Cirrus Logic Inc (CRUS) 2003 Q4 法說會逐字稿

Welcome to Cirrus Logic fourth quarter and full year fiscal 2003 financial results conference call. At this time, all lines are in a listen-only mode. Later we'll open the call up for your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I'd like to now turn the call over to Mr. Steve Overly, Chief Financial Officer of Cirrus Logic. Mr. Overly, you may begin.

Thank you, Operator. Good afternoon, and thank you for joining Cirrus Logic's fourth quarter and fiscal year 2003 financial results conference call. Joining me today on the call is Dave French, Cirrus's 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 for first quarter revenues, combined R&D and SG&A expenses, gross margin and cash levels, as well as expectations regarding our growth and future performance. Please keep in mind that these statements are predictions that are subject to risks and uncertainties that may cause actual results to differ materially.

Please refer to the company's press release dated April 30th, 2003, our latest 10-K for the year ended March 30th,2002, our form 10-Q for the quarter ended December 28th, 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 who you have not yet had a chance to read our press release, I will quickly recap our results. I would like to mention that our fourth quarter results were in line with our guidance that we gave on our January 22nd conference call. I'd also like to point out that beginning today, we will be reporting our results and providing guidance on a GAAP basis only. For the fourth quarter of fiscal 2003, revenue was $52.1 million.

Gross margin was 51 percent. R&D and SG&A expenses totaled $34.8 million, and net loss was $152.8 million including a non-cash charge of $136.2 million related to the write-off of goodwill in accordance with FAS 142, which we indicated was a possibility during our last conference call. This loss also includes the impairment of intangible assets associated primarily with the previously announced closing of our wireless product line. Net loss per share was $1.82. For the full fiscal year 2003, revenue was $262 million. Gross margin was 50 percent. R&D and SG&A expenses totaled $168.9 million, and a net loss was $199.2 million. The net loss per share was $2.39.

Fiscal 2003 was a challenging year, but also one of many accomplishments. We've refreshed our high margin audio and mixed signal product lines and also made important technology strides in advancing our video product line offering during fiscal 2003. Unfortunately, we were not able to capitalize on the expanding market for DVD players due to challenges in meeting the rigorous software quality requirements in this new market.

We have made significant progress in this area, however, and we continue to see strong interest from customers related to our single chip DVD player solution that incorporates embedded servo technology. In addition, the market for video recording products, including personal video recorders and DVD recorders, has not expanded as quickly as we had anticipated going into fiscal year 2003. Nonetheless, we continue to believe that we are now well positioned for the emerging DVD recording market with our high performance 98-200 DVD decoder family and our 92-288 encoder product. We are very pleased so see strengthening indicators that this market will soon begin to demonstrate substantial growth.

We also realigned our organizational and management infrastructure in fiscal year 2003 along functional lines to better focus on new product development while use using our resources more effectively. We reduced our combined quarterly R&D and SG&A expenses by 33 percent on a comparable basis and headcount by 25 percent from year-ago levels. Even as we have scaled back our expense rates, we have continued to expand our leadership portfolio of audio DSP and mixed signal products, and we have further prepared ourselves to capital capitalize on the substantial growth opportunities that exist in the digital video area. We entered the June quarter in fiscal year 2004 a more streamlined company with an outstanding and refreshed product portfolio that addresses high growth consumer entertainment electronics applications and with $123 million in total cash and no debt on our balance sheet.

Late in the fourth quarter, we introduced several new products that enhanced our mixed signal audio product portfolio. Our fourth quarter revenues did not benefit from these new products because of our customers' design cycles. In fact, our sales were down primarily because we experienced lower demand for some of our older mixed signal components. Revenue from our legacy computer audio products continued to decrease as a result of earlier de-emphasis of this product line. Our core analog and mixed signal products continue to generate high gross margins, and we remain a leading provider of integrated circuits for advanced audio applications.

In our video product line, several new video product programs that we expected would ramp in the March quarter were pushed out by our customers and are now expected to begin to ramp in the June quarter, and contribute more strongly in the subsequent quarters. While disappointed in these temporary setbacks, we believe we have significant growth opportunities in the second half of calendar 2003and beyond. We are working with our customers as they qualify our chips for a number of new and differentiated products including portable DVD players, DVD recorders and personal video recorder products, as well as for mainstream DVD player applications using our soon to be released single chip DVD player solution. I will go into more detail about these products applications in a few moments, but first Steve Overly will give you a more detailed analysis of our financial results for the year and for the fourth quarter. Steve?

Thanks, Dave. Our revenue for fiscal 2003 was $262 million, compared with 411 million in fiscal year 2002. Revenue in fiscal year 2002 included 129.4 million for magnetic storage products, a product line that we exited in July 2001. Gross margin in fiscal 2003 was 50 percent, up notably from the 24 percent in the prior year. Fiscal year 2003's net loss was 199.2 million, compared with 206.1 million in fiscal year 2002. The net loss per share was $2.39 on 83.4 million weighted average shares outstanding, compared with a net loss per share of $2.66 on 77.6 million weighted average shares outstanding in the prior year.

Now let's discuss in detail our results for the fourth quarter of fiscal year 2003 that ended March 29th, and what we expect to see in the first quarter of fiscal year 2004. Fourth quarter net revenue was $52.1 million, down from $60.5 million in the third quarter. Audio revenue in the fourth quarter was $41.1 million, compared with $49 million in the third quarter. Video revenue in the fourth quarter was $3.9 million compared with $4.5 million in the third quarter. Game console revenue in the fourth quarter was $7.1 million, compared with 7 million in the third quarter. For the first quarter of fiscal year2004, we expect revenue to range between 40 and $45 million. The decline in revenue expectations for our June quarter primarily reflects the expiration of our obligation to supply certain game console components, as well as limited visibility in our other product line as our customers continue to request short lead times and to maintain lean inventory levels.

Our guidance does not reflect a traditional seasonal uptick in the June quarter. While we believe that in the consumer area, retail inventories are low, and we could see increased consumer buying over the next few months, we are not ready to factor that into our guidance. If there is a major positive swing in consumer confidence and buying patterns, we believe we are ready to meet the increased demand for our products. But given all the uncertainty today, we are choosing to be conservative in our overall guidance for the June quarter. As a result of the expiration of the supply commitment with the larger of our two game component customers, revenue from our ongoing game console products will be reported as part of the audio business category beginning with the first quarter of fiscal 2004.

Gross margin for the fourth quarter was 51 percent, unchanged from the third quarter. For the first quarter, we expect gross margins to be in the 48 to 50 percent range. During the fourth quarter, combined R&D and SG&A expenses were $34.8 million, a reduction of 13 percent from combined R&D and SG&A expenses of $39.8 million in the prior quarter. The $34.8 million in the fourth quarter includes deferred compensation charges associated with acquisitions and legal costs incurred in connection with our exit from the magnetic storage product line in amounts comparable to the prior quarter. In the fourth quarter, the company incurred a non-cash charge of $126 million related to a FAS 142 charge for goodwill impairment, and a FAS 144 impairment charge of $10.2 million for certain acquisition-related intangible assets from our share wave and audio logic acquisitions.

Other fourth quarter charges included a $4 million non-cash charge for amortization of intangible assets associated with past acquisitions, a $4.6 million charge associated with settling a lease agreement on unused space resulting from our acquisition of StreamMachine (ph) in fiscal year 2002, and $1.2 million in restructuring charges related to work force reductions and facility costs. We believe that these charges will not impact our operations or growth prospects. Including the $146 million in charges already described, our fourth quarter operating expenses were $180.8 million compared with 46.5 million in the third quarter. For the first fiscal quarter, we expect combined R&D and SG&A expenses to total 34 to $36 million, similar to the 34.8 million in the quarter just ended.

The net loss for the fourth quarter was $152.8 million compared with a net loss of $12.2 million in the third quarter. The net loss per share was $1.82 based on 83.8 million weighted average shares outstanding. This compares with a net loss per share of 15 cents in the prior quarter based on 83.5 million weighted average shares outstanding. Our employee headcount at the end of the fourth quarter was 905 employees, down 12 percent from the prior quarter, and as Dave mentioned earlier, down 25 percent from the end of our fiscal 2002 levels. We ended the fourth quarter with total cash of $123 million compared with $125 million in the prior quarter. During the fourth quarter, we received approximately $6.9 million resulting from a favorable arbitration decision we received in a dispute between Cirrus and the former shareholders of our Luxonar (ph) acquisition. Offsetting this cash inflow was a one-time payment of $7.5 million we made during the March quarter when we bought out a multi-year lease associated with our StreamMachine (ph) acquisition. This lease buyout resulted in a $4.6 million lease termination charge to the P&L.

In the first quarter, we expect to use 5- to$10 million in cash. Total cash at the end of the first quarter is expected to range between 113 and $118 million. Our focus on receivables in the quarter yielded another exceptional collection period. Net day sales outstanding were 40 in the fourth quarter versus 42 in the third quarter, keeping Cirrus among the best in our industry peer group on this measure. We continue to successfully manage inventory levels. Our net inventory was $22.3 million at the close of the fourth quarter, compared with $28.5 million at the end of the third quarter. Net inventory turns were 4.6 in the fourth quarter versus 4.1 in the third quarter.

Capital additions including purchased software and technology licenses totaled $1.1 million for the fourth quarter compared with 7.4 million in the third quarter. Capital spending in the third quarter was driven primarily by facility consolidation in Austin. Depreciation and amortization expense totaled 8.5 million in the fourth quarter, compared with $9.9 million in the third quarter. Accounts payable and accrued liabilities decreased $13.7 million from the prior quarter to 43.1 million in the fourth quarter, as inventory levels and operating expenses declined, and due to the settlement of prior quarter accruals related to the StreamMachine (ph) lease and a patent infringement matter. Stockholders equity at the end of the quarter was $163.5 million, down from $315.9 million in the third quarter due to our net loss, which included the non-cash charges previously discussed.

Now let me provide you with an update on the outstanding litigation between Western Digital and Cirrus. During our fourth quarter, the trial date which had been scheduled for May of this year was rescheduled to December of this year. Despite the delay in the trial date, we remain confident that we will ultimately collect $53 million plus interest from Western Digital. Before I turn the call back to Dave, I want to address the SARS situation. With approximately 17 percent of our employees in Asia, as well as many of our customers and contract manufacturers, we are closely monitoring the SARS situation, which to date has not had a material impact on our business. Now I will turn the callback to Dave, who will cover the highlights from the quarter. Dave?

Thank you, Steve. Beginning with the audio market, which is the area of largest revenue content for Cirrus Logic, we were pleased to read the recent press release by Forward Concepts, a noted market research firm that says that Cirrus Logic continues to lead the consumer audio chip market. According to the report, total audio chip revenues reached $2.5 billion in 2002 and are forecasted to grow at a 22 percent compound annual rate to $6.8 billion by the year 2007. However, the forecast for 2003 calls for a more muted 15 percent growth with Europe and Asia largely responsible for near-term growth. This forecast echoes our near-term concerns, but it also confirms two critical factors related to Cirrus Logic's current position.

First, it indicates that in spite of currently weak consumption of audio components and systems, it is likely that over the next several years, demand for semiconductor components in the digital audio arena is likely to continue to grow at a rate in excess of demand growth for semiconductors in total, and second, we are pleased to see that our broad line of differentiated digital signal processing and mixed signal components have continued to keep us in a leadership position in this growing market. As I said, with $41 million in sales in the fourth quarter, audio DSP and mixed signal applications remain our largest revenue category. Sequential sales were down largely due to lower demand for some older mixed signal products as well as a deeper than anticipated seasonal dip in our customers' run rates in recent months.

At the audio engineering conference in Amsterdam last month, we introduced four products with very long life cycles that together with other audio products which we introduced during fiscal year 2003 will contribute to our audio revenue rebound. These products include the following; two new 24-bit highly integrated stereo Kodak solutions which are targeted for high volume home and car applications as well as a wide variety of high end audio applications such as multi-track recording systems, sect (ph) processors and digital mixing consoles.. Also a digital-to-analog converter which is geared for high end consumer as well as professional audio application including DVD audio and super audio CD.

Also in this past quarter, or flagship analog to digital converter which is a SIM (ph) compatible converter designed is the converter of choice for cutting edge audio applications such as DVD audio. This product consumes less than 50 percent of the power of all alternatives and requires less than 80 percent of the board space than competing ADC's. Each of these products offers exceptional per performance, is competitively priced and offers outstanding audio quality and low signal drilling (ph) characteristics. We believe these new products in our many other leading edge products will help us remain the number one consumer audio chip market vendor. We are also pleased with the progress we are making in the professional audio market. This is particularly6 important as technology developed for this market ultimately drives advancements in the high volume consumer entertainment space.

During the fourth quarter, we announced the first quarter chip level product associated with our peak audio acquisition. This digital audio networking processor incorporates Cirrus's Cobra net technology, the professional audio industry's leading technology for distributing uncompressed real-time digital audio over a fast Ethernet network. This product is expected to be in full production later this year. We're also pleased to add Harmon Pro group, one of the premier names in the audio industry, and Innovative Electronics Design, a leader manufacturer of commercial audio systems and communications systems for airports, convention centers and large industrial facilities to the growing list of 37 leading manufacturers that have licensed Cobra net technology as their solution for audio networking. Finally, I'd also like to point out that we are beginning to demonstrate greater synergy between our professional audio and consumer audio product lines. The same core digital signaling processing family that we expect to drive our success in the high market commercial market just noted will also support our next generation consumer audio solutions, which are scheduled to be brought to market later this year.

Now I'd like to shift our discussion to our video product line. While results were disappointing in our first year in this market, we believe that the technical progress we have made in the past quarter is worthy of some note. Even after the disappointments of fiscal year 2003, we believe the current rate of achievement offers continuing good opportunities in video. To further strengthen our video offerings, we recently announced the licensing agreement with Divix (ph) networks to incorporate their MPEG 4 technology into our DVD Processor solution. This will allow us to enable replay of video that consumers have downloaded from their computers on to CD's and DVDs.

I'd like to mention that many people have voiced a belief that based on its ability to offer good video quality by using much lower bandwidth and much less storage requirement than previously adopted standards, MPEG 4 technology has the potential to revolutionize the distribution and enjoyment of digital video content much like MP3 technology revolution revolutionized digital audio over the course of the past few years. We expect to be among the first in enabling DVD players with Divix (ph) support at mass market prices by integrating our leadership MPEG 4 playback capability with our single chip DVD player technology later this year. Also noteworthy in the fourth quarter, we supported Argus Electronics launch of its cost-effective high quality DVD player under the label of Cyberhome Entertainment. This product uses our 98-100 DVD processor, and as well our 4340 digital-to-analog converter.

Moving to the DVD recording market, we agree with market research firm IDC that the video recording segment is one of the best growth prospects for the semiconductor industry. According to a recent IDC report, the semiconductor market for DVD recording products is forecast to reach $678 million by 2004. Compound annual growth rate of 204 percent from 2002. They also forecast to reach - this market to reach $2.7 billion by 2007, which is an impressive annual compound growth rate of 106 percent from 2002. As manufacturers begin to offer these products at mass market prices, the DVD recorder will realize its potential as a VCR killer application. We fully intend to help our customers make this happen.

Earlier this year, we introduced our DVD+RW recording platform solution. It's based on our flagship 98-200 family of DVD playback processors which are the industry's highest performance DVD processors, and our encoding solution which is the 92-288 MPEG audio video coding. We began initial shipments in the fourth quarter to the Mustech (ph), the Taiwanese consumer electronics giant and another company not yet announced. We expect volume shipments for both to begin ramping in the current quarter, and as well, we are working with approximately half a dozen other manufacturers and believe they represent important revenue opportunities to us over the next several quarters.

Based on our discussion with multiple suppliers of the DVD+RW drives, it is clear that others share our optimism in this growth area. These drive manufacturers forecast that they'll be able to supply in excess of 1 million drives this calendar year to our customers. For reference, the market research firm Instep has forecast approximately 3.6 million units as the total worldwide DVD recorder demand during calendar year 2003. In addition, the personal video recorder, commonly called the PVR, which integrates hard disk storage and DVD player capability into a single consumer friendly box continues to be an emerging growth opportunity for us.

We're excited about these products because they offer consumers time shifting capabilities combined with broadband connectivity as well as DVD playback that is not commercially available on DVD recorders. Our compression technology offers superior video quality at lower bit rates for these applications. This means our customers can use smaller disk drives with enhanced storage capacity to deliver lower retail prices and a significant competitive advantage. During the fourth quarter, one of Japan's best known manufacturers joined Samsung and Apex Digital in selecting our 92-288 recording chip and MPEG video compression technology for its soon to be introduced PVRs. In PVR and DVD recorder applications, we expect to announce significant design wins as major customers launch their products into retail.

Before we take your questions, I'd like to close with a quick restatement of our guidance for the current quarter. One month into the June quarter, our customers are continuing to report limited visibility due to a variety of factors including low consumer confidence levels reported at least through March, unclear economic circumstances, the potential for the threat of SARS to substantially reduce consumer spending patterns in Asia in some of the more faster-growing markets of the world, and also general geopolitical uncertainties. Our customers continue to maintain short lead times and tight inventory levels. These factors lead us, as Steve mentioned, to take a cautious view of the June quarter.

Specifically, we expect revenue in the June quarter to be between 40 and $45 million. Our gross margins are expected to be in the range of 48 to 50 percent, and our combined R&D and SG&A expenses are expected to total between 34 and $36 million, and as well, we expect to exit the June quarter with total cash between 113 and $118 million. In closing, our formal remarks, I'd like to point out that we are seeing early indicators of significant growth opportunities for Cirrus Logic in the second half. However, due to our currently low visibility, it is very difficult to forecast results in quarters beyond our first fiscal quarter with any certainty. And, operator, we are now ready for questions.

If you have a question, key star 1 on your tone dial phone. If your question has been answered, or you want to withdraw your question, key star 2. Again, star 1 for questions, and we'll pause for just a moment. Our first question comes from Brian Alger from Pacific Growth Equities.

Good afternoon, guys.

Hi, Brian.

Wondering if we might get a little bit better clarity on what you're expecting in the next quarter. Obviously down significantly sequentially. Is that going to be coming out of the new audio definition or is that going to becoming out of video on the decline?

Do you mean in the June quarter or the - or are you talking next quarter meaning September quarter, Brian?

June quarter. I'm sorry.

We haven't guided by segments. We do have results of previous quarter revenues by segment so since audio is such a big percentage, obviously that has some of the decline, and certainly game consoles based on Steve's comments on at least one of the contracts which expired, that's a big chunk of the decline as well.

Let me ask it another way. Do you expect video to be up sequentially?

Again, we haven't guided by segment.

Ok. Fair enough. Looking at the OPEX line, we're looking at a slight, you know, if we take the middle of the road here, it looks like a slight increase or essentially flattish type of OPEX. Are we looking to reduce that on ago-forward basis if the revenues don't expand?

We guided that revenues in the current quarter would be flat, and I think that we can support substantial growth at our current operating expense level, and I guess I'd like to leave it at that.

Ok. And are we expecting any tax benefit or tax costs in the June quarter?

We have, as you know, a substantial tax provisioning reserves on our balance sheet, and over the next period of time as various statutes of limitations expire and we resolve those issues, they'll drop off the balance sheet, Brian.

Ok. And then just one final clarification. We had a nice reduction in a forward lease obligation. Should we be taking that $4.6 million out of what we see in the 10 request's and K's as far as forward obligations? Is it a straight linear type of pullout?

I'm not sure I understand the question, Brian.

In your Q and K, you have a breakdown in terms of lease obligations going out, I believe, to 2013. Should we reduce that number by the 4.6?

The answer is yes. I don't have the Q and K in front of me at this moment, but we did have that $4.6 million accrual which we reversed when we bought out the lease.

Ok. Thanks.

Thanks, Brian.

And our next question comes from Eric Gomberg from Thomas Weisel Partners.

Hi, guys. Could you discuss what the pricing environment was like both in audio and DVD in the fourth quarter and what your expectations are for the June quarter?

We didn't make any comments specifically on that. I can say that in the past, as well as our current position, on our mixed signal product line which is predominantly analog and it's differentiation and content, we don't tend to be under very substantial price pressure on a real-time basis, and as you can see from our gross margin percentage, which is pretty much tracked our estimates through the last several quarters, we don't tend to have a pricing pressure on that front. Likewise on our embedded DSP components in audio, these are components which come with a significant amount of programming, software content, some of which we actually provide to our customer base, so again on a real-time basis, we don't have that same pricing problem. I think that in high volume video applications is where, for straight digital applications, I think that's where some of the other chip suppliers have tended to see a little bit more price pressure than we've experienced.

So going forward, what are your expectations in the DVD market, and also maybe just expand, it seems like you have your hands or hope to have your hands in a bunch of different areas. Where do you see yourself positioned competitively or competitively advantaged in the DVD/PVR market?

Well, we certainly believe on the video recorder, we're ahead both in time as well as in the resulting cost of solutions that our customers can build a DVD+RW system with, and so both time and cost as well as features there. On straight DVD players, we think that in combination with our audio technology, the integrated DVD receiver function, or home theater in a box type function, there's no other supplier that has the breadth of technologies that we bring to the party there, so we can bring a much better solution at a much better cost point for that class of applications. In straight, low end video player applications, I mentioned in the script our single chip DVD player technology which we've continued to advance over the course of the past year and we think that our cost position is very strong in that area, we think we can compete even at the lowest prices that we've heard out in the marketplace quite successfully, though we don't intend necessarily to be a price leader even in that niche of the market.

Ok. In the past, I guess you're backing off a little from this, but in the past you've talked about timing of where you might see yourselves back at EPS break-even. To the extent that you have any visibility in programs that may come back after we get a little bit better consumer confidence, do you have any sense of when we may get back to, I guess, the 65 to 69 million level you need to get to break even?

Well, I'd sure like it to be sooner, but as I pointed out, I'm going to resist any temptation to make any sweeping economic forecast here, and we've just guided in the current quarter because the visibility is so low out there.

Could you quantify at all the dollar figure of push outs that you've seen that you thought would be coming in the June quarter that's not happening?

No, Eric, I don't have that data in front of me, and there's just too many line items to keep track of probably on that front.

Ok. Thanks.

Thanks, Eric.

And our next question comes from Nick Balushio (ph) from PCW.

Hi, guys. How are you doing?

Hi, Nick.

Quick question on the cash proceed potential from the Western Digital law suit. What did you quantify that number at? I missed that.

We are seeking $53 million. The statutory interest rate would be 10 percent, so that we didn't quantify, you know, the accrued interest on it.

When is it resolved?

The trial starts December 1st.

And is there any hope for a set settlement before that?

We, of course, always remain open and we'll stay tuned, but we're prepared to try it on December 1st.

Right. And no other cash proceeds from asset sales or tax rebates coming in, I guess?

Nothing right now that's certain.

Ok. The other question I have is, you've got 50 percent gross margins. Your gross margins are almost Intel's. And yet, you know, you're spending all this money on the DVD, you know, recorder business, and you're very, very profitable in the DSP and the analog business and the audio business. How much are you losing, and is it really worth it? In other words, why not focus on your core business and buy back stock with all the cash on your balance sheet and, you know, make some money for your shareholders instead of, you know, going after a commodity business where you've got enormous price pressure and, you know, a lot of Asian competition?

Nick, this is Dave. Obviously we continue to evaluate all the options that are available to the company. We think that the trade-offs of growth and synergies available by being in the audio as well as in the video market can keep us in a differentiated position on systems that employ both those technologies, which are, as I pointed out earlier in our opinion as well as the opinion of others growing at a more rapid clip than other semiconductor markets, at least that's what we believe, so we obviously still think it's a good strategy for the company.

All right. Thank you.

Thank you.

And our next question comes from Orrin Hirschman (ph) from OH Investments.

Thanks. Can you talk in a little bit more detail what's actually going on in the audio market in the mid range and also as well as your new chips with the combo CD, MP3 drives, what's going on there? There seems to be a lot, a lot of models out there. Is it just consumer demand is soft and people just are not picking up on the segment right now in

On the audio market, Orrin - this is Dave - we've read reports from numerous market research firms as well as looked at the results of some of the bigger retailers in Japan and elsewhere, and our belief is that there's an industry-wide slowdown of late in terms of takeaway from retail around the globe for audio applications in total. I don't think it's limited to just high end or just low end. I don't think it's limited in the regions, although the U.S., up until the last few months, has probably been weaker than some of the other areas. Reports that we get now are that the greater softness exists in Asian markets, particularly those which have been most noted as areas with a high incidence of SARS infections, and though I personally don't have the direct experience associated with the slowdown there, the reports are coming from many sources that spending in the consumer front is off dramatically. That would tend to affect the low-end audio take away from retail as Asia represents a bigger percentage of that market than they do of the medium to high end home audio market that we have historically serviced as a higher percentage of our business.

And in terms of what's going on within that home audio segment regular home audio equipment, is that becoming kind of taking a second seat to what's going on in the audio and the video space, and are people shipping anything which has a combo of a chip for audio and video which is making it harder for you to continue with the audio side? Is there some quantum shift slowly happening there?

There is greater growth in combined audio/video systems than there is in straight audio systems, according to most people that forecast the market. Without getting into quantification, I would like to point out that we participate in those combination systems in solving the audio challenge. Even when we don't service the video applications. So there's a growing number of home theater in a box application that is have a video decoder from another supplier, and an embedded DSP at a very low price from us, so we're actually seeing some growth from that arena.

Finally my last question is can you give kind of an overall view on the lease obligations and whether, you know, the extensive lease expenses are hampering your ability to continue to cut costs?

Let me let Steve address that question.

Thank you.

Yeah, I think at this point, Orrin, we've pretty well managed our lease for those buildings that we have moved out of and vacated. We have already restructured and accrued the costs of those buildings. Certainly we're looking actively at trying to sublease those facilities, or we're looking at other financial arrangements we could do that would be favorable to the company as a way to resolve those as well.

But is that going to hamper your ability to continue to further cut costs beyond kind of what you've guided on the expense side?

Well, for those leases that we have already restructured, those costs would not be included in what we're already guiding to in the combined R&D and SG&A guidance. So that if looking at can cutting those costs if we wanted to, those leases have already been resolved.

And can you just talk, last question, on future effects - I know someone asked this before but it wasn't clear - future cash effects from some of those lease issues? In other words are those buyouts, are they a one-time affair and that's finished for you?

For those leases that we buy out like the one that we just did with StreamMachine (ph), we buy it out and the lease is finished. It's terminated.

Ok.

For those leases that have ongoing terms, we continue to remain obligated under the leases.

Ok. Thank you.

Sure. Thank you.

As a reminder, key star 1 for questions. And our next question comes from Tim Harsara (ph) from Kennedy Capital.

Just a follow-up on the cost question here. It's hard for me to understand in this June quarter that you're guiding for cash to be down, you know, roughly 10 million. How much of that is one-time charges, and how much is on an operating basis, I guess, going forward?

Let me let Steve address that question.

If you simply take the revenue guidance we've provided coupled with the gross margin guidance and the OPEX, your calculation would get - that you'd burn cash because of a loss in the 5 to $10 million range. It's not looking at - or assuming any unusual one-time charges.

Ok. I guess the follow-up question would be, how many quarters are you willing to accept losing this sort of money? I mean, with your revenue lower here, your visibility is low, at what point do you say you're tired of losing money and cut costs enough to get to at least a break-even level?

Well, this is Dave, and let me just address that question qualitatively. The cycle for entertainment electronics is such that the big design-in time happens now through the September period where a lot of customers make pretty serious commitments for the emerging North America peak, which is the retail season going into Christmas. And continuing to emphasize a high degree of effort to win as much business as we can this year without squeezing, you know, more cost out at this stage of the game has been our game plan. We mentioned that earlier, continues to be the way we're approaching business over the course of the next several months. We believe as I mentioned during the formal remarks that we believe there are a lot of opportunities that we have in front of us, and we expect that we can get our fair share, and so we look forward to seeing how that all turns out, and then as we get through the next quarter, then we'll look at what we're going to do for subsequent quarters.

Ok. Thank you.

Thanks.

And that was our last question. I'd like to turn the call back over to David French for his closing remarks.

Ok. Before we sign off, let me thank you once again all for joining us here today. We look forward to talking with you when we report our June quarter financial results, which are now scheduled for July 23rd at the same time. In the meantime, we hope to see many of you at upcoming conferences. As a couple of examples, we'll be presenting at the JP Morgan technology and telecom conference on May 7th in San Francisco and we'll also be presenting at the U.S. Bancorp Piper Jaffray technology conference on May 14th in New York City. Thank you again for your attendance here today and for your continuing interest in Cirrus Logic.