Cirrus Logic Inc (CRUS) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic’s third quarter fiscal 2003 financial result conference call. At this time, all participants are in listen-only mode. Later we’ll open the call to your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Steve Overly, Chief Financial Officer of Cirrus Logic. Over to you, Mr. Overly.

Thank you, operator. Good afternoon and thank you for joining Cirrus Logic’s fiscal third quarter financial result conference call. Joining me today on the call is Dave French, Cirrus’ President and CEO. Before we begin, I would like to remind you that during the course of this conference call we will make projections or other forward-looking-statements regarding, among other things, our estimates of fourth quarter revenues, R and D, and SG and A expenses, and gross margin levels, as well as expectations regarding our growth and future performance.

Please keep in mind that these statements are predictions that are subject to risk and uncertainties that may cause actual results to differ materially. Please refer to the company’s press release dated January 22, 2003, our latest 10-K for the year ended March 30, 2002, our form 10-Q for the quarter ended September 28, 2002, as well as our other filings made with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from our current expectations. Now, I will turn the call over to Dave French. Dave?

Thank you, Steve. And thanks to all of you who are joining us here today. For those of you who have not yet had a chance to read our press release, I’d first like to point out that our actual results were in line with the revised guidance that we issued on December 12th. And right now, I will quickly recap our third fiscal quarter results. On both a GAAP and pro forma basis, revenue was $60.5 million. On a GAAP basis, the gross margin was 51 percent. The GAAP net loss was $12.2 million and the GAAP net loss per share was 15 cents. While the pro forma gross margin was 50 percent, the pro forma net loss was $7.0 million and the pro forma net loss per share was 8 cents.

As we had said in our release on December 12th, we saw customer push-up and cancellations of orders towards the end of the December quarter. As our customers began to realize that the anticipated Christmas holiday sell-through was not going to materialize as they had previously thought, we saw an across the board softening of demand for our audio and video products.

We have continued to streamline our expense structure. Over the past two months we have reduced our work force by approximately 15 percent. Our expected quarterly pro forma revenue break-even is now between $65-69 million; a significant reduction from the $80-85 million break-even range at the end of the second quarter.

While we are disappointed with our top line performance in the December quarter, we remain thoroughly committed to our business strategy. Our analog and mixed signal product line is diverse and continues to generate very strong gross margins. We continue to lead in the field of integrated circuits for advanced audio applications and we continue to invest in leadership system solutions, particularly in video recording applications. In fact, we had tremendous response from customers at the International Consumer Electronic Show, or CES, to many of the new technologies we were demonstrating. And I’ll go into more detail about those products that we showcased in a few moments. But first, Steve Overly will give you a more detailed analysis of our numbers. Steve?

Thanks, Dave. Now, let’s discuss in detail, our results for the third quarter of fiscal 2003, which ended December 28th. I will also add some comments on what we expect to see in the current fourth quarter. Total third quarter net revenue was $60.5 million, down from $73.3 million in the second quarter. For the fourth quarter we expect revenue to between $52 million and $56 million. Audio revenue in the third quarter was $49 million, compared with $59.9 million in the second quarter. Audio results declined quarter-over-quarter due to a number of factors.

After a strong month of September and bullish demands from our audio-video receiver, or AVR customers, early in the December quarter, we saw a softening of demand from those customers as they conclude the holiday sales would be lower than they initially anticipated. We also experienced a significant reduction in audio mixed signal orders from a number of customers and the distribution channels late in the quarter. From the data that we have seen, including the consumer electronic retailers, Christmas sales projections and results, we believe that the audio market as a whole was down in the December quarter and that Cirrus held its market share during that period.

Video revenue in the third quarter was $4.5 million, compared with $6.4 million in the second quarter. Again, we saw order push-outs from customers and some delayed customer product ramps due to non-Cirrus issues that we believed had been resolved, as well as cancellations resulting from customers not being able to get product to the U.S. in time for Christmas sales.

Game console revenue in the third quarter was $7 million, the same as the second quarter’s revenue. As many of you know, our products are currently used in two well-known game consoles. While we cannot disclose how much revenue we generate from each of the game consoles, I do want to point out that our contract to supply one of the game console makers expires at the end of the March quarter. If this contract is not renewed or is renewed on terms substantially different than what are now in place, we could see our game console business decline significantly, beginning in the June quarter.

Third quarter GAAP gross margin improved to 51 percent, from 49 percent. Pro forma gross margin increased to 50 percent, up from 48 percent in the prior quarter. For the fourth quarter, Cirrus expects gross margin to continue to be in the 48 percent to 50 percent range on both a GAAP and pro forma basis. Third quarter GAAP operating expenses decreased to $46.5 million, a 13 percent improvement from $53.7 million in the second quarter. Our pro forma operating expenses were $38.5 million in the third quarter, an improvement of 11 percent from $43.4 million in the prior quarter. Cost savings measures and continued expense management drove this improvement.

For the fourth quarter, Cirrus expects GAAP, R and D and SG and A expenses to total $38 million to $40 million. Cirrus expects pro forma, R and D, and SG and A expenses to total $33-$35 million in the fourth quarter. Total pro forma, R and D, and SG and A expenses exclude approximately $5 million of acquisition-related amortization of intangibles and compensation charges.

The company will incur additional restructuring charges relating to work force reductions and facility consolidations, during the fourth quarter; the full amount of which cannot be quantified at this time. In addition, the company may incur possible non-cash impairment charges related to certain intangible assets, as well as goodwill impairment in accordance with FAS142, that cannot be quantified at this time. Any potential FAS142 charge would not be expected to have any impact on the company’s operations or growth prospects.

As part of our restructuring in the fourth quarter, we have decided to close our wireless business that we acquired in October 2001, which is located in Eldorado Hills, California. While this was a very difficult decisions, we have decided to focus the company’s ongoing investment on higher margin analog components and solutions for mainstream digital entertainment applications that utilize our audio and video technologies.

GAAP net loss for the third quarter was $12.2 million, compared with a net loss of $18.4 million in the second quarter. The GAAP net loss per share was 15 cents, compared with a net loss per share of 22 cents in the prior quarter; both on 83 million weighted average shares outstanding. Pro forma net loss for the third quarter was $7 million, or a pro forma net loss per share of 8 cents, compared to a pro forma net loss of 7.8 million, or 9 cent net loss per share in the second quarter, both on 83 million weighted average shares outstanding.

Our employee headcount at the end of the third quarter was 1,024 people. Our current employee headcount is now approximately 900. We ended the quarter with $125 million in total cash, versus 127 million in the prior quarter. During the third quarter, we settled and received payment of 7.4 million for a sublease dispute, in which we agreed as the sub-lessor, to terminate two subleases. We remain liable, as a tenant on both of these leases, for the duration of the lease periods and are seeking opportunities to sublease these properties.

For the fourth fiscal quarter, we expect to use $5-$10 million in cash. We expect this usage to be offset by a favorable arbitration decision that we just received relating to an escrow account established as part of our LuxSonor acquisition. As a result of this decision, we expect to receive approximately $7 million during the quarter. Thus, we expect total cash at the end of the fourth quarter to range between $122 million and $127 million.

Our focus on receivables in the quarter resulted in another good collection period for us. Our net days at sales outstanding were 42 days in the third quarter, versus 43 days in the prior quarter. The Cirrus manufacturing team adjusted billed plans quickly and was able to successfully manage inventory levels during the third quarter. As a result, net inventory was 29 million at the close of the third quarter; essentially flat with the prior quarter. Net inventory turns were 4.1 in the third quarter, versus 5.2 in the second quarter.

Capital addition, including purchased software and technology licenses totaled $7 million for the third quarter. Capital spending was driven primarily by facility consolidation in Austin. Depreciation and amortization expense totaled $10 million in the third quarter. Accounts payable and accrued liabilitities decreased by $3 million from the prior quarter, as inventory levels and operating expenses declined. Income tax payables declined $4 million due to a favorable resolution of a State tax issue. Stockholders equity at the end of the quarter was $316 million, down from $327 million in the second quarter, due to our GAAP net loss.

Before I turn the call back [technical difficulty], let me also provide you with an update on the outstanding litigation between Western Digital Corporation and Cirrus. In December, the court issued a favorable summary judgement decision for Cirrus and dismissed eight of the ten claims brought against Cirrus by Western Digital. A trial date has been scheduled for May of this year. The recent court ruling, when coupled with the court’s previous $25 million attachment order that found Cirrus had established the probable validity of the claim upon which the attachment was based, reinforces our continued confidence that we will ultimately collect $53 million plus interest from Western Digital. Now I will turn the call back to Dave, who will cover the highlights from the quarter and a discussion of the recent consumer electronics show. Dave?

Thank you, Steve. There’s no question that this holiday season and the revenue that we generated in the December quarter were disappointing for us. However, those of you who visited us at the recent International Consumer Electronics Show in Las Vegas were able to see, firsthand, why we remain excited about Cirrus’ strategic focus on digital consumer entertainment application; a market that many analysts believe will be one of the fastest growing segments of the semi-conductor market over the next several years. We are pleased to report that at the Consumer Electronics Show, Cirrus introduced and demonstrated solutions in two of the hottest consumer electronic areas; DVD recorders and MP3 players.

With these new products and more to come, our goal is to expand our leadership in audio ICs and also to become a leader in the digital video recording device market. We demonstrated our leading edge products to more than 200 current and perspective customers in our private demo suites at CES. And we were particularly pleased with customer response to our video recording solutions, which we believe will be a major growth driver for us in the second half of this calendar year. I will now briefly discuss some of our opportunities and recent successes in home and personal audio applications as well as DVD recorders and hard disk space, personal video, recorders.

With $49 million in sales in the third quarter, audio applications are our largest revenue category. While our revenue in audio applications was down sequentially, in December, as retailers focused sales efforts through this tough season on DVD content, low cost DVD players, and high-end display product categories, we believe that our expertise with multi-channel audio products affords us increasing opportunities over time in surround sound audio application solutions. These multi-channel audio products will continue to sell in traditionally separate audio-video receivers, or AVR boxes, as well as in formats integrated with DVD players and recorders as complete home theater solutions.

It continues to be my view that the rapid proliferation of surround sound audio content, in the form of a huge selection of movies recorded on DVDs, will drive significant increases over time in the demand for hardware that provides the rich experience enabled by surround sound audio. Cirrus is well known as the leading provider of ICs into AVRs. Since our last call we have furthered our position with the introduction of a new family of highly integrated, cost effective, six and eight channel surround sound CODEC. These introductions represent the industries first fully integrated complete 192 kilohertz solution for DVD audio, designed to give OEM superior audio performance, while accelerating their time to market. This family of 10 compatible, scalable surround sound CODECs will be available for use in AV receivers, home theater systems, as well as other audio form factors. Over time, automotive applications are also likely to generate substantial demand for these solutions.

As Cirrus’ CODECs are adopted into customer’s design, manufacturers can reduce overall system component counts and costs. These CODECs make a perfect companion for other DSP products, allowing Cirrus to provide an integrated, cost-effective audio solution for our customers.

In the personal audio player area, industry analysts expect the market for personal compressed audio, or MP3 players, to grow from about 7 million units in 2002 to over 24 million units in 2006. Cirrus is well positioned in this area, based on our product solutions for each of the three popular form factors driving this growth, including flash based system, hard-drive base systems and now CD-based MP3 players. Our CS7410 music processor introduced last year was recognized as an honoree, recently, in the CES innovation 2003 design and engineering program.

This music processor supports CD-based MP3 and Windows Media audio players and is important because it enables manufacturers to target the mainstream market for personal audio players, with retail prices as low as $49.

We believe that this price will stimulate significant renewed growth in the MP3 player market, allowing us to capture as much as $5 of content per player in this additional unit growth. I’m particularly pleased that this award-winning product was recently selected by Starlight Electronics, a volume manufacturer of high-quality value priced consumer electronics, and is scheduled to be in production soon.

Now I would like to shift our discussion to our video business. As the DVD market expands beyond units that only play back video, Cirrus is positioned to capture significant market share. Among those new market segments, DVD recorders and personal video recorders based on hard-drives are expected to become the next volume growth drivers. What the market needs now is a working solution to enable manufacturers to introduce products at retail prices low enough to stimulate widespread adoption.

At CES we demonstrated Cirrus technology in platforms to design – are designed to accomplish this aim, as early as this spring. The DVD+RW recording platform solution we demonstrated at CES is designed to help consumer electronics manufacturers accelerate widespread adoption of DVD+RW recording products, as these products become affordable replacements for VCR’s.

It is based on our flagship CS98200 family of DVD playback processors, which are the industries highest performance DVD processors, and as well, our encoding solutions, the CS92288 intake audio CODEC. The solution is an important part of our DVD strategy and it’s helping to lower system costs for our customers and as well for the end consumer.

Market analysts are forecasting worldwide unit shipments, growing from less than 1 million units in 2002 to 3 million units in this calendar year and to 14 to 19 million units by 2005. Cirrus is already working closely with customers in Asia where much of the production for the next generation of DVD products is occurring. Early this month, in fact, [Mustech], a Taiwanese consumer electronic supplier, unveiled it’s first DVD recording device using Cirrus’ DVD+RW recording platform.

The personal video recorder, or PVR, product line, which integrates hard-disc storage and DVD player capability into a single consumer friendly box, continues to be an exciting, emerging growth opportunity for us. Market analysts are forecasting significant growth in this form factor, in addition to the high growth rate I just mentioned earlier, for DVD recorders themselves.

These analysts see worldwide unit shipments growing from less than a million units last year to 3 million units in 2003 and 14 million units by 2005. Our compression technology offers superior video quality at lower [bid] rates. This means our customers have a choice of using smaller disc drives to hit lower retail prices, or using drives the same size as our competitors but featuring enhanced storage capacity for video content. We are experiencing strong customer interest in our next generation feature-rich personal video recording reference design, which is available now for the design in season.

In anticipation of Christmas 2003, our dollar content for this opportunity and also in the DVD-RW class is roughly $25 per box. In addition to the already announced [designment] with Samsung for its combination personal video recorded / DVD player device, which used our intake audio video encoder chip, Apex Digital, North America’s unit sales leader for DVD players, has also now adopted our chip solution.

Targeting a very competitive market entry price, the Apex PVR 1000 is in pre-production now, with expected buying production by the end of March, for availability in North America and Europe. The Apex digital video recording device will play DVDs and record video content onto a hard drive. The Apex PVR also offers a time-shifting feature, allowing users to playback a recorded content, such as a television program, while it is still being recorded.

We think that our continuing leadership in audio applications and the progress we have demonstrated with customers in the rapidly emerging video recording field can put us back solidly in a revenue growth position in the second half of 2003. However, in the seasonally slow March quarter, we continue to anticipate market softness as retailers work off the effect of a tough holiday selling season.

With this in mind, I’d like to close with a summary restatement of our GAAP and pro forma performance for this quarter before we take your questions.

Again, we expect revenue in the March quarter to be between 52 and $56 million. Our gross margins, on both a GAAP and pro forma basis, are expected to be 48 to 50%. Our GAAP R&D and SG&A expenses, combined, are expected to total $38 to $40 million. And our pro form R&D and SG&A expenses, combined, are expected to total $33 to $35 million.

In closing, we believe our new product offerings and continued strong customer relationships give us a significant competitive advantage in the digital entertainment market. And we expect revenue growth to return in the second half of calendar 2003.

Operator, we are now ready for questions.

If you have a question, key star 1 on your tone dial phone. If you want to withdraw your question, key star 2. Again, star 1 for questions. Please hold for the first question. And the first question comes from Mark Grossman from SG Cowen.

Dave, you mentioned before that the game console contract might potentially end, I guess, in a few months. Can you talk about when you’re likely to know whether or not that will happen and how confident are you that you’re going to keep that or not?

It’s difficult to predict. I think that if we knew, we’d certainly say. Right now, we’ve been in ongoing discussions with our customers in trying to determine demand for our product, but we don’t have anything further to add on that right now.

Okay. Assuming that revenues don’t pick up, is there still room to cut expenses beyond the 65, 69 million break-even, or what are your plans there?

Well, right now we’re not planning to cut further on expenses. Obviously, what we do in the future depends on what happens in the future, but right now, we think we’ve got a good combination of nearer term and longer term development programs that can provide us a good leadership position for growth. And that’s our plan right now.

Okay. The last thing, on that DVD encoder what are the price points for encoder chips these days?

At the volumes we’re at today, we’re still in the 20’s. I expect when we get up to 7-digit numbers, we’re going to get down below $20.

Okay, great. Thanks a lot.

And the next question is from Jonathan [Josef], from Salomon Smith Barney.

[indiscernible] for Jon. Hi. In regards to your guidance for the next quarter, where do you expect the declines to primarily come from, or are they pretty much broad-based?

We haven’t given guidance on a product-by-product basis and so I really don’t have a lot more detail to provide in terms of a product-by-product breakout.

Okay, can you give some – can you characterize the pricing environment?

Our analog and mixed signal components tend to have pretty stable prices, though we do quote for wins on new design wins sometimes more aggressively than we have in prior periods. There’s not the tactical price pressure of commodity type products. However, on our system solutions, we do continue to drive towards new technologies and further integration that on a function-by-function basis drives the cost and the price down by, sometimes 20 or 25% per year.

Thank you very much.

Please hold for the next question. And the next question comes from Larry Green from [maple grown] Management.

If at all possible, could I get a little more color on the weakness that you saw in audio? Maybe some specifics on – was it more toward the MP3 side or maybe toward the home entertainment system? Maybe a little more color there.

On a qualitative basis, Larry, I guess, number one I’d say, it was pretty evenly spread across a wide number of products and customers. The home audio applications are substantially larger percentage of our total, than the portable. So that had more of an affect than MP3 players, for instance

Okay. Do you guys still have 50% market share in the MP3 side? Or what do you think has happened there?

We think our market share has remained, roughly, the same through the course of this past quarter. As Steve mentioned in his comments, it’s our view that the softness was an industry thing, and not just something specific to Cirrus.

Okay. You gave some growth statistics for the MP3 players that looked pretty impressive, 7 million units this year going to 24 million in ’06, what are you thinking for ’03?

We’d leave it to the market experts to forecast the market, but with the introduction now with products priced at the $50 price point, we think that it could be a substantial growth market within calendar ’03. Up until now, you’ve not been able to buy a mainstream MP3 player in any format, down close to that price point. There have been some off price specials, down at $79, but mainstream players at that price, we think, could drive pretty substantial growth this calendar year.

Okay. One more question for you. You were talking about the DVD+RW business, are you targeting the PC side on that, or just the sit-top box side?

We have a pretty strong position in PC-based video recording. However, our focus is on true consumer devices. In fact, the breakthrough – a reference design that we brought to market and demonstrated in our form factors as well as in our customer boxes at CES were for stand-alone consumer devices that played back DVDs of all forms, but also record DVDs using the DVD+RW standard.

Okay, and you think that the potential is for $25 in content in those boxes?

Yes, definitely.

And who do you compete with, or who would you consider you compete with in the DVD+RW and the PVR side?

Well, most of the chip providers in DVD player applications have begun to talk pretty extensively about their future offerings in this space. The only other company that’s close to having a production-worthy encoding solution in that form factor, we think, is LSI.

Okay. Thank you.

Thank you Larry.

And the next question is from Brian [Alger] from Pacific Growth Equities.

Hi, this is actually Jenny Lejor, on behalf of Brian Alger. I’m just wondering if you could break out for Q3, your audio business a little further?

We actually don ‘t break it out at any finer a cut than just by the collection of audio products that we have.

Okay.

As a reminder, key star 1 for questions. And our next question comes from Orrin [Hirschman] from Hirschman & Company.

Hi. Can you indicate what’s really been the dynamic for the MP3 market and what can get it growing again?

Hi Orrin. Yes, we think hitting lower price points is the key issue, just like with any consumer application. We’ve not found a way, in spite of the pretty dramatic reduction in the price of flash memory, the industry hasn’t found a way to get down to that magic 50 and then, subsequently, the $39 price point, using flash memory technology.

The most cost-effective way is using a very low-cost high-volume CD loader function and so that’s why we focused, starting last year, on the CD form factor for driving most of our growth and this new music processor, the 7410, is optimized for that class of application. And we think we’re right out in the leading edge by a significant margin, in terms of offering the most effective solution to rekindle some growth in that space.

Is it still the same competitors in that market? Any new dynamics?

No, in that arena there’s really not any good comprehensive solution. There’s a couple of Taiwanese providers that provide the [servo] solution. There’s a couple of other Taiwanese providers that provide some of the audio processing, but the early leaders in high-end hard disc drive-based systems and flash based systems really haven’t put together the integration roadmap to cost-effectively service that application.

Do you think [miconit] is still fighting it out there, or they let it go?

You know, I guess they might still be out there, but I haven’t heard there name lately in any of our customer interface activities.

On the DVD player and the combo PVR DVD recordable, in particular, what do you think are the key features that are going to make the difference and does that narrow down the competition dramatically for you, in terms of those key features?

On the PVR, I think the functionality, ease-of-use and price are key issues. Of secondary interest are the number of hours that you can record on the drive itself, and the versatility of the playback of the DVD player itself. Right now, we think that we’ve got the most comprehensive solutions.

We’ve already got second and third generations being developed now for introduction later this year, as well. We think that our video encoding technology that we acquired with Stream Machine, offers that best trade-off of good cost-effective solutions and the most hours on any given side of the disc drive. So we think that puts us in a very good position.

That solution is how many chips and is there a roadmap to get it down to a single chip solution?

Certainly our roadmap is to further integrate and get down to minimum chip configurations. Sometimes – because that requires some pretty interesting analog input devices, which is a pretty high precision analog input device, so it will probably remain on separate chips for a period of time. However, the integration of digital electronics, certainly we plan on that integration to drive the most cost-effective solution in that space.

And, finally, can you just comment on some of the other markets, like [seismic], etc. and how it’s [inaudible].

Well, the general analog market has been slow. Certainly the size of that class of application has been showing some signs of growth. Other broad-based industrial analog components business opportunities have been kind of choppy over the past couple of months. It’s difficult to see if the buying trends early in January are indicative of any kind of upturn or not.

Okay. Thanks so much.

And that is our final question. Back over to David French.

Well, thank you again for joining us here today. We look forward to talking to you when we record our March quarter financial results, which will also be the close of our fiscal year. That call is scheduled for April 30. In the meantime, we hope to see many of you at the upcoming Thomas [Weizel] Partners Tech 2003 Conference in San Francisco on February 4. If any of you would like information about arranging one-on-one meetings at that event, or otherwise, please contact Stapleton Communications at (650) 470-0200.

Thank you again, for your attendance and for your continued interest in Cirrus Logic. Bye.