Cirrus Logic Inc (CRUS) 2004 Q2 法說會逐字稿

Welcome to the Cirrus Logic first quarter fiscal 2004 financial results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference over to Mr. Kirk Patterson, Corporate Controller and acting Chief Financial Officer. Mr. Patterson, you may now begin.

Thank you, operator. Good afternoon and thank you for joining Cirrus Logic's second quarter fiscal 2004 financial results conference call. I'm Kirk Patterson, Vice President, Corporate Controller and acting Chief Financial Officer of Cirrus Logic. Joining me today on the call is David French, Cirrus Logic'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 third quarter revenues, combined R&D and SG&A expenses, gross margin and cash levels, as well as expectations regarding future reductions in operating expenses and our growth and future performance. Please keep in mind that the statements are predictions that are subject to risks and uncertainties that may cause actual results to differ materially.

Please refer to our press release dated October 22, 2003, which is available on our website at www.cirus.com, our latest Form 10-K for the year ended March 33, 2003, as well as 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 expectation.

Now I will turn the call over to Dave French.

Thank you Kirk. Thanks to all of you who are joining us today.

For those of you who have not yet had a chance to read our press release, I will quickly recap our results. I'd like to mention before proceeding that our second quarter results were in line with or better than the guidance that we previously provided, and that all financial numbers we discuss our in accordance with Generally Accepted Accounting Principles.

For the second quarter of fiscal 2004 revenue was $50.1 million, gross margin was 51.9 percent, combined R&D and SG&A expenses totaled $32.6 million and net income was $21.1 million. Earnings per share were 25 cents and our ending total cash balance was $127.3 million.

Last quarter we said that we believed audio and mixed signal channel inventory was being depleted and that demand was increasing. Our outlook turned out to be accurate and revenue grew $5 million in our audio product category, as well as $5 million in our video product category during the September quarter.

While we are pleased to return to a GAAP net profit, I would like to point out that our acquisition net income included a number of onetime benefits which totaled $31.7 million, which if offset by offset by $5.3 million of expenses not related to our ongoing businesses would have produced a net loss instead of a net profit. The onetime positives included favorable patent infringement litigation settlements, gains realized on the sale of marketable securities and an income tax benefit. The offsets to these positives included legal expenses associated with the recently settled lawsuit with Western Digital, amortization of acquisition related deferred compensation, amortization of acquisition related intangibles and a small restructuring charge.

In any case we're pleased with our second quarter results and are encouraged by our expectations by further improvements during the December quarter, which is not traditionally a strong growth quarter for this industry. We believe that the mood in our markets is shifting and our customers are accelerating their relationships with us, asking us to help them bring next generation products to market even more quickly than before. So, we're continuing to invest wisely in research and development and other key areas to capitalize on these revenue and profit growth opportunities with existing and new customers.

I'd like to point out that as we work closely with our customers to expand these growth prospects, we're carefully monitoring leading indicators of success. And if we see any shift from the current positive market outlook, we will adjust our expenses quickly to accelerate operating probability. In the meantime, we believe our investments in new product development and customer support will provide ongoing revenue and profit growth opportunity.

Now I would like to review the financial results for the second fiscal quarter in more detail.

Second quarter net revenue was $50.1 million, up 23 percent from $40.7 million in the first quarter. Audio revenue, which includes digital audio, analog and mixed signal applications, was $42.1 million, up 13 percent from $37.4 million in the first quarter. Video revenue in the second quarter increased to $8.1 million from $3.0 million in the first quarter. And encoder and decoder chip sales into DVD recording applications accounted for more than 75 percent of our video sales.

Gross margins for the second quarter were 51.9 percent, up from 48.5 percent in the first quarter. As we stated in July, our previous quarter gross margins were negatively impacted by a onetime impairment charge of $723,000 taken on assets that were being sold to ChipPAC as part of outsourcing our test operation and also by reserves taken on certain parts in inventory.

Combined R&D and SG&A expenses were $32.6 million in the second quarter, an improvement from $33.2 million in the first quarter. Combined R&D and SG&A expenses included $624,000 from legal costs incurred in connection with our recently settled litigation with Western Digital, as well as $525,000 for deferred compensation charges associated with acquisition.

Our second quarter total operating expenses were $22.4 million, down sharply from $44.6 million in the first quarter, and this decline was primarily related to favorable patent litigation settlements with ATI and nVidia. These settlements, which generated a net reduction of $14.4 million in operating expenses, were recorded as a separate P&L line item. Also included in the second quarter operating expenses were $3.8 million of amortization associated with acquisition intangibles, and also a net charge of $395,000 for restructuring and other related costs primarily associated with the outsourcing of our test operation.

The Company also benefited from a $7.2 million income tax benefit due to the release of a reserve following the expiration of the statute of limitations. This release had no cash impact.

Net income for the second quarter was $21.1 million versus a net loss of $24.3 million in the first quarter. Our earnings per share for the second quarter were 25 cents, based on 85.6 million diluted weighted average shares outstanding, an improvement from the net loss per share of 29 cents reported in the first quarter based on 83.8 million weighted average shares outstanding.

Our employee headcount at the end of the second quarter was 861, down from 892 at the close of the first quarter.

Total cash at the end of the second quarter was $127.3 million, up from $115.5 million in the first quarter. The increase in cash was largely due to the following items -- 7.2 million net of expenses received from the patent settlements with nVidia; approximately 5.6 million from the sale of stock in SigmaTel's recent IPO; and an additional $4.5 million in cash received from SigmaTel relating to a contingent guaranty made in November 2000 that became payable on their IPO; and finally, $3.5 million for the sale of assets in connection with our outsourcing agreement with ChipPAC.

These items were partially offset by multi-year CAD license renewals and certain annual insurance premiums. Second quarter total cash did not include the $9 million we received so far in October from ATI or the $45 million just received last week from Western Digital.

By the way, the Company continues to be debt free.

We ended the second quarter with $21.9 million in net receivables and DSOs were 40 days, down from 53 in the first quarter. Net inventory was $25.1 million at the close of the second quarter, up from $21.2 million as we built some inventory to support our customers' manufacturing ramps.

Our cash in the September quarter and our expectations for cash in the December quarter are up significantly due to a number of onetime events. We took advantage of this improved cash position to renegotiate several CAD licenses during the second quarter. Partially as a result of these actions, our capital additions in the second quarter were $8.4 million. This compares with $835,000 in capital expenditures in the first quarter.

Depreciation and amortization expense totaled $6.9 million in the second quarter compared with $7.6 million in the first quarter.

Accounts payable and accrued liabilities were liabilities were $53.3 million compared with $43.9 million in the first quarter. This increase was primarily due to a $3.6 million increase in trade payables associated with our increasing sales level; $3.1 million in ChipPAC proceeds related to assets still to be transferred; and finally, $1.8 million in legal fees associated with the ATI settlement.

Stockholders' equity at the end of this previous quarter was $162.5 million, up from $140.2 million at the close of the first quarter.

Now I would like to update you on various litigation matters. As we discussed earlier in this call, during the second quarter we favorably settled the ATI, nVidia and Western Digital lawsuits. Currently, we have outstanding lawsuits with Fujitsu and Wolfson Microelectronics.

The Fujitsu trial, which relates to the magnetic storage business, we've already exited. It's currently scheduled for July 2004.

In addition, earlier this month we filed suit against Wolfson, a United Kingdom-based audio semiconductor company in the US District Court in Southern California. We also filed a second action with the International Trade Commission. These complaints allege that at least 15 of Wolfson's products, which incorporate digital to analog converters infringe on our intellectual property. We've asked for an injunction against Wolfson selling these components in the United States, as well as any other available relief.

While we recognize that this new action will have a cost to us, which, by the way is already factored into our guidance, we will not let Wolfson or any other company taken advantage of our (technical difficulty) and our significant research and development investment.

Now I would like to share some of our excitement about recent successes and some of the growth opportunities in specific product areas.

We were very pleased that both our audio and video product revenue increased in the second quarter, and especially pleased to see that revenue from our video products contributed $8.1 million in Q2, up from only $3 million in the prior quarter.

As you know, we sell our digital audio analog and mixed signal products into high margin, diversified and fragmented markets where we have leadership positions. Audio remains our largest revenue category at 84 percent of second quarter sales.

To pry a little more insight into the audio category I'd like to discuss here several market applications within audio, including multi-channel or surround sound, portable audio, automotive audio and industrial mixed signal applications.

Within surround sound, a.k.a. multi-channel applications which include audio video receivers, demand continued to improve beginning in the latter part of June as distributors and retailers started to replenish their inventories and as OEM customers introduced new models.

We recently demonstrated production ready Dolby Pro Logic IIx audio DSPs at the CEDIA Expo. Two leading audio manufacturers -- Marantz and Harman Kardon -- quickly adopted this new format. Both audio manufacturers have announced plans to use our DSPs, which deliver a rich seven channel surround sound listening experience for the home theater environment.

We also introduced our 23rd new analog product in the past year and a half to support audio video receivers, DVD receivers and home theater products for our blue-chip customers. Our new family of innovative cost-effective surround sound codex is designed to give OEMs a chip that delivers professional quality, multi-channel 192 kHz DVD audio capability, while helping manufactures accelerate time to market.

The portable audio category also grew in the second quarter and we have several new MP3 player design wins, including Audiovox, a manufacturer of wireless and mobile consumer products, and Virgin Pulse, the consumer entertainment product division of one of Britain's most widely recognized companies. Virgin Pulse products using Cirrus Logic's CS7410 music processor are now being sold at Target stores in North America.

Automotive applications represent a large opportunity for Cirrus Logic. We have an established audio customer base with Bose, Delphi and Harman Becker to name a few. And we're excited about our prospects as surround sound audio moves from the living room into the car.

Last year I reported to you that Delphi selected our CS4334 DAC for its XM Radio platform. I'm also pleased to note that this quarter Harman Becker, another Tier 1 customer, is now moving into production on a 12 channel 600 watt amplifier under the Mark Levenson brand, which is being designed into the Lexus LS430 and SE430 models.

Our sales and design win activity for industrial applications also increased in the second quarter as a result of the increased emphasis we have been placing on this product line over the course of the past year. As you may know, industrial applications include high margin niche market product in areas such as power management and energy exploration.

Digital power meters offer both residential and industrial meter customers advantages over older mechanical devices, including lower cost, greater reliability and the ability to monitor utility usage from central locations. Actaris, a leading leader in utility metering products, recently selected our power meter on a chip which offers improved temperature stability and accuracy, forming a superior choice for designers of electronic meter systems.

Also, as interest in energy exploration increases, so does customer interest in our seismic products. During the second quarter we captured several new design wins, which we expect to bring revenue in the coming quarters of in this important application area.

Finally, let's discuss our video products, which are the fastest-growing area of our business. IDC recently increased its industry forecast for DVD recorder demand. IDC now forecasts that 13 million units could be shipped in 2004, up from its earlier projection of 8.3 million units. They also raise their projection for (technical difficulty) more than 50 million units compared with approximately 30 million units in their prior forecast.

We're attacking this market aggressively with a two prong approach. First, we're working with our customers and other interested industry participants to design video recorder solutions that help manufacturers reduce the cost of their bills of material. This will lower retail price points and enable a faster market expansion of digital video recording applications.

Second, we're working with manufacturers to help them differentiate their products by enabling new features, increasing the choices available to consumers at a wider variety of price points. While optical based DVD recorders are our biggest video revenue contributor right now, we are also supporting customer development of innovative, combination products that incorporate both DVD optical drives and hard disk drive technology.

After beginning shipments two quarters ago, we've quickly gained market share in this high-growth DVD recording semiconductor market. Our digital video encoding and decoding chips are enabling mass-market DVD recording for this holiday season. And initial feedback on sell through has been encouraging. Argus, selling under the Cyber Home brand, sold its entire initial production lot, for instance, of several thousand units over the Labor Day weekend at a price point of $338 on the home shopping network. Mustek, another leading series Cirus DVD recorder customer and a top DVD recorder manufacturer, is also reporting strong retail sales.

To advance our competitive position and expand market demand, we recently introduced a number of new product features in reference design. These platforms enable improved compatibility, increased standard support, better video quality and more connectivity options with other digital entertainment products such as camcorders.

For example, we recently introduced a new family of encoding chips for manufacturers of DVD recorders. These components now offer built-in digital video and 1394 media access controller support for direct connection with camcorders.

We're also working with OEMs to shorten our time to market, improve supply chain dependability, rapidly reduce costs as drive technology matures and provide a roadmap of software compatible product upgrades.

Our collaboration with a wide array of drive manufacturers is essential to achieving these goals. And at the Hong Kong Electronics Fair earlier this month we demonstrated the interoperability of our DVD recording reference platform with drives from several high-quality manufacturers including AccessTech, BTC, BenQ, DBS, MET Technology, NEC, Phillips, and Ricoh. At the same trade show, Taiwanese drive manufacturer BenQ announced that it's using Cirrus Logic chips in its first single board DVD recorder, which it expects will accelerate system cost reduction. BenQ will sample its new DVD recorder this month, and expects to begin volume production in the first quarter of calendar 2004. This new reference design integrates the digital front-end components of a DVD recordable drive with digital back-end electronics, using our DVD processors and MPEG encoder.

By partnering with drive manufacturers, we expect to help our customers integrate much of the traditional hardware found in today's DVD recorders, thus lowering the costs of their building materials. We anticipate that reduced retail price points, perhaps below $200 by next year at this time, will spur the growth of DVD recorders in a similar way that mass-market pricing led to the explosive growth of DVD players.

Now, let's look at our December quarter guidance. Although December quarter revenues for semiconductors targeted toward end consumers in North America are often flat with, or slightly down from, September levels, we believe our product and design momentum in exciting high-growth markets will enable us to continue to grow in the December quarter.

In addition, we continue to focus our development activities. In the current quarter we have already made targeted headcount reductions that should allow us to sequentially reduced combined R&D and SG&A expenses for the seventh consecutive quarter. As we complete the shift of development resources from stand-alone DVD players towards recording applications, we expect to further reduce operating expenses by the March quarter.

So, for our third fiscal quarter ending December 27, 2003 we expect revenue to be between 53 and $56 million, a sequential increase of 6 to 12 percent. Gross margins are expect to be in the range of 50 to 52 percent. Our combined R&D and SG&A expenses are expected to total 31 to $33 million. And total cash at the end of the third quarter is expect to be in the range of 172 to $177 million, an increase of 45 to $50 million.

And now we are ready for your questions. Operator, if you could open the call to questions, that would be great.

(OPERATOR INSTRUCTIONS) Brian Alger, Pacific Growth Equities.

Great quarter. Nice job. Looking at the guidance towards next quarter, growth of 6 to 12 percent as you said is a little bit better than maybe what people would expect in consumer chip stocks. Where's the strength coming from? Is that broad based across all product lines or is there one that is standing out?

Right now, Brian, it's pretty broad. I think we have good reason to believe that at the stage of DVD recorder product evolution, it is pretty early yet and the seasonal effects that normally affect the video business in particular are less likely to hit that sector as the application is so new.

And audio is going to be up as well?

Yes, audio is a little bit less tightly coupled typically to Christmas. But yes, it appears that there some strength there as well.

Great. And looking at a gross margin guidance, are we still looking for an improvement once we complete the ChipPAC divestiture beyond the guidance that you have given us for the December quarter?

Yes. We still think the guidance that we originally had provided upon closure of the ChipPAC deal, which was profit improvement of 1 to $1.5 million a quarter, is a good way to look at it, all in the direct cost line.

Outsourcing the analog test, does that do anything to your quarterly depreciation at all?

Let me go back on the ChipPAC deal. It's 1.5 to $2 million, not 1 to $1.5 million a quarter. Sorry, go ahead.

Just asking on the depreciation, by outsourcing the test on the analog side does that changes depreciation on a quarterly basis once that's complete?

Yes, a little bit. Not much. A lot of that equipment was a little older, so we're still going to have D&A about in the same area it is now.

Great. Noticing that the cash increased of 45 to $50 million, you mentioned that you've already received the 45 from Western Digital and then the 9 from ATI. Should we read in then on an operations basis you expect a slight decline?

Operating cash in the December quarter is slightly negative, yes.

Again, great quarter. Seriously. Well done.

(OPERATOR INSTRUCTIONS) Mark Grossman, Needham & Company.

Can you characterize where you think your customers are on the DVD recorder side in terms of ramping up their business, what their plans look like over the next few quarters? And then for '04 can you talk about, excluding the captive guys, what sort of market share do you think you can realistically capture?

That's a tough question. We're not giving very much for long-term guidance and it is pretty early in the segment's evolution. Right now I would say there are market estimates out there that show that Mustek is one of the top five manufacturers of DVD recorders already, and that includes all the captive guys – Philips, Panasonic, as well as a couple major Japanese providers, and then Mustek right up next. And I think that's a pretty good example of where we've gotten to already in the first six months of production.

So consequently I think we've already established a pretty meaningful market share this year, maybe 15 to 20 percent of the total market for the total year of DVD recorders, even though we've only been in the market for six months. And probably of the non-captive market, the market share is probably twice that.

We're going to try to expand that in the coming year, but obviously it's going to become a very competitive marketplace so to make a prediction on market share for next year in this environment probably doesn't make a lot of sense.

On the audio side, it sounds like inventories in the channel are relatively low for the audio chips. Does that imply that the drop-off in the March quarter will be less than it has been over the last couple of years?

We sure hope so. Of course, you never know what Christmas is going to bring until Christmas has come and gone. But we believe that the inventory levels today compared to 12 months ago are substantially lower on audio products in the retail channel, and as well in the supply chain that services the retail channel and that that bodes well for us in the post-Christmas quarter. But again, it's very difficult to interpret quantifiably what that means and consequently we're not able to give good guidance into March yet.

You mentioned that operating expenses could come down again in the March quarter. Any sense on what the magnitude of that could be?

As soon as we know, of course, we will make sure we tell everybody. I think that the one item that remains available to us, which we're focused on is as we move from a standalone player emphasis completely to a DVD recording focus and audio focus, we're migrating our emphasis on front-end technology also to the recording system. That's going to allow us to save a little bit more operating expense. And we haven't yet quantified that (technical difficulty) a noticeable expense level to us up through now.

Jane Wenglow (ph), Monis, Cresby & Hart (ph).

I just had a few questions. Am I correct in thinking that after all these special charges and gains you're at about a loss of -5 million for the quarter?

Roughly, yes.

So about six cents a share, great. And then also, I want to ask you -- inventory days, it's ticking up a little bit. What do you guys expect that to do for the December quarter? Can we expect that to come down a little?

Expect which to come down?

Inventory days.

Oh, inventory days. I don't think there's a lot of reason to believe it's going to move a lot in the December quarter. Right now, we believe that at the revenue levels that we've guided to inventory should say about the same. We think that there's some potential that some of these exciting reports on bullish holiday sales could come true, in which case that would bode well for us and that would bring inventory down. But right now it's best to assume that inventory stays about flat.

Great. CapEx for the quarter, can you guys give that out?

CapEx for the upcoming quarter, somewhere between 1 and 2 million is the best estimate.

What was it for September?

September was higher. It was about $7 million (multiple speakers) sorry -- $8.4 million. Again, I mentioned that with all the onetime pluses on cash, we took it as an opportunity to go back to our good EDA, our CAD tools providers, renegotiate the terms of our agreements, which caused a cash payment, but maybe a little bit better terms for us going forward.

Great job, guys. Thanks.

(OPERATOR INSTRUCTIONS) As there are no further questions at this time I would like to turn it back over to you for any closing comments.

Thank you operator, and thank you all for your questions, your attendance here today and your continued interest in Cirrus Logic. We look forward to talking with you when we report our December quarter financial results, which is scheduled for January 21, 2004.

In the meantime, we hope to see many of you at upcoming conferences. We will be presenting at the AeA Classic Conference in San Diego on November 3 and 4, the Lehman Brothers conference in San Francisco on November 19, Pacific Growth Silicon Valley Bus Tour at our Fremont California design center on December 2nd, the Needham conference in New York on January 6 through 8th and of course the Consumer Electronics Show in Las Vegas from January 8th to January 11. We look forward to seeing you all there.

Thank you again for your continuing interest in Cirrus Logic.

Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any time.