Cirrus Logic Inc (CRUS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic first quarter fiscal 2004 financial results conference call. At this time all participants are in a listen-only mode. Later, we will open up the call to your questions. Instructions for Q&A will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Mr. David Allen, Vice President of Investor Relations and Treasurer of Cirrus Logic. Mr. Allen, you may begin.

Thank you, operator. Good afternoon and thank you for joining Cirrus Logic's first quarter fiscal 2004 financial results conference call. I'm Dave Allen, Vice President of Investor Relations and Treasurer, Cirrus Logic. Joining me today, on the call is David French, Cirrus Logic's President and CEO and Kirk Patterson, Vice President, Corporate Controller and Acting Chief Financial Officer. Before we begin, I'd 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 second quarter revenue, combined R&D and SG&A expenses, gross margins, cash levels, projected savings from outsourcing our test operations, reduction in income tax payables, days sales outstanding as well as expectations regarding our growth and future performance. Please keep in mind that these statements are predictions and are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our press release dated July 23, 2003, which is available on our Web site at www.cirrus.com., our latest form 10-K for the year ended March 29, 2003, as well as in our other filings made with the Securities and Exchange Commission for additional discussions of risk factors that could cause actual results to differ materially from current expectations. Now I will to turn the call over to Dave French. Dave.

Thank you, Dave 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 will first quickly recap our results. I would like to mention before proceeding, that our first quarter results were in line with the guidance that we gave on our April 30 conference call, and also importantly, that all financial numbers we discuss here are in conformance with generally accepted accounting principles.

For the first quarter of fiscal 2004, revenue was $40.7m, gross margin was 48.5%, combined R&D and SG&A expenses totaled $33.2m, and net loss was $24.3m, including a charge of $7.6m, which was primarily related to facilities consolidation. Net loss per share in total was $0.29 and our ending total cash balance was $115.5m.

At the end of April, we told you that our customers were reporting limited visibility due to a variety of factors, including low customer confidence, unclear economic circumstances and the uncertainties surrounding the spread of SARS. We also said that we thought the audio market might not see its typical seasonal rebound during the June quarter. Our early reports confirm our views on June quarter demand were accurate. For instance, according to a recent consumer electronics association survey, factory shipments of audio systems into US retail stores during the month of May were down 35% on a year-over-year basis.

Moving into the September quarter however, it's becoming more apparent that the excess inventories and retails have been worked off and that the outlook for demand of audio and related hardware product in the North American retail segment is likely to increase. Based on this early assessment of this report that it appears our first fiscal quarter was a turning point for Cirrus Logic and now we expect to return to revenue growth during the current quarter. While the seasonal rebound in audio demand started much later in our first quarter than we have traditionally seen, we have greater visibility with higher orders and backlog now than at this point last quarter. In addition to the modest seasonal recovery we are seeing in audio products, we are now seeing traction for digital video recording applications which we have indicated could be key drivers of second half revenue growth for Cirrus Logic.

Continuing to look for opportunities to contain and reduce our cost, I'm also pleased that we recently entered into a strategic relationship with ChipPAC to outsource our test operations. We expect this new relationship will provide us with savings of $6m to $8m per year, beginning in calendar year 2004.

Before I review our first quarter results in detail, let me quickly comment on our recent management change we had at Cirrus Logic.

As we have previously announced, Steve Overly, who served as our Chief Financial Officer for the past 15 months recently left the company. Steve successfully guided us through some difficult downsizing and expense cutting and we are pleased to have benefited from his contribution. With Steve's departure, I'm also pleased that Kirk Patterson could step in immediately. Kirk joined Cirrus Logic three years ago and has spent more than 23 years in financial management roles. For the past two years, he has been our Chief Accounting Officer and has led our finance team as corporate controller. Kirk is here with me now and he will be available for direct involvement during the questions and answers part of this call.

I'd like to now give you more detailed analysis of the financial results for our first fiscal quarter, again which were in line with our April 30th guidance. First quarter net revenue was $40.7m, down 22% from $52.1m in the fourth quarter. Audio revenue in the first quarter was $37.4m compared with $41.1m in the fourth quarter. And Video revenue in the first quarter was $3.0m compared with $3.9m in the fourth quarter. Other revenue in the first quarter was $0.3m.

I'd like to remind you that revenue during the March quarter included $7.1m in game console revenue, of which $6.8m related to game console components, sold under a supply commitment which was completed at the end of the quarter. Revenue from our ongoing game console product was reported as part of our Audio revenue in the just-completed first quarter.

Gross margins for the first quarter were 48.5%, down from 50.6% in the fourth quarter. Now let's point out that this change was driven largely by a one-time $723,000 dollar impairment charge we recorded in this recently completed quarter on assets being sold to ChipPAC, associated with our recently announced agreement and by reserves taken and certain parts in our inventory.

During the first quarter, our combined R&D and SG&A expenses were $33.2m, an improvement of $1.6m down from $34.8m reported in the prior quarter. SG&A decreased to $2.8m, largely due to lower salaries and benefit expenses and lower marketing expenses due to the timing of some trade shows. R&D increased $1.2m, mainly due to increased product development costs.

I would like to point out here that as we have reported in earlier quarters, our combined R&D and SG&A expenses include legal costs incurred with in connection with our exit from the magnetics storage product line, as well as deferred compensation charges associated with acquisitions. In these two areas, expenses in the just completed quarter totaled $1.5m. As you will note in the tables, first quarter operating expenses also include $3.8m of amortization associated with acquisition intangibles.

In addition, in the first quarter the company incurred a charge of $7.6m for restructuring in other related costs, primarily relating to facility consolidations in Texas in California. Our first quarter operating expenses were $44.6m compared with $180.8m in the fourth quarter on a comparable basis. And again as you would recall, in the fourth quarter, we incurred a non-cash charge of $136.2m related to the write-off of goodwill in the impairment of intangible assets.

The net loss for the first quarter was $24.3m compared with a net loss of 152.8m in the fourth quarter. The net loss per share for the first quarter was $0.29 based on $83.8m, 83.8m shares rated outstanding. This compares with a net loss per share of $1.82 in the prior quarter based on the comparable number of shares outstanding.

Our employee headcount at the end of the first quarter was 892, down from 905, close to the prior quarter.

We ended the first quarter with total cash of $115.5m in line with our prior guidance of $113m to $118m. Total cash at the end of the prior quarter for reference was $122.8m. We ended the first quarter with $23.6m in net receivables and a DSO of 53 days vs. 40 in the fourth quarter. We view this increase as temporary and expect our DSO to return to prior levels in the current quarter.

Our net inventory was $21.2m at the close of the first quarter, which on a dollar basis was down from $22.3m in the prior quarter. I point out that as we prepare for a higher level of anticipated sales in the September quarter, our net inventory at the end of the June quarter represents a slightly higher percentage of sales than at the end of the prior quarter.

Capital additions remain very modest to slightly at $835,000 in the first quarter compared with $1.1m in the fourth quarter. Depreciation and amortization expense totaled $7.6m compared with $8.5m in the prior quarter.

Accounts payable and accrued liabilities were $43.9m compared with $43.1m in the prior quarter.

And stockholders' equity at the end of the quarter was $140.2m, down from $163.5m in the fourth quarter due primarily to the net loss, which included the restructuring charges as previously discussed.

And before I provide comments on our products and markets, let me quickly report that there has been no change in the status of the outstanding Western Digital and Fujitsu lawsuits as noted in our recently filed Form 10-K.

Now, let's look at some of the exciting application areas we are pursuing and the related product activities inside of Cirrus Logic. As I mentioned, I am encouraged about the seasonal pickup in audio demand we are now seeing as our distributors and retailers begin to replenish their inventory level, and as our OEM customers introduce new models. While it's clear in late December that there was likely to be a significant excess in audio product inventories in North American retail after the holiday selling season, this situation was even worse than many of us thought. While the several months trend represents a slow period in retail sales for these products, the pickup in orders that we have recently seen across the wide range of audio customers suggest that retailers and manufacturers leave this inventory overhang is behind us. I am also very encouraged to see our video recording orders and related backlog improving. Our digital video recording solutions are at the forefront of an emerging market, and we are now enabling a growing list of customers to introduce new digital recording products at affordable price points that we expect will spur demand for these products later this year.

Particularly in the audio area, audio and mixed signal applications remain our largest revenue category contributing $37.4m in sales in the first quarter. We continue to build on our market leadership position here as evidenced by our audio/video receiver win recently at Onkyo, one of the leading names in audio/video components and home theater systems in the world. Our highly integrated CS42518 and CS42528 surround sound CODEC will be featured in Onkyo's next generation receiver along with our CS5333 analog-to-digital converters. As is often the case, we were chosen for this design, because we enable a cost effective product line with best-in-class performance and leading edge features.

The growing area of DVD receivers, which integrate high-performance audio amplifiers in the same box with a DVD player, we continue to be a major semiconductor supplier to Bose, a company synonymous with great sounding audio systems. We are bolstering our DVD receiver customer base with several recent design wins including well-known leading brands that we expect will be coming to market later this calendar year.

Before we turn to the quickly developing digital video recording markets, let me comment on the opportunity that automotive related sales offers to Cirrus Logic. Today, automotive related sales account for a relatively small percentage of our revenue and a very small share of a very large and growing market. We currently sell a number of products to industry leaders - Bose and Delphi. And in fact during the first quarter Delphi selected our CS4334 audio digital-to-analog converter for its XM radio platform which is sold to tier 1 automotive manufacturers.

The market research firm IMS, expects that the worldwide market for in-car audio and infotainment systems, will expand from 90m units in calendar 2002 to 125m units by calendar 2008. Our consumer entertainment expertise directly applies to the migration of premium audio and video capabilities from the home into the car, with the car becoming an important entertainment environment. A key to expanding our automotive customer base beyond Bose and Delphi and ramping up product sales will be our attainment of ISOTS-16949 certification, which we're now actively pursuing. We have already dozens of existing products that can be sold into this market; we're now building relationships with large tier1 automotive suppliers for participation in development efforts. I expect we'll be talking more about automotive efforts in progress in future conference calls.

Now I'd like to shift the discussion to our video product line. We recently made some important gains. Particularly in the emerging video recording area, which we expect will be a major growth driver for Cirrus Logic.

In the DVD recording market we agree with market research analysts that the video recording segment is one of the best growth prospects for the semi conductor industry. According to a February 2003 IDC report, the semi conductor market for DVD recording products is expected to grow from $74m in calendar 2002 to $283m this year. This market is expected to grow further to $678m next year and $2.7b by calendar year 2007. The growth from 2002 level through 2007 represents a compound growth rate over this extended period of time of over 100%, on an annual basis.

According to other studies by IDC and INSTAT and Gartner Group, DVD recorder shipments to grow from approximately 1m units in calendar 2002 to some where between 3-3.7m units this calendar year. Further going to 8.3m to 10.6m units next year and then to over 30m units by calendar 2006. We believe that the key factor behind this growth will be how quickly OEM's bring affordable DVD recorders to the resale market.

As we've recently announced through a number of customer design win press releases we're now beginning to enable our video customers to bring to market for the first time these products that match market price, with more affordable price points DVD recorders will usher in a major product replacement cycle, as consumer drive the VCR in the same direction as the eight track tape player.

Earlier this year at the Consumer Electronics Show, winner Mustek, a major Taiwanese consumer electronics manufacturer demonstrated a DVD recorder reference platform. The platform uses our CS 92288 video encoder, encoder, and our flagship CS98200 DVD playback processor, which is among the industry's highest performing DVD processors. Mustek recently began volume production shipments of its first DVD recording device, which will soon be available on retail outlets across Europe and in North America at prices below $450.

Recently Taiwan-based Sampo Corporation announced the launch of its own DVD recorder. The DV-R1, which is targeted for the mass market with the retail price also under $500. This DVD recorder also uses our CS98200 processor and CS92288 encoder providing Sampo with a complete audio video and software solutions. In addition the Cirrus logic platform enables Sampo to integrate IEEE 1394 functionality and support Kodak pictures CD and MP3 in Windows Media Audio format.

The Sampo DVD recorder leverages Cirrus logic audio expertise by incorporating our CS5333 A to D converter and CS4362 digital to analog converter.

In addition to these DVD recording opportunities, we're also working closely with a number of consumer entertainment system manufacturers including Apex, DDK, Digit Tech and others on personal video recorders that employ hard disk drive base solutions, for example BBK Electronics Corporation, one of the larger consumer product manufacturing companies in China, recently announced a personal video recorder combined with a DVD player, the DR 9907 based upon a comprehensive suite of a audio and video component. BBK's new recorder combines popular digital entertainment features into a single compact and affordable consumer device. BBK's new product records up to 41 hours of high quality digital video encoding of content such as Broadcast TV. With popular viewing control features such as the ability to pause and replay live broadcast. The BBK product will be marketed and then distributed under the Silco (ph) brand by major consumer electronics retail chain.

Also already on stores shelves in certain markets are Cirrus logic powered video recorders manufactured by Sony and Samsung. Sony uses our CS 92288 encoder to provide video and audio recording functionality in two new high-end digital video recorder products that are now available in Japan. Samsung is marketing a DVD player combined with a personal video recorder unit also based on our CS 92288.

All told, we are now working with approximately a dozen manufactures of consumer video recording products, which we believe will be in production or on retail shelf by this holiday season. We believe they represent important revenue opportunities to us over the next several quarters.

Now let's look at our guidance for our second fiscal quarter which ends on September 27th. We expect revenues to be between $45 and $50m. We expect gross margins to be in the range of 48 to 50%. Our combined R&D and SG&A expenses are expected to total $33 to $35m, including legal costs incurred in connection with our exit from the Magnetic Stores Product line, and as well as the deffered compensation charges associated with acquisitions. During the second quarter we expect to benefit from a $7.2m reduction in income tax is payable due to the release of the reserve. This release will not have a cash impact. And we expect to exit the September quarter with total cash between $106 and $111m, again with no debt on our balance sheet. While we expect healthy growth in fiscal Q2, we have to caution that it is too early to project December quarter results, especially since the economy is still unsettled and remains to be seen how consumers will choose to spend their discretionary income during the upcoming holiday season. And now we are ready for you questions. Operator.

Thank you sir. Ladies and gentlemen, at this time if you do have a question or comment please key star one on your touch-tone phone. If your question has been answered and you wish to withdraw your question, please key star 2. All questions will be taken in the order they were received. Again ladies and gentlemen that's star one for questions. Please hold for your first question. And your first question comes from Jane Hwangbo of Monness, Crespi and Hardt. Please go ahead.

Yeah, hi guys. Congratulations. I just wanted to see if you could walk us through some of the special charges that you took this quarter to make it very clear.

Yes and thanks for joining us here today, I pointed out at number of items, again I also pointed out that the numbers we reported are in compliance with GAAP. We think that it is a good thing to do, particularly during the first quarter just completed the R&D and SG&A expenses, included $1.46m WD related litigation expenses and deferred compensation. In addition, we had restructuring in other costs in our P&L for the first quarter of $7.6m.

Okay

We had amortization of acquired intangible of $3.8m. And finally in the direct cost line we had a $700,000 writedown of assets associated on a one-time bases non-cash associated with the equipments we sold to Chip-Pack. If you add up all those unusual and one-time activities, it will add up $12m some thing and if you subtract that from the operating lots, you would get to a $0.13 operating loss net of those events.

Okay

Okay great, thank you.

Your next question comes from Brian Alger of Pacific Growth Equities, please go ahead.

Several questions guys. First on these special charges. Haven't we been including the legal cost associated with the WD in terms of the out packs in the previous quarters?

We have been including that and pointing out what it is. For clarification again, we report only GAAP so we tell you what it is and we include it in the numbers.

Fair enough. You mentioned in your audio numbers that you had above $7.1m associated with a game console, which as I recall in the fourth quarter was broken out previously. On an apple to apples basis should we be comparing the 37.4 to a 48.2 number from the March quarter? Or is there - am I just hearing things differently?

No you should not be comparing that, I think that you should take it the $7m that was game console revenue in the prior quarter and know that the vast majority that went away when the one contract ended as we'd announced a long time ago. And there's a very, very, very small amount left over which we have lumped in the audio number. So I would compare just the audio number previously with the audio number now.

Okay, and in the June quarter, what was the audio number not including any game console?

We hadn't brought in us a few hundred thousand for the residual game console business.

Brian, Dave Allen, actually we referenced that the customer, that contract requires a 6.8m and we also sold you game console for 7.1 in the fourth quarter. So you can do the math and figure out that, that other customer would be about 300,000 in audio in the last quarter from the information we gave you.

Okay I'm still a little confused whether the 6.8 incurred as a kind of follow up contract in the March quarter or was it in the June quarter?

In March.

Okay great. Thank you. And as we look at the growth, that you're forecasting in the September quarter, can you may be give us a sense as far as how much is coming from audio versus how much is coming from video?

Well, we haven't broken it out obviously. It's difficult to predict. You know, I think that if you look at trends in the market, certainly things are going up. We don't know how much each side of the business will go up, but we do anticipate that both sides are going up at a pretty good clip in this current quarter.

Okay. And as we're looking at your operating expenses, can you give us a sense as to how much of those expenses particularly the R&D line is associated with your video business versus your audio business?

For us, it's difficult to break out. We get a lot of desire to see a lot of that, I mean, we haven't made attempt to try to break out on a statement basis or even split it up. There's a lot of expense that are shared, for instance when we do - new designs for Bose and we're working on a complete systems solution and we can't break it out. When we're doing new designs for other retail brands, you know, integrating single chip home theatres systems, difficult to break out. So it's kind of hard. I would say that certainly the video specific operating expenses as a percentage of video-specific revenues, is much higher than it is in audio, so, but to break it out is start to become a little bit of arbitrary game to try get real specific on that.

Okay I guess may be a different question will be. Is the video business profitable at current revenue levels on an operation basis?

No.

Okay, That's it guys thanks.

Thank you.

Once again ladies and gentlemen just as a reminder if you do have a question or comment, please key star one on your touchtone phone. And our next question comes from Eric Gomberg of Thomas Weisel Partners, please go ahead.

Yeah. Just maybe I will try re-asking one of those questions I was asking you - when you're looking into this September quarter and looking at the growth in audio and video, realizing that you're not specifically breaking out those numbers, given that video is coming from such a low base and all the opportunity talked about in terms of recordable DVD, is that going to be growing at a materially faster rate than audio and into the September and December quarters?

Into the September and December? We haven't guided December. We've only guided September, but certainly video is a big part of the growth in the period in which we've guided and as we said, we think that video recording is going to be a substantial contributor to growth in subsequent periods as well.

Okay. What do you say is the key drivers between the low end and the high end of guidance over for the September quarter?

How you mean the question?

It's a fairly wide range and you said that this ability still not wonderful, has improved somewhat. What could - what do you see as the key that could go right or wrong that would bring it from the either the low end or the high end?

Yeah. Well obviously if new order rates continue on the trends that are positive that we've seen of late, is pushing us towards higher numbers, whereas if things slow down a little bit as summer goes on, you know, will probably close at lower trends. I think it's difficult to predict because we retailers really don't have a good mechanism to connect traffic levels in the summer with anticipated spending patterns in the holiday season. So right now, I'll look at it is usually this sector over reactfull to over inventory and under inventory situation and the fact that we've got a pretty broad level of buying right now indicates things that, you know, the inventory situation must be kind of on the dry side, which will lead me to believe this, or may be we are being too conservative in some cases. But on the other hand, I think being conservative when you don't know where the economy is going is the right thing to do.

Okay. And again you have given this in past quarters, what's the - what do you see as the revenue breakeven for the company?

Still think its kind of where we were before, which I think is in the $65m to $69m for quarter range.

Okay and finally, what was the cash received for this sale of test of ChipPAC?

We received $3.5m in that sale, we wasn't and - just completed quarter.

It wasn't until the very beginning of the current quarter. So it is not on the reported results.

And expected D&A and capex for September?

They should be pretty consistent with what we just reported this quarter.

Which was capex around a million and D&A somewhere around $7m.

Eric, when you look out into the future of our breakeven recognize that when the ChipPAC [Inaudible] benefits start to benefit us from the beginning of next calendar year, we expect to lower our expenses to $6m to $8m a year. And so the number Curt was putting out was our current - under our current expense level.

Right. And if ChipPAC kicks in, the deal with ChipPAC kicks in it should bring down the breakeven point on a P&L basis and also on a cash basis by $3m to $4m.

Understood. Thank you.

Yeah, Thanks Eric.

And your next question comes from Alan Adler of Alan Adler Enterprises. Please go ahead.

David could you go through a couple of the video products, customers therein, and sketch as best you can what their plans are, you know, when do they introduced what their price points or, and what kind of distribution they will be getting and by when? Will these products be there in October or just Christmas time?

Well Alan, I loved to talk in ways that make people understand in as much deal as possible about our customer's plans, but it probably is inappropriate for me to do so. I think that the customers that we have announced certainly have a plan to capitalize on the cyclical spending patterns in North America as well as in some cases Asia. So the planning to be there in time for the holiday season, I can tell you that, but short of that, I don't think that they tend to want me to do their marketing for them. So as we did for some specific - in terms of which brands that they are going to bring out under, in some case to be pointed out which channels. But other than that, we try to steer clear of talking in more levels of details our customers marketing plan. I just think that's really what they want us to do.

Thank you sir. Gentlemen, at this time there seems to be no further questions in the queue at this time. You may proceed with you lecture or any closing remarks you might have.

Okay, well, thank you for your questions and also thanks for your continuing interest in Cirrus Logic. I'd like to reiterate real quickly the key points that I tried to bring out in today's call. First, we believe that the June quarter was a turning point for Cirrus Logic and that we expect to return to revenue growth this quarter. Orders are improving. Since the end of June, the June quarter as the auto market started to seasonally bound in, our overall backlog now is significantly higher than it was at this point 90 days ago. Also I'd like to point that, while I am encouraged about the positive reception in increasing demands we are getting on our video recording product, our outlook for later this year continues to be tampered by macro economic conditions and concerns over how consumers will ultimately allocate their discretionary spending budget. Looking beyond the holiday season, all of us remain confident that our products and our technology and customer relationships are quite strong. The markets we target here at Cirrus are providing strong growth opportunities over the next several years. And finally, as we have again demonstrated with our recent announcement about outsourcing our kept operations with ChipPac, we remain committed to looking for ways to further improve our operational efficiencies and lower our cost structure, while at the same improving our customer service. And then finally before we sign off, let me thank you once again for joining us here today and I'd like to say that we look forward to talking with you when we report our September quarter financial results which is scheduled for October 22 and in the mean time we hope to see many of you at upcoming conferences. We'll be presenting at the Adams, Harkness & Hill, Summer Seminar in Boston on August 6. We'll be at the SoundView Technology Group conference in San Francisco on August 14, and we'll be at the SG Cowen Fall Technology conference in Boston on September 3. Thanks again for your attendance here today and for your continuing interest in Cirrus Logic.

Ladies and Gentlemen, that concludes your Cirrus Logic conference call. You may disconnect now.