Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second quarter fiscal year 2023 financial results Q&A session. At this time, all participants are in 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.
Thank you, and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's Chief Executive Officer, and Venk Nathamuni, Chief Financial Officer. Today, at approximately 4 P.M. Eastern Time, we announced our financial results for the second quarter fiscal year 2023. The shareholder letter discussing our financial results, the earnings press release, along with the webcast of this Q&A session are all available at the company's investor relations website. This call will feature questions from analysts covering our company. Additionally, the results and guidance we will discuss on this call will include non-GAAP financial measures that exclude certain items. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release and are also 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 and the shareholder letter issued today, which are available on the Cirrus Logic website and the latest Form 10-K, as well as other corporate filings registered with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from our current expectations. I'd now like to turn the call over to John.
Thank you, Chelsea, and thank you everyone for joining today's call. As you've seen in the press release, Cirrus Logic delivered record second quarter revenue and earnings per share. The September quarter also marked the fifth consecutive quarter in which we have set a revenue record for the corresponding fiscal period. I'd like to thank all of our valued customers, our partners throughout the supply chain, and the entire Cirrus Logic team for their hard work and collaboration in achieving these outstanding results. Before we discuss the results in greater detail, I'd also like to provide a progress update on the key elements of the strategy that is currently driving our momentum. The three pillars of our strategy are, first, maintaining our leadership position in smartphone audio by delivering world-class products and outstanding execution to the leading customers in the market.
Second, expanding the reach of our audio components and technologies in key profitable applications beyond smartphones. Third, leveraging our world-class mixed-signal engineering expertise to build a growing footprint of products outside of audio in what we call our high-performance mixed-signal product lines. We've already seen meaningful contribution from products in this category, and we believe this area presents significant opportunities, both within smartphones and in other markets that can contribute meaningfully to future growth. This quarter, we continued to execute successfully on all three of these strategic vectors. In audio, against a backdrop where demand for our amplifiers and codecs remained strong and in excess of the available supply, we not only continued the development of our next generation 22-nanometer smart codec, but also began initial development of a next generation custom boosted amplifier.
These are exciting and vitally important products for us and for our customers. Our 22-nanometer codec development will bring a new level of performance and power efficiency to audio sensing and other signal processing use cases, and our next generation boosted amplifier will bring significant performance, efficiency, and architectural advantages to our customers' products. I'd also like to point out that given that these types of products typically enjoy a long lifespan in production, we believe these new product development initiatives help to provide us with good longer-term visibility regarding our business and optimism about their potential for sustained revenue contribution. Looking beyond smartphones, we've spoken previously about the laptop market and its potential as one of the areas where we see an opportunity to expand the reach of our audio components profitably.
I'd like to distinguish between the near-term softness in the PC space that we're all aware of and the secular drivers that we believe are meaningfully expanding our serviceable available market in laptops in the long run. These include a greatly increased emphasis from our customers and end users on higher quality audio experiences due to the growth of remote and hybrid working, a transition to thinner and lighter form factors, a drive for greater power and thermal efficiency, and an evolution towards more smartphone-like audio architecture that leverages multiple boosted amplifiers. This quarter, we engaged with multiple customers in design activity around our first amplifier designed specifically for this market, and we also started sampling our first SoundWire-enabled codec specifically designed for laptops.
We continue to believe this area can represent a valuable expansion of the market for our audio products and technologies. Moving on to our high-performance mixed signal products, we're proud of the progress we've made growing HPMS revenue, which represented 38% of total revenue in the September quarter. With the launch of a new generation of smartphone devices this fall, we've also been delighted to see an increase in adoption of our camera controllers, which play a vital role in helping to deliver outstanding camera experiences. I've spoken previously about the consistent year-on-year expansion of value that we've seen in the camera space since the introduction of our first product. Looking forward, we believe we have opportunities to deliver further innovation and continue this trend in the future.
Turning to power, we are currently also developing new power-related products and technologies that will expand our range of solutions in battery health, metrology, charging, and other areas, and we believe these investments can position the company to expand our footprint in the power area in the coming years. In summary, we made exciting progress this quarter on strategic initiatives that we believe will contribute to sustained multi-year growth, and our engagement with key customers around future products and opportunities remained extremely strong. With both a compelling lineup of existing components shipping today and continued investment in innovative audio and high-performance mixed-signal products, we believe we are well positioned to drive further growth and product diversification in the coming years.
With that, let me now turn the call over to Venk Nathamuni to provide an overview of our financial results for our fiscal second quarter 2023, as well as guidance for our fiscal third quarter 2023.
Thank you, John. Fiscal second quarter revenue was $540.6 million, which was a September quarter record, and as John mentioned earlier, represents the fifth consecutive quarter of record revenue for the corresponding fiscal period. Revenue was up 37% quarter-over-quarter and up 16% year-over-year. Our strong performance during the quarter resulted in revenue above the high end of our guidance range and was driven by higher smartphone unit volumes associated with our customers' new product ramps. On a year-over-year basis, the revenue performance was driven by higher ASPs, an increase in smartphone unit volumes, and high-performance mixed-signal content gains. I'd like to highlight the outstanding execution by the supply chain organization and the entire Cirrus Logic team in helping deliver these strong results.
Turning to gross margin, non-GAAP gross profit in the quarter was $271.6 million, and non-GAAP gross margin was 50.2%. This was roughly in line with the midpoint of the guidance range we had provided. On a sequential basis, gross margin was down primarily due to higher reserves, product mix, and increased supply chain costs. The year-over-year change in gross margin reflects an increase in supply chain costs that came into effect in January 2022 and, to a lesser extent, higher reserves. Non-GAAP operating expenses in the quarter were $123.9 million, up $4.4 million sequentially. I'd note that operating expenses came in below the midpoint of our guidance range despite higher revenue, as higher variable compensation was more than offset by lower product development costs and employee-related expenses.
We intend to continue to invest strategically in new product development while controlling discretionary spending. non-GAAP operating income was $147.7 million in the second quarter or 27% of revenue. Finally, on the P&L, non-GAAP net income in the second quarter was $114.5 million or $1.99 per share. Let me now turn to the balance sheet. Our balance sheet continues to remain strong, and we ended the second quarter of fiscal year 2023 with approximately $428 million in cash and cash equivalents, and we had $300 million undrawn on our revolver. Our ending cash balance was down roughly $25.8 million from the prior quarter, primarily due to cash flow from operations offset by stock repurchases during the quarter.
Specifically, we generated cash flow from operations of $36 million during the September quarter, which is a seasonally slower quarter for cash generation due to the timing of product ramps. We have no debt outstanding and inventory was $165 million, down $10 million sequentially, and days of inventory was 56 days in Q2, down 27 days sequentially as we ship product to support our customers' new product ramps. Turning to cash flow, as I mentioned earlier, cash flow from operations was $36 million in the September quarter. Free cash flow for the quarter was $25.7 million. In Q2, we utilized $50 million to repurchase roughly 583,000 shares of our common stock at an average price of $85.78.
As of the end of Q2 fiscal year 2023, we had $586.1 million remaining in our share repurchase authorization. We executed an additional $25 million in stock buybacks subsequent to the quarter end to repurchase roughly 376,000 shares at an average price of $66.46 as part of a 10B5-1 trading plan. We expect to continue to return capital in the form of stock repurchases, which we believe will provide a long-term benefit to shareholders going forward. Now on to the guidance. For the fiscal third quarter of 2023, we expect revenue in the range of $520 million-$580 million. We expect gross margin to range from 49%-51%.
Non-GAAP operating expense is expected to be flat sequentially in the range of $120 million-$126 million, as higher product development cost is offset by lower SG&A expense. We will continue to control discretionary spending, but invest strategically in product development to drive long-term growth. On the tax front, as we have previously discussed, due largely to a tax rule effective this year that requires companies to capitalize and amortize R&D expenses rather than deduct them in the current year, we continue to expect our fiscal 2023 non-GAAP effective tax rate to be approximately 23%-25%. We maintain our expectation that under this rule, our effective tax rate will decrease and may return to a normalized range in about five years as additional years of R&D expenses are amortized for tax purposes, absent any changes to the legislation.
However, there appears to be strong legislative support for delaying or eliminating this rule, which we're watching closely. I note that without the impact of this rule, our non-GAAP effective tax rate would be in our more typical mid-teens range. In closing, we had a strong Q2 fiscal year 2023, as we executed well to deliver these results. Going forward, we will continue to focus on the best opportunities to enable the company to grow both revenue and profitability over the long term. Finally, before we begin the Q&A, I'd like to note that while we understand there is intense interest related to our largest customer, in accordance with Cirrus Logic company policy, we will not discuss specifics about our business relationship. With that, let me now turn the call to Chelsea to start the Q&A session.
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 ready to take questions.
At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Your first question comes from the line of Rajvindra Gill with Needham. Your line is open.
Yeah, thank you for taking my questions, and congrats on really strong results in a tough environment. Just a question on the seasonality in the business. It's been kind of, you know, quite volatile this year and kind of deviating from normal patterns. I'm just wondering, you know, how we're thinking about seasonality on a go-forward basis, how we're also thinking about, you know, potential supply chain volatility with, maybe with your top customer just in general. So any thoughts on kind of seasonality and supply chain delivery would be helpful to understand. Thank you.
Thank you. I'll add a few comments and invite Venk to add a little more color if he wishes. I think one of the characteristics of the climate this year on the supply side has been that most of the supply chain has been running pretty close to capacity. That has meant, I think, that things have been a little more linear than they would be typically. Obviously, we have big seasonal ramps and builds for product launches, and there just hasn't been the headroom in the supply chain to have that kind of acceleration of production. I think that has led to linearity, coupled with the fact that just demand is relatively high and has continued to remain high relative to the available supply in general.
Not really sure how that looks as we go further out beyond the quarter we're guiding. I would say that from the supply chain perspective, we still regard our sales and the situation in the supply chain as being supply constrained, primarily around wafer supply, and that's certainly gonna persist the rest of this year. We see that persisting, well into calendar 2023 as well.
Yeah. Thanks. John answered most of the questions that Rajvindra raised. Rajvindra, first of all, thanks for your nice comment. You know, in terms of just the seasonality question that you asked, you know, as you know, over the last several years, especially the last couple of years, it has been difficult to predict what is normal seasonality and what's not, just given the changes in customer ordering patterns and the economy overall. I would say that perhaps in the last few months, there's probably some semblance of normalcy coming back. Of course, now we have to deal with the macro uncertainty and so forth. In general, it's hard to call out any specific seasonal patterns.
You know, clearly, as John alluded to earlier, we are seeing, you know, good demand, especially as it relates to the new product launches from our customers, and we're fulfilling that demand. We'll just take it one quarter at a time as it relates to seasonality going forward.
Yeah. Thank you for that. Just for my follow-up, I'm wondering, John, how you're thinking about some of the trends that have been helping your business, namely, you know, your expansion into the fast-charging market. Number two, kind of the increased attach rates for camera controllers and then lastly, your expansion into the mid-range audio amplifier. I'm just wondering if you could talk a little bit about those kinda segments and markets. Thank you.
Thank you. Yeah, there are a number of strings to that bow. I think the big picture is that we've been doing content expansion rather than relying purely on whatever happens with the units, and that's been on multiple fronts. Both expanding within audio. I mentioned the growth we've had in the laptop market there and the opportunity that we see, but also significant expansion of the range of products that we are bringing to mobile devices. Those include, yeah, charging products, as you said. In fact, a number of technologies around the battery. We brought to market our power conversion and control ICs last year, which is additional technology focused on battery health.
Going forward, we've signaled that we believe we've got multiple other opportunities to expand content outside of the audio space in the high-performance mixed-signal area. That's something where, you know, we believe that gives us visibility and reason for believing that we can deliver year-on-year growth as we go forward.
Your next question comes from the line of Christopher Rolland with Susquehanna. Your line is open.
Hey, guys. Thanks for the question. I guess, there's a couple of new products that you guys mentioned in the letter, I think. You know, you continue to engage with a strategic customer around a new HPMS component. Also additionally, you guys continue to develop your 22-nanometer new codec as well. I guess, first of all, any more detail around the HPMS component and then kind of the economics around this. How does that change in terms of, you know, ASPs or cost overall for you guys as well?
Yeah, it's a little early to give much color on the additional HPMS content, Chris. I will say that actually I think we referred to another category of new product as well. Obviously the 22-nanometer codec, additional HPMS content, but also kicking off the development of our next generation custom amplifier. We have that's what we're talking about. We have other stuff in the pipeline as well as you would hope and expect. You know, it'll be a little while before those come to market. We have signaled that we are working towards a timeline of bringing some additional HPMS content to market in the back half of next year. There's a long road between now and then, as you'd expect.
We'll give more color as we get closer to the time and plans get locked.
If I may, John, just to add to what you just said. I think one of the things that's evident in our results and also in our guidance is the fact that we are continuing to increase our content in these you know in customers' products. We've talked in the past about you know having some good long-term visibility and multi-year visibility in terms of content gains. That a lot of that is coming in the high-performance mixed-signal area, and we feel good about where we stand relative to increasing content over time.
Great. As a follow-up, you know, given the kind of weak Android background that we have out there, I was surprised that your percentage of revenue from your non-biggest customer out there was as strong as it was. I was wondering if maybe you can talk to that kind of strength, where you might be seeing strength. Is this all amps or is this new products? I know you've been talking up some custom PC products as well. Where is that strength outside of your largest customer coming from?
Well, I'm not gonna tell you that the Android market is strong. I think we're all well aware of the challenges around different parts of that market. I will say that our approach in general is always to work with what we see as being the strongest customers with the strongest products. We have seen content gains in Android this year in flagship phones, and that's meant that we've done better than perhaps some have in the current climate. That's specifically around getting haptic solutions into flagship phones in addition to our audio devices. We've been doing well there.
It's a tough market, but as I said, we continue to focus on you know, customers and products and sockets where we believe you know, they're the strongest and the demand is gonna be the most resilient in the current climate.
Your next question is from the line of Tore Svanberg with Stifel. Your line is open.
Hi, good afternoon. This is Jeremy covering for Tore. Let me add my congratulations on the record results here. I guess first question would be on the new laptop content. I noticed on the presentation the ASPs were in the range of, I think up to $1.50. Is there a reason? I guess, can you call out any differences between that and maybe their smartphone counterparts? Is it maybe just early stage of the integration cycle here? Anything you can call out would be helpful. Thanks.
Thanks, Jeremy, and thanks for the nice comment there. It's actually to do with the multitude of different socket opportunities that we see over time in the laptop market. I will reiterate, this is very much you know, greenfield space for us, so we see our SAM expanding there significantly in the coming years, but even with a very conservative set of assumptions around what happens to the market overall in terms of units. To give you some color to that, the kinds of sockets that we see as representing constituent parts of that addressable market would be on the audio side, you've got boosted amplifiers and codecs. You may see 2, 4, or in some cases even more than four boosted amplifiers.
You have multiple opportunities for content expansion there. In addition to that, our fast charging related IP has given us opportunities for sockets really either side of the battery there in the laptop. We see potential for multiple sockets around that. Then of course, as devices get thinner and lighter, the trend will be more towards haptics and moving away from mechanical touchpads and the like. Again, that provides a content opportunity. If you look five years out or four years out, I guess calendar 2026, we see a SAM there based on those opportunities that I've outlined of somewhere north of $1 billion.
I would say about 2/3 of that is probably in the audio space, and roughly a third of it in the HPMS space.
Great. Thank you. That's very helpful. I guess the other question would be, I think Venk you might have mentioned the year-over-year results were driven by higher ASPs units and HPMS content gain. I was wondering if you could maybe give us, you know, a rough breakdown of the various impacts, you know, if specific numbers aren't available, could you maybe rank order those impacts? Thank you.
Yeah, Jeremy, again, thanks for your nice comment. Yeah, as I mentioned, the year-on-year, you know, change was driven primarily by those the three factors that you mentioned. You know, we have stated them in the order of significance. You know, in general, it's fair to assume that we benefited from the increase in unit volumes and over time, we'll also see a content gain story. I think it's consistent with what we've stated.
Your next question comes from the line of Matt Ramsay with Cowen and Company. Your line is open.
Yeah. Hey, guys. This is actually Ethan Potasnick on for Matt. I just wanted to kinda piggyback on the prior question, maybe ask it a little differently here. I guess going into the back half of the year, I think we had the expectation that results at your primary customer would be primarily driven by unit growth rather than any socket or content expansion. Given the results and guide, is that how we should still think about it? Or were there maybe additional wins either within the phone or maybe other products at your largest customer that drove the upside here?
I think the story is primarily around phones, to your latter question there. I would say it's worth keeping in mind that when we have a significant content expansion as we did with the addition of the power conversion and control ICs that came into the generation of devices launched last year, that we do have a tailwind from that as we go into the second generation of devices as well. It continues to contribute to the revenue growth.
Okay. Understood. As my follow-up, just wanted to get a little more clarity on visibility and the state of demand through the remainder of fiscal 2023 here. If I recall correctly, you guys have previously said, you know, growth expectations might be more modest. Is that how we should think about it through the remainder of the year?
Yeah. Hi, this is Venk. You know, at a high level, you know, obviously given what we just announced, and the guidance we've provided takes into account a couple of factors, right? We clearly have a you know, good indication from our lead customer in terms of what the demand pattern is, but there's also another element of the business which is more tied to the general market and such. Given some of the macro concerns, we have taken that into account as we provided the guidance. At this point, we wanna you know, stick with just guidance for the current quarter, and not looking beyond. We'll certainly update you at that time.
It's probably fair to assume that we do see the content gain that John alluded to. That's something that we see as a multi-year story, but we'll give you more specific guidance on the next earnings call.
Your next question is from the line of David Williams with The Benchmark Company. Your line is open.
Hey, good afternoon. Thanks so much for taking the question, and congrats on the excellent results. First, I wanted to ask maybe on just on the revenue side, just kinda curious what maybe the puts and takes were this quarter. I'm just trying to understand maybe if the surprise was more on the supply side or maybe on the demand side, and maybe any color you can provide on the ability to kind of flex up and down as we think about the business going forward.
Certainly the demand for the components going into smartphones in particular was stronger than we were forecasting back when we guided. That demand did tend towards more devices which had the greater amount of our content in them than we expected when we guided. Really very strong demand story. I will say that on the supply side, you know, the team has worked incredibly hard with our supply chain partners to kinda try to catch up and keep up with that and keep bringing in shipments. The majority of the impact here relative to our guide was demand led.
Fantastic. Thanks for the color there. Certainly helpful. I guess, secondly as a follow-up from me is just are you seeing anything in Asia or China specifically in terms of some of the COVID restrictions and some of the things we're hearing there? Is there anything you're concerned with as we kind of think about the December quarter?
Yeah. We've been reading all those reports about the COVID restrictions in China and such, and we're constantly in touch with our contract manufacturers as well as our entire supply chain. You know, clearly what we have provided you in terms of guidance takes into account some of those uncertainties, but we're constantly monitoring the situation. We don't have any special insight into it beyond what we just hear from our contract manufacturers as well as our entire supply chain. We're taking that into account as we have guided for the December quarter.
Again, if you would like to ask a question, press star followed by the number one on your telephone keypad.
This will be our last question.
Your final question comes from the line of Blake Friedman with Bank of America. Your line is open.
Hi, yeah, this is Blake on for Vivek. Thanks for taking my question. Just maybe as a follow-up to a question earlier, I know just, you know, looking at the data that, you know, your, kind of your Android and other businesses have been surprisingly resilient, which seems like versus the broader market. I was just curious, you know, as you know, it's kind of still a weaker demand environment in general. Can this change the tone or, you know, timeline of implementation of engagements?
I mean, the demand environment there certainly has been softer, but I would maybe reference some of the color I've given on previous calls regarding the nature of our engagement with Android, because I think that might be a key to what you're seeing there in the results as well. We've been supply constrained through all of last fiscal year and this fiscal year to date. That's meant that we've been very selective out of necessity about which sockets and customers we've been able to chase. We don't wanna let anybody down, so we've just had to be very selective there.
Given the products we're providing into smartphones are generally the performance leaders in their class, we've been at the top end of the market and have typically been shipping into sockets where the customer is very committed to having flagship leading performance in their flagships. I think the fact that we, you know, we've been doing anything but over-serving that market over the past year just because of the supply constraints has meant that there's been a resilience there, as the weather has changed.
Great. Then just kinda quickly focusing on your cash balance. I know kind of following the Lion Semi acquisition, we're kind of back at those, you know, similar levels. Just kinda curious how you think about M&A just in this environment when valuations are lower, or if you're more focused maybe through cash returns still through buybacks.
Yeah. Thanks for the question, Blake. Essentially, our cash balance, as I mentioned on the prepared remarks, is in pretty good shape. You know, we've stated all along that our primary uses of cash, you know, number one is to drive the growth in the business through investment in R&D. Number two is to do M&A, and three is to use it for share buybacks and such. As it relates specifically to your M&A question, you know, clearly the market is now in a situation where there's a lot of, you know, price discovery aspects that are still uncertain, just given how the market has performed.
For us, we wanna be very selective about what M&A we pursue, and we'll do it both, you know, based more on strategy as opposed to, you know, just purely from the standpoint of, you know, what the current market conditions are. We continue to look at M&A opportunities on a regular basis, but we'll pull the trigger for the appropriate opportunity at the right time. Our primary uses of cash are, you know, in that order, number one, to invest in R&D, M&A, and then to do cash buybacks. As you've seen over the last few quarters, we have been very regular buyers of our stock and, you know, we'll continue to use that as an additional tool in terms of how we deploy our cash balance.
With that, we will end the Q&A session. I will now turn the call back to John for his final remarks.
Thank you, Chelsea. In summary, in the September quarter, Cirrus Logic delivered record second quarter revenue and earnings per share, driven by strong execution across our three areas of strategic focus. Those are continuing our leadership in smartphone audio, broadening sales of audio components in key profitable applications beyond smartphones, and applying our mixed signal expertise to expand into new adjacent high-performance mixed signal areas. We're more excited than ever about the opportunities that we see in front of us, and thank you for your continued interest in Cirrus Logic. Before we close, I'd also like to note that we will be participating in the Barclays Conference on December eighth in San Francisco. Please check our investor website for the details. 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'd like to thank everyone for participating today. Goodbye.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.