAP operating expense for Q3 FY20 are detailed below in order of significance in Figure C.

Figure C: Primary Drivers of Operating Expenses

Q/Q Y/Y

Employee-related expenses**

Variable compensation

Variable compensation

Stock-based compensation*

Product development (including a reduction in contract labor)**

Product development**

Employee-related expenses**

Increased R&D incentives

Asset impairment

Amortization of acquisition intangibles*

*Excluded from non-GAAP operating expense **Includes restructuring costs reflected in the GAAP to non-GAAP reconciliation on page 12

GAAP R&D and SG&A expenses for Q4 FY20 are expected to range from $115 million to $121 million, including roughly $14 million in stock-based compensation and $3 million in amortization of acquired intangibles. The forecasted operating expense reflects a sequential reduction in variable compensation, offset somewhat by higher product development and employee expenses. The company will continue to focus on our expense profile as we balance our long-term profitability goals with our investment in important R&D projects that we see as central to future growth. Our total headcount exiting Q3 was 1,441.


Figure D: GAAP R&D and SG&A Expenses (M)/Headcount Q1 FY19 to Q4 FY20

*Reflects midpoint of combined R&D and SG&A guidance as of January 29, 2020

GAAP earnings per share for the December quarter were $1.13, compared to $1.27 the prior quarter and $0.49 in Q3 FY19. Non-GAAP earnings per share for the quarter were $1.41, versus $1.55 in Q2 FY20 and $0.91 in Q3 FY19.

Our ending cash balance in the December quarter was approximately $606 million, up from $483 million the prior quarter. Cash from operations was $128.7 million for the quarter. As of December 28, 2019, the company has $170 million remaining in its current share repurchase authorization. We are pleased with our strong cash flow generation and will evaluate potential uses of this cash, including acquisitions and the repurchase of shares on an opportunistic basis. Net interest income is currently expected to be roughly $2.5 million in Q4 FY20.

Taxes and Inventory For the December quarter, we realized GAAP tax expense of $6 million on GAAP pre-tax income of $74.5 million, resulting in an effective tax rate of approximately eight percent. Non-GAAP tax expense for the quarter was $10.8 million on non-GAAP pre-tax income of $96.5 million, resulting in an effective tax rate of approximately 11 percent. Both GAAP and non-GAAP tax expense for the

1,609 1,592 1,580 1,5511,496 1,472 1,441

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

Q1/FY19 Q2/FY19 Q3/FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

R&D SG&A Expense* Headcount


December quarter include the favorable impact of a release of prior year unrecognized tax benefits due to the lapse of a statute of limitations. Non-GAAP tax expense for the quarter includes the effect of higher non-GAAP income in various jurisdictions. We expect that our worldwide non-GAAP effective tax rate in FY20 will range from 13 percent to 15 percent. In FY21, we expect our worldwide non-GAAP effective tax rate to be consistent with FY20 on an annual basis.

Q3 inventory was $137.9 million, down from $144.8 million in Q2 FY20. Inventory in Q4 FY20 is expected to be relatively flat with the prior quarter as we continue to fulfill ongoing demand.

Company Strategy In the December quarter, our customer engagements were robust and design activity was encouraging across our product portfolio. Sales into smartphones exceeded expectations, and we made progress in growing the number of components we supply in these devices. The company also continued to penetrate a variety of other end products and strengthened our position as a source of new technology in areas beyond audio and voice. Throughout the next fiscal year, we expect to add new content with several customers and longer-term we are optimistic that demand for components requiring low-power, low-latency signal processing will continue to expand in our target markets.

Interest in differentiated tactile feedback in smartphones is fueling further demand for the company’s haptic solutions. There are multiple trends driving this interest, most notably the evolution of smartphones towards industrial designs which eliminate mechanical buttons in order to maximize the surface area occupied by the display. Alongside this, media consumption and gaming applications further benefit from rich haptic feedback. In the December quarter we were actively engaged with numerous customers and in the first half of CY20 we expect several new Android smartphones to come to market that use our components. In addition, we recently began sampling our next-generation haptic driver that delivers an enhanced touch experience while reducing the overall footprint of a smartphone haptic subsystem by up to 50 percent. Customer feedback has been very positive, and we anticipate initial revenue from these devices to begin early CY21. While we expect mobile phones to remain the largest market opportunity, we are encouraged by customer conversations and evaluations in a variety of other end products, including wearables.

In the past quarter, we also continued to ramp shipments of boosted amplifiers for recently introduced flagship devices at the top four smartphone OEMs. We experienced strong traction across flagship and mid-tier Android platforms and we expect new smartphones utilizing our components to come to market over the next few quarters. While the company is a well-established supplier of amplifiers in smartphones, we are also experiencing strong demand for these components in wireless digital headsets and tablets, and we expect to see new end products in


these applications come to market in CY20. We recently began sampling several new 55-nanometer boosted amplifiers with key customers as we continue to build out this product line. These low-power devices improve the overall system performance while driving louder, higher-quality sound output from the latest micro speakers. Underlying drivers of this product category include the consumer desire for louder playback and thinner form factors, both of which require continued innovation in amplifier and transducer design. We believe these drivers will remain important going forward, and with solid customer relationships and a compelling range of boosted amplifiers, we anticipate revenue from this product line will grow year-over-year in FY21.

We continue to believe there are meaningful growth opportunities for signal processing within audio, voice and beyond. While we expect 55-nanometer to continue to be a workhorse process node for many of our components, we are excited to bring new capabilities to market for certain solutions. As such, we are in the process of transitioning key intellectual property and smart codec technology from 55-nanometer to 22-nanometer. As part of a multi-year transition, we are currently validating our first silicon component on this node. This advanced process will significantly enhance our ability to deliver ultra-low power, high-performance mixed-signal smart codecs without compromising analog performance. Looking beyond audio and voice, we are pursuing multiple opportunities where our expertise is particularly well suited for closed-loop controller products that optimize performance and allow for precision control when driving and managing a variety of different outputs. We are excited about our longer-term prospects to add additional content with both existing and new customers and expect to begin shipping our first component addressing these new opportunities in CY20.

Furthermore, we are investing in several strategic initiatives that we believe are essential for future growth. With a large portfolio of components and compelling roadmaps, we are leveraging our expertise in low-power, low-latency, high-performance signal processing to drive product diversification within smartphones and broaden our penetration in wearables, wireless digital headsets, tablets, laptops and beyond. As we noted in the previous shareholder letter, in an effort to appropriately resource exciting new opportunities, the company recently reallocated a significant number of MEMS microphone engineers. Since then, we have evaluated our strategic options and are exiting this product line in order to concentrate our resources on projects that we anticipate will have a larger return on investment.

We are pleased to announce John Forsyth has been appointed president of Cirrus Logic. As president, he is assuming a broader role in day-to-day business operations, while leading the company’s product development teams and continuing to drive product line strategies. As chief executive officer, Jason Rhode will oversee the long-term growth and direction of the company. Since joining Cirrus Logic in 2014 through the acquisition of Wolfson Microelectronics, John has led several new product development efforts, most recently as chief strategy officer. John has demonstrated tremendous leadership skills and has been at the forefront of the company’s drive


toward several strategic initiatives that we believe will fuel growth opportunities in the years to come.

Summary and Guidance For the March quarter we expect the following results:

• Revenue to range between $250 million and $290 million;

• GAAP gross margin to be between 51 percent and 53 percent; and

• Combined GAAP R&D and SG&A expenses to range between $115 million and $121 million, including approximately $14 million in stock-based compensation expense and $3 million in amortization of acquired intangibles;

• GAAP operating expense is expected to include a restructuring charge of approximately $22 million.

In summary, Q3 FY20 results exceeded guidance as we experienced higher-than-anticipated volumes for certain components shipping in smartphones. During the quarter, development activities across all of our major product categories progressed and the company continued to execute on key strategic initiatives that we believe will fuel future growth. With a compelling pipeline of products that address audio, voice and other signal-processing applications we believe Cirrus Logic is well positioned for long-term success.

Sincerely,

Conference Call Q&A Session Cirrus Logic will host a live Q&A session at 5 p.m. EST today to answer questions related to its financial results and business outlook. Participants may listen to the conference call on the Cirrus Logic website. Participants who would like to submit a question to be addressed during the call are requested to email [email protected].

Jason Rhode Chief Executive Officer

Thurman Case Chief Financial Officer


A replay of the webcast can be accessed on the Cirrus Logic website approximately two hours following its completion, or by calling (416) 621-4642 or toll free at (800) 585-8367 (Access Code: 8287509).

Use of Non-GAAP Financial Information

To supplement Cirrus Logic's financial statements presented on a GAAP basis, Cirrus has provided non-GAAP financial information, including non-GAAP net income, diluted earnings per share, operating income and profit, operating expenses, gross margin and profit, tax expenses and effective tax rate impact on earnings per share. A reconciliation of the adjustments to GAAP results is included in the tables below. We are also providing guidance on our non-GAAP expected effective tax rate. We are not able to provide guidance on our GAAP tax rate or a related reconciliation without unreasonable efforts since our future GAAP tax rate depends on our future stock price and related stock-based compensation information that is not currently available.

Non-GAAP financial information is not meant as a substitute for GAAP results but is included because management believes such information is useful to our investors for informational and comparative purposes. In addition, certain non-GAAP financial information is used internally by management to evaluate and manage the company. The non-GAAP financial information used by Cirrus Logic may differ from that used by other companies. These non-GAAP measures should be considered in addition to, and not as a substitute for, the results prepared in accordance with GAAP.

Safe Harbor Statement

Except for historical information contained herein, the matters set forth in this shareholder letter contain forward-looking statements, including statements about our outlook in the coming quarters and years, and optimism for the long-term success and outlook of the company; future revenue growth and market opportunities, including opportunities with wearables, digital headsets, and tablets; anticipated revenue growth for our amplifier product line in FY21; and expected product introductions and customer ramps; expectations related to new or additional content at customers; expectations of expansion into adjacent markets; expectations for future revenue growth with voice biometrics, closed-loop controllers, headset products, audio amplifiers, haptic devices and other components requiring low-power, low-latency signal processing; our ability to continue to generate strong cash flow; effective tax rates for fiscal year 2020 and fiscal year 2021; and our forecasts for the fourth quarter of fiscal year 2020 revenue, profit, net interest income, gross margin, combined research and development and selling, general and administrative expense levels, stock-based compensation expense, amortization of acquired intangibles, restructuring charges and inventory levels. In some cases, forward-looking statements are identified by words such as “emerge,” “expect,” “anticipate,” “foresee,” “target,” “project,” “believe,” “goals,” “opportunity,” “estimates,” “intend,” “will,” and variations of these types of words and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future


events or circumstances are forward-looking statements. These forward-looking statements are based on our current expectations, estimates and assumptions and are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, the following: the level and timing of orders and shipments during the fourth quarter of fiscal year 2020, customer cancellations of orders, or the failure to place orders consistent with forecasts; changes with respect to our current expectations of future smartphone unit volumes; any delays in the timing and/or success of customers’ new product ramps; failure to win new designs or additional content as expected at Android customers; any changes in U.S. trade policy, including potential adoption and expansion of trade restrictions, higher tariffs, or cross border taxation by the U.S. government involving other countries, particularly China, that might impact overall customer demand for our products or affect our ability to manufacture and/or sell our products overseas; the potential impact of any epidemic or outbreak of a contagious disease on our operations, customers, and supply chain; and the risk factors listed in our Form 10-K for the year ended March 30, 2019 and in our other filings with the Securities and Exchange Commission, which are available at www.sec.gov. The foregoing information concerning our business outlook represents our outlook as of the date of this news release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

Cirrus Logic, Cirrus, and the Cirrus Logic logo are registered trademarks of Cirrus Logic, Inc. All other company or product names noted herein may be trademarks of their respective holders.

Summary of Financial Data Below:


Dec. 28, Sep. 28, Dec. 29, Dec. 28, Dec. 29,2019 2019 2018 2019 2018

Q3'20 Q2'20 Q3'19 Q3'20 Q3'19Portable products 344,870$ 349,379$ 288,640$ 897,187$ 824,950$ Non-portable and other products 29,798 39,533 35,655 104,646 120,133 Net sales 374,668 388,912 324,295 1,001,833 945,083 Cost of sales 177,163 180,979 161,115 473,901 472,225 Gross profit 197,505 207,933 163,180 527,932 472,858 Gross margin 52.7% 53.5% 50.3% 52.7% 50.0%

Research and development 88,713 88,239 88,575 265,782 282,888 Selling, general and administrative 36,113 33,018 30,364 98,651 96,308 Total operating expenses 124,826 121,257 118,939 364,433 379,196

Income from operations 72,679 86,676 44,241 163,499 93,662

Interest income 2,392 2,250 1,740 6,927 4,712 U.K. pension settlement - - (13,768) - (13,768) Other (expense) income (563) (568) 101 (1,509) (67) Income before income taxes 74,508 88,358 32,314 168,917 84,539 Provision for income taxes 5,996 12,148 2,381 19,577 705 Net income 68,512$ 76,210$ 29,933$ 149,340$ 83,834$

Basic earnings per share: 1.18$ 1.31$ 0.50$ 2.56$ 1.39$ Diluted earnings per share: 1.13$ 1.27$ 0.49$ 2.47$ 1.35$

Weighted average number of shares: Basic 58,188 58,011 59,511 58,247 60,482 Diluted 60,492 60,213 60,783 60,395 62,076

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS(unaudited)

(in thousands, except per share data)

Three Months Ended Nine Months Ended

Prepared in accordance with Generally Accepted Accounting Principles


Dec. 28, Sep. 28, Dec. 29, Dec. 28, Dec. 29,2019 2019 2018 2019 2018

Net Income Reconciliation Q3'20 Q2'20 Q3'19 Q3'20 Q3'19GAAP Net Income 68,512$ 76,210$ 29,933$ 149,340$ 83,834$ Amortization of acquisition intangibles 6,470 6,722 7,630 20,420 33,763 Stock-based compensation expense 14,160 13,759 11,181 39,705 37,106 Restructuring costs 1,323 - - 1,323 - U.K. pension settlement - - 13,768 - 13,768 Adjustment to income taxes (4,871) (3,417) (7,003) (11,091) (27,983) Non-GAAP Net Income 85,594$ 93,274$ 55,509$ 199,697$ 140,488$

Earnings Per Share ReconciliationGAAP Diluted earnings per share 1.13$ 1.27$ 0.49$ 2.47$ 1.35$ Effect of Amortization of acquisition intangibles 0.11 0.11 0.13 0.34 0.54 Effect of Stock-based compensation expense 0.23 0.23 0.18 0.66 0.60 Effect of Restructuring costs 0.02 - - 0.02 - Effect of U.K. pension settlement - - 0.23 - 0.22 Effect of Adjustment to income taxes (0.08) (0.06) (0.12) (0.18) (0.45) Non-GAAP Diluted earnings per share 1.41$ 1.55$ 0.91$ 3.31$ 2.26$

Operating Income ReconciliationGAAP Operating Income 72,679$ 86,676$ 44,241$ 163,499$ 93,662$ GAAP Operating Profit 19.4% 22.3% 13.6% 16.3% 9.9%Amortization of acquisition intangibles 6,470 6,722 7,630 20,420 33,763 Stock-based compensation expense - COGS 200 254 220 695 589 Stock-based compensation expense - R&D 9,343 7,830 6,761 24,413 20,845 Stock-based compensation expense - SG&A 4,617 5,675 4,200 14,597 15,672 Restructuring costs 1,323 - - 1,323 - Non-GAAP Operating Income 94,632$ 107,157$ 63,052$ 224,947$ 164,531$

Non-GAAP Operating Profit 25.3% 27.6% 19.4% 22.5% 17.4%

Operating Expense ReconciliationGAAP Operating Expenses 124,826$ 121,257$ 118,939$ 364,433$ 379,196$ Amortization of acquisition intangibles (6,470) (6,722) (7,630) (20,420) (33,763) Stock-based compensation expense - R&D (9,343) (7,830) (6,761) (24,413) (20,845) Stock-based compensation expense - SG&A (4,617) (5,675) (4,200) (14,597) (15,672) Restructuring costs (1,201) - - (1,201) - Non-GAAP Operating Expenses 103,195$ 101,030$ 100,348$ 303,802$ 308,916$

Gross Margin/Profit ReconciliationGAAP Gross Profit 197,505$ 207,933$ 163,180$ 527,932$ 472,858$ GAAP Gross Margin 52.7% 53.5% 50.3% 52.7% 50.0%Stock-based compensation expense - COGS 200 254 220 695 589 Restructuring costs - COGS 122 - - 122 - Non-GAAP Gross Profit 197,827$ 208,187$ 163,400$ 528,749$ 473,447$

Non-GAAP Gross Margin 52.8% 53.5% 50.4% 52.8% 50.1%

Effective Tax Rate ReconciliationGAAP Tax Expense 5,996$ 12,148$ 2,381$ 19,577$ 705$ GAAP Effective Tax Rate 8.0% 13.7% 7.4% 11.6% 0.8%Adjustments to income taxes 4,871 3,417 7,003 11,091 27,983 Non-GAAP Tax Expense 10,867$ 15,565$ 9,384$ 30,668$ 28,688$

Non-GAAP Effective Tax Rate 11.3% 14.3% 14.5% 13.3% 17.0%

Tax Impact to EPS ReconciliationGAAP Tax Expense 0.10$ 0.20$ 0.04$ 0.32$ 0.01$ Adjustments to income taxes 0.08 0.06 0.12 0.18 0.45 Non-GAAP Tax Expense 0.18$ 0.26$ 0.16$ 0.50$ 0.46$

(not prepared in accordance with GAAP)

RECONCILIATION BETWEEN GAAP AND NON-GAAP FINANCIAL INFORMATION(unaudited, in thousands, except per share data)

Non-GAAP financial information is not meant as a substitute for GAAP results, but is included because management believes such information is useful to our investors for informational and comparative purposes. In addition, certain non-GAAP financial information is used internally by management to evaluate and manage the company. As a note, the non-GAAP financial information used by Cirrus Logic may differ from that used by other companies. These non-GAAP measures should be considered in addition to, and not as a substitute for, the results prepared in accordance with GAAP.

Three Months Ended Nine Months Ended


Dec. 28, Mar. 30, Dec. 29,2019 2019 2018

ASSETS

Current assets

Cash and cash equivalents 342,301$ 216,172$ 219,319$

Marketable securities 13,098 70,183 59,793

Accounts receivable, net 175,937 120,656 142,135

Inventories 137,920 164,733 167,879

Other current assets 45,345 53,239 51,151

Total current Assets 714,601 624,983 640,277

Long-term marketable securities 250,162 158,968 165,063

Right-of-use lease assets 141,348 - -

Property and equipment, net 174,390 186,185 191,324

Intangibles, net 47,133 67,847 76,389

Goodwill 285,904 286,241 286,678

Deferred tax asset 9,183 8,727 13,131

Other assets 24,819 19,689 24,003

Total assets 1,647,540$ 1,352,640$ 1,396,865$

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable 98,835$ 48,398$ 108,022$

Accrued salaries and benefits 34,228 29,289 23,566

Other accrued liabilities 45,248 37,853 38,175

Total current liabilities 178,311 115,540 169,763

Non-current lease liability 133,993 - -

Non-current income taxes 72,422 78,309 78,532

Other long-term liabilities 2,934 18,551 18,769

Stockholders' equity:

Capital stock 1,417,646 1,363,736 1,349,941

Accumulated deficit (157,869) (222,430) (217,871)

Accumulated other comprehensive income (loss) 103 (1,066) (2,269)

Total stockholders' equity 1,259,880 1,140,240 1,129,801

Total liabilities and stockholders' equity 1,647,540$ 1,352,640$ 1,396,865$

CONSOLIDATED CONDENSED BALANCE SHEETunaudited; in thousands

Prepared in accordance with Generally Accepted Accounting Principles

q3 fy20 shareholder letter final...q3 fy20 letter to shareholders 2 january 29, 2020 dear...

Documents