Cirrus Logic Inc (CRUS) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cirrus Logic third-quarter fiscal 2004 financial results conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference call over to Mr. David Allen, Vice President of Investor Relations and Treasurer. Mr. Allen, you may begin, sir.

Thank you, operator. Good afternoon and thank you for joining Cirrus Logic's third-quarter fiscal 2004 financial results conference call. Joining me today on today's call are David French, Cirrus Logic's President and Chief Executive Officer, and Thurman Case, Cirrus Logic's acting CFO.

Before we begin, I would like to remind you that during the course of this call we will make projections or other forward-looking statements regarding among other things, our estimates for fourth-quarter revenues, combined R&D, SG&A, expenses, gross margins and cash levels, as well as expectations, estimates and assumptions regarding our 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 our press release dated January 1,2004, which is available on our Website at www.cirrus.com, our latest Form 10-K for the year ended March 29, 2003, 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 David French. David?

Thank you, David, 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 quickly recap our results. I would like to mention before proceeding that our third-quarter results were in line with or slightly better than the guidance that we previously have provided and that all our financial numbers we discussed are in accordance with Generally Accepted Accounting Principles.

For the third quarter of fiscal 2004, which ended December 27th, 2003, revenue was $55.3 million, gross margin was 52.0 percent, combined R&D and SG&A expenses totaled $30.4 million, and net income was $39.4 million. Diluted earnings per share were 46 cents, and our ending total cash balance was up significantly at $180 million. It is important to note here that even excluding the cash received during the third quarter from two favorable litigation settlements, we are pleased to see that the Company was cash neutral on an operating basis.

Last quarter based on our product and design momentum, we forecasted that our revenue would continue to grow in the December quarter, a quarter that is not traditionally a strong sequential growth quarter for consumer electronics component suppliers. And so we are pleased that for the second consecutive quarter we achieved or slightly exceeded our expectations. Both our audio and our video product categories grew again with audio product revenues contributing now 81 percent of total revenue for $44.6 million and video revenue representing 19 percent of total revenue or $10.7 million in the December quarter.

I would like to point out that our third-quarter net income of $39.4 million included a $45 million onetime benefit resulting from a favorable commercial litigation settlement with Western Digital and $4.1 million of net expenses for acquisition, legal and restructuring related items with amortization of acquired intangibles representing the largest part of this net expense. If these items had not been included in the calculation of net income, we would have reported a small net loss instead of a net profit.

As we mentioned last quarter, although we continue to search for ways to reduce our operating expenses, we are continuing to invest in new product development and customer support in key areas. In Korea and Taiwan and in China where much of our customers' product development occurs, we continue to expand the number of our field applications engineers. By providing increased local technical presence, we believe that our ability to provide better customer support can lead to new near-term revenue opportunities.

In addition, as we increased staff in locations closer to our video recording customers, we continue to manage our expenses carefully. In Colorado in the United States, we expect to combine engineers from two locations into a single smaller facility to better meet our needs. This facility consolidation will likely result in a fourth-quarter restructuring charge of $2 to $3 million.

Now I would like to review the financial results for the third fiscal quarter in more detail. Third-quarter net revenue as we mentioned was $55.3 million, up 10 percent from $50.1 million in the second quarter. Audio revenue, which includes digital audio, analog and mixed-signal applications, was $44.6 million, up 6 percent from $42.1 million in the second quarter. And video revenue in the third quarter increased to $10.7 million, up 32 percent sequentially from $8.1 million in the second quarter.

Gross margins in the third quarter were 52.0 percent compared with 51.9 percent in the second quarter. Combined R&D and SG&A expenses were $30.4 million in the third quarter, a reduction from $32.6 million in the second quarter.

Note here that the benefit of the $45 million settlement with Western Digital is recorded as an offset to operating expenses. As a result, our third-quarter total operating expenses were actually a -$10.3 million, down sharply, of course, from the $22.4 million in the second quarter. I would like to point out that the second quarter also reflected the favorable outcomes from two patent infringement litigations during that quarter totaling $14.4 million. These settlements were recorded as separate expense reduction items on the P&L in both of these quarters.

And as I mentioned earlier, the third-quarter results also included $4.1 million of net expense for acquisition, legal and restructuring related items with amortization required intangibles representing the largest part of this net expense, while the second quarter had included similar items totaling $5.3 million. Net income for the third quarter was $39.4 million versus net income of $21.1 million during the second quarter. Diluted earnings per share for the third quarter were 46 cents based on 86.4 million diluted weighted average shares outstanding, compared with diluted earnings per share of 25 cents reported in the fire quarter, based on 85.6 million diluted weighted average shares outstanding. Our employee headcount at the close of the third quarter was 805, down from 861 at the close of the second quarter.

And now onto the balance sheet. Our balance sheet continued to strengthened in the third quarter. Total cash, as I mentioned, at the end of the third quarter was $180 million, up from $127.3 million in the second quarter. Excluding cash received during the third quarter from two favorable litigation settlements, the Company, as I mentioned in my opening remarks, was cash neutral from operation, and the Company continues to be debt-free.

We ended the third quarter with $18.7 million in net receivables. Our DSOs or Day Sales Outstanding were 31 days, down from 40 days in the second quarter. Net inventory was $26.8 million at the close of the third quarter, up slightly from $25.1 million in the prior quarter. Net inventory turns in the third quarter were 4.0 compared with 3.8 at the close of the second quarter. Our capital expenditures were $584,000 in the third quarter, down sharply from $8.4 million in the second quarter. And as you may recall, we took advantage of our improving cash position during the second quarter to renegotiate several multiyear CAD licenses which resulted in unusually high capital additions in that second quarter.

Depreciation and amortization expense totaled $6.5 million in the third quarter compared with $6.9 million in the second quarter. Accounts payable and accrued liabilities were $50.2 million compared with $53.3 million in the second quarter. Finally, stockholders equity at the end of quarter was $203.8 million, up from $162.5 million at the close of the second quarter.

On litigation front, we currently have outstanding lawsuits with Fujitsu and Wolfson Microelectronics. The Fujitsu case involves Cirrus Logic's claim against Fujitsu for failure to pay for certain integrated circuits sold to Fujitsu during calendar year 2001. In response to our claim, Fujitsu alleged damages against Cirrus Logic, Amcor and Sumitomo for alleged hard disk drive failures using Cirrus Logic products. Schedules for the Federal Court trial in this case remains set for July 2004.

As an update, Cirrus Logic's filed an amended complaint on December 23rd, 2003 -- just last month -- alleging fraud and other related claims against Amcor and Sumitomo based on their knowledge that the molding compound used in the packaging for Cirrus Logic's integrated circuits was defective.

With respect to the matter against Wolfson Microelectronics, a United Kingdom-based mixed-signal fabless semiconductor company, we filed a complaint in the Federal District Court alleging that 15 of Wolfson's products that incorporate digital to analog converters infringe on two of Cirrus Logic's mixed-signal patents. Wolfson has filed a counterclaim against Cirrus Logic concerning unfair competition and other claims based on allegations that Cirrus Logic acted in bad faith by filing the lawsuit. We have invested Wolfson's claims and remain confident that we will ultimately succeed against these allegations.

In addition to the District Court case, the International Trade Commission has initiated a separate investigation into Wolfson's importation of products into the United States, and we alleged infringe the same two patents as in the District Court case. We anticipate that the hearing before the International Trade Commission will occur sometime this summer.

As David Allen mentioned during his introductory remarks, Thurman Case, our acting Chief Financial Officer, will be available throughout this call. We have engaged a national recruiting firm to search for a permanent Chief Financial Officer, and in the meantime, we have a very strong finance team which continues to perform very well and has my full confidence, enabling us to continue to devote the time necessary to finding the best candidates for this position.

Now I would like to share with you my growing confidence about Cirrus Logic's business for calendar year 2004, confidence based on execution of our customer entertainment strategy, our consumer entertainment strategy, our customer base that includes many of the world's most popular brands and expanding customer acceptance of our video encoding products.

In the December quarter, we were pleased that both audio and video product revenue increased for the second consecutive quarter, contributing to an overall 10 percent sequential increase in revenue. And to reiterate, audio, our largest revenue category at 81 percent of the total revenue, delivered $44.6 million in revenue in the third quarter. And our video products, which are focused on fast-growing digital video recording opportunities, contributed $10.7 million or 19 percent of our third-quarter revenue.

In October of 2003, we introduced a number of new DVD recorder reference designs at the Hong Kong Electronics Fair, and only three months later at the Consumer Electronics Show in Las Vegas, we showcased a number of new customer products based on our reference designs and chipset solutions, including digital video recording products from LG Electronics, Mustek, CyberHome, Ellion, GoVideo, BBK Electronics, Sampo and Sony. Several of these manufactures had product available for the 2003 holiday sales period at leading U.S. retail outlets such as Wal-Mart, Target and RadioShack, and also regional retailers that included Good Guys and Fry's Electronics, as well as European retailers such as Karstadt and Media-Markt.

I would now like to discuss our largest product category, audio components, which includes our analog, digital signal processing and mixed-signal products. Our audio products are used in a number of applications including home audio, commercial audio, automotive entertainment, as well as industrial mixed-signal applications.

The home audio area. At CES, we recently launched our new CS49500 family of high-end audio digital signal processors, which is targeted for home audio video receivers and car audio systems and other digital entertainment markets. With this new DSP family, features that were previously limited to home audio systems costing thousands of dollars can now be brought to the market at retail prices in the $400 to $500 range. We expect this family of DSPs to drive our audio video receiver and automotive entertainment product revenue over the next several years.

In the December quarter, we continued to broaden our industry-leading digital to analog converter product line by introducing our CS4351 and CS4344 family. Our CS4351 delivers premium audio quality and integrates costly (inaudible) chip analog circuitry, saving the customer development time as well as production costs. And the CS4344 family offers our audio customers the industry's smallest DVD quality digital to analog converter, providing a low-power extremely cost-effective solution with superior sound quality. Both products target a wide array of consumer, professional and automotive applications, ranging from the lowest cost DVD players to high-performance automotive entertainment systems.

The installation of high-performance two-way network to audio systems in buildings worldwide has become an increasingly important communication and security concern since the events of 9/11. Our commercial audio product line helps to address this need. We recently passed an important milestone in this area with a sampling of our first fully integrated silicon product. This single chip solution now opens up new product opportunities for our customers who up until now required more expensive complete circuit boards in order to employ our Cobra Net technology, the professional audio industry's leading technology for distributing uncompressed real-time digital audio over a fast ethernet network. Our strength with low-cost consumer applications will, we believe, help our customers expand their implementations of our leadership Cobra Net technology.

Automotive applications represent a large relatively uncapped opportunity for Cirrus Logic, particularly as surround sound systems become a standard offering in cars, which we believe will occur sometime in just the next few years. In order to achieve validation in this industry, Cirrus Logic has moved diligently to obtain the necessary quality certification, including a major automotive supplier certification later this summer. And while we continue to advance toward achieving additional quality certification, we are already shipping automotive product into an established blue-chip audio customer base which includes Bose, Delphi and Harman Becker.

During the third quarter, we continue to advance our automotive initiative with ongoing designing activity in the United States, in Europe and in Japan with major Tier 1 automotive suppliers and OEMs. Our new CS49500 DSP family, an expanding lineup of audio converters which I discussed earlier, has strengthened our automotive great product offering.

Within our industrial mixed-signal product line, data acquisition products represent an important part of our business. These products support high margins, niche markets, and have relatively long lifecycles. While our third-quarter data acquisition sales were essentially flat compared to the prior quarter, we expect that this category will begin to grow in the March quarter.

Two interesting growth drivers in this area are seismic products, which benefit from increased energy exploration, and power meter applications, which are beginning to be increasingly deployed in developing countries.

Finally, I would like to discuss the exciting market opportunity for our digital video recording product, which represents the fastest-growing area of our business. In calendar year 2002, worldwide shipments of DVD recorders totaled approximately 1 million units. In calendar year 2003, that number increased to an estimated 3 or 4 million units. And in calendar year 2004, market research analysts project the market could double or even triple over last year's level. Looking further out, the market research firm, IDC, has indicated that it expects that shipments of devices that digitally record video content, including DVD recorders, home theater-in-a-box devices, and combination units, could reach 51 million units annually by calendar year 2006.

As we mentioned last quarter, we are attacking the market aggressively with a two-pronged approach. First, we are working with our customers to design video recording solutions that help manufactures reduce their costs. This approach helps to lower retail price points and support the faster market expansion of digital video recording applications. And secondly, we are working with manufactures to help them differentiate their products by enabling new features, thereby increasing the choices available to consumers at a wider variety of retail price points.

Well, as a result of these initiatives, I am pleased to report that after starting volume shipments two quarters ago, we have now shipped our 1 millionth digital video calendar chip during the December quarter with roughly 75 percent of these shipments going into DVD recorder applications, our primary area of focus. This represents a telling indicator of customer acceptance for our digital video recording products and our strong and growing position in this emerging market, which as I said earlier, analysts estimated at 3 to 4 million units total for all of calendar 2003.

Leading consumer electronics manufacturers, including LG Electronics and Mustek and CyberHome and GoVideo among others, are now developing next generation digital video recorders based upon our latest reference design, many featuring our third generation video encoder product. LG Electronics, a world leader in DVD players, selling under its own brand and the Zenith brand in the United States announced at the Consumer Electronics Show a next generation DVD recorder, the 5810 MJC model, based upon Cirrus Logic's solutions. LG's product, expected to be in volume production by this June, makes LG the first Cirrus Logic customer with an announced DVD recorder that supports both the -RW and +RW standards. The selection of a Cirrus Logic solution by LG further validates our emerging merchant market leadership in this rapidly growing market.

Cirrus Logic has been successful in attracting customers such as LG Electronics and others who are seeking a cost-effective platform for the highest volume application. For example, our two-chip platform uses a quad flatpack assembly, or QFP for short, and a two-layer printed circuit board. Our approach is more cost-effective for manufactures than our competitors' single chip solutions that require (inaudible) grid arrays because those solutions require an expensive four-layer printed circuit board.

Another key differentiator between Cirrus Logic and our competitors is that our core software with its modular structure allows for easy customer product upgrades and feature additions. Mustek, one of our largest end customers and one of the top five worldwide manufactures of DVD recorders, announced at CES that it expects to be in production in June for its new DVD-R 500 model. Mustek's new product is powered by Cirrus Logic's software and hardware and features the ability to record digital video onto a hard disk drive, with the ability to pause, fast forward and replay television or record directly to DVD disk media. Users of this system will also have the ability to transfer content from the hard drive to a DVD for permanent archiving if we continue to leverage our expertise in audio with our emerging leadership in video.

And at the Consumer Electronics Show earlier this month, we introduced the industry's first DVD recording reference design for a complete digital entertainment center with powerful software that turns a DVD recorder with an optical and a hard disk drive into a consumer-friendly audio and video jukebox function. This innovative technology converts CD based music files automatically into a digitally compressed format during playback. Hundreds of hours of content can be stored, sorted and quickly accessed. Extending our capabilities, our software also enables users to create and manage photo albums, transferring files from existing sources without the use of a personal computer.

We have also ported our time shift and personal video recording software, which enables consumers to pause, fast forward and replay broadcast content or as many TiVo ads the kids would like to say, we are enabling consumers to replay live TV while automatically recording television on this platform.

Looking ahead to the March quarter, we, along with other industry participants, are still evaluating channel and retail inventory levels and the actual sell-through from the December holiday season. Although we see growing acceptance for our products, our forecast for the seasonally slow March quarter remains cautious. At this point in time, our guidance is based on the expectation of lower demand that typically follows the December quarter for consumer electronics component suppliers.

Beyond the current quarter, we are optimistic about our prospects for the balance of calendar year 2004. We are strategically on track, and we are continuing to invest in new product development and in customer support, while at the same time continuing to carefully manage our expenses and look for additional cost savings. And so for our fourth fiscal quarter, which will end on March 27th, 2004, we expect revenue to be between $48 and $52 million. Gross margins are expected to be in the range of 51 to 53 percent. Our R&D and SG&A expenses are expected to total $30 to $32 million, and total cash is expected to be in the range of $177 to $181 million at the end of our fiscal year.

And now we are ready for your questions.

(OPERATOR INSTRUCTIONS). Mark Grossman, Needham & Company.

I have been hearing that consumer ship orders, especially including audio, have been generally stronger than normal in early January. Can you talk about what sort of order patterns you have been seeing in the first couple of weeks of the year?

Yes, Mark. I think trying to clarify trends versus normal has become difficult in the past couple of years. Certainly audio chip owners orders are coming out of the December quarter and coming into the March quarter look better than what they were a year ago, but it is difficult to make a lot of predictions based on just a few weeks of data. So we have chosen to take a cautious view on the March quarter as we have continued to get reports back from our customers and try to understand the reports of retailers themselves.

What is your sense of inventory levels (inaudible) in the system?

It is my view -- and it is difficult to substantiate this scientifically in real-time -- it is my view that inventories, particularly on audio products going into and coming out of the selling season in North America, are low.

Okay. With respect to DVD recorders, you mentioned the LG, when they are going to start shipping in the June quarter. When do you think you are supposed to see volume shipments to LG?

Well, I think that leadtimes are difficult to predict, and I think that a lot of issues have to be resolved in getting that product out to the marketplace. I think certainly by the June quarter we expect to start shipping. Whether or not we actually start shipping toward the end of the March quarter, is still yet to be determined.

Can you talk in general about DVD recorder seasonality? Given how fast the market is growing, do you think it will track along normal seasonality, or do you think the June quarter will be stronger than typical for a consumer?

Normal seasonality in video end products, you would typically see a noticeable decline in the March quarter of shipments of semiconductors from the December quarter. However, the recorder is so early in its adoption phase. (inaudible) only have been a worldwide 3 to 4 million unit market last year, with a relatively small percentage of that in North America. So one could easily conclude that the March quarter could show a lot less seasonal seasonality than typically in video applications.

But we really don't know yet because it is so early in its adoption. If you go back a couple of years in DVD players, there were years where we saw March continuing to grow from the December quarter, which is easily unusual in total for that market space. And it's difficult to tell if we are now into that part of the curve where DVD recorders can continue to grow in spite of the season or if we will probably normal seasonal soft period in March while retailers figure out their product line up in shelf space allocations for the back-to-school and Father's Day season.

Okay. Great. Thanks a lot.

Brian Alger, Pacific Growth Equities.

Hi, guys. Well done. I want to look at the audio line. You did a good job of illustrating the breadth of your product lines in there. Can you maybe give us a sense of within the 44.6 million that you just reported, how much of that is what we would consider audio type of applications versus some of the other more industrial, like the seismic and power metering solutions?

Yes, Brian, we don't break it out. There always are fluctuations in mix back and forth, but a significant majority of that business is pure audio applications, and I really don't have any more details to provide on that in front of me.

So when we look at that group on a year-over-year basis, obviously that was down for the quarter. Was that down in the audio space, or was that down in the industrial side?

I think the year-over-year numbers, there are a lot of things that moved around. One of the things that was true a year ago that is not there today is that we used to ship into PC audio applications a year ago, whereas that is pretty much gone by now.

Okay. Great. (multiple speakers).

A year ago we had a significant part of the Xbox game business, and that represented $7 million of year-over-year in total but not in the audio space.

Understood. One of the areas that we are seeing strength in the audio-related arenas is the DVD receiver, and one would think that you guys with your background on the video side as well as audio should be benefiting there. I am wondering how that market is playing out for you with your DVD chips and then also are we seeing any ramp with your (inaudible) business at this time?

DVD receivers is a good space and, in fact, was the primary growth and emergence and then growth of that application type was one of the biggest reasons why we decided to expand our technology-base into the video arena. We continue to have a great relationship with Bose in servicing that class of applications more on the higher end, and we continue to sell a substantial amount of mixed-signal componentry into DVD receivers just as we have over the years in stand-alone audio video receivers. So we look at that DVD receiver segment as replacing with its growth some of the growth that we have seen historically in stand-alone AV receivers, and we are pleased with that kind of penetration we are getting in those boxes.

As far as Class B, we have not generated a lot of revenue with our Class B productline. We have got a pretty good technology base. We've got some reference designs that show this technology. It is our view that when that product arena can generate adequate cost through the appropriate foundry-based manufacturing strategy, it will really become a serious replacement for traditional Class A, B amplifiers in that marketplace. We think we will be well prepared with our ongoing investment to take advantage of that when that is the case.

Okay. I've got to take a shot at it. Obviously the signal pattern in March is understandable, but from what you have described to us, you seem to have a number of designs that are ramping up in the June quarter. Do you think it is reasonable to expect a better than seasonal ramp in the June quarter versus what one terminates "normal" pattern?

I think 2004 is going to be a good year, and I think June and September are probably the stronger quarters in the year for sequential growth.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Jane Wenglow (ph), Monness, Crespi and Hardt.

Hi, guys. Good quarter. I was wondering some lowballs, I guess, the easy questions. I think leadtimes for the video and the audio side? Can you give us a sense of how much visibility you might be dealing with at this point?

Yes. I would say leadtimes generally speaking are still pretty short. In the video arena, I think we are well-prepared to respond quickly to our customer base. In audio, particularly in the mixed-signal components, we have seen a little bit of extension of leadtimes on a number of our components.

Got you. What would you say if you had to pick an average week's extension? (inaudible)

It is difficult because we are still off-the-shelf on many components or shipping out of die (ph) inventory, which is just the two to six week. But the number of components where we no longer have die inventory and, therefore, we're quoting somewhere between 10 and 14 weeks has gone up.

Okay. Great. Excellent. Then, I was also wondering if you might be able to give us some details on some further cost-cutting initiatives that might be coming down the line.

Well, we continue to look for ways to constrain, and we have already announced a few of those that are still yet to take effect. We will continue to look for ways to improve efficiencies, though we are pretty pleased with the progress we have seen on most of our new products and customer development initiatives, and I think we are more primarily focused on maintaining the momentum on building this business through calendar year 2004.

Do you guys actually have at this point something of a gross margin blended target for this year given that you guys are sort of shifting around the mix a little bit? It looks like video is going to be really exciting, audio is going to be good, but maybe grow a little bit slower if you had to look through the year? Would you say that is about right?

Yes, I think your comments are consistent with our view. We guided the current quarter 51 to 53 --

Which is great.

And we have continued to look for ways to manage our component costs, as well as our operating costs, and in our audio productline, there is still some upward possibilities. I think video is growing as a percentage of our total revenue, and that will probably tend to constrain growth in the gross margin line.

Okay. Got you. Do you think staff -- I guess it ticked down a little bit this quarter versus last. Do you expect that to happen going forward as well?

There are some already announced further reductions that will take effect during the March quarter.

Okay. Great. Thank you, guys. Congratulations.

Sean Slayton (ph), Ferris, Baker, Watts.

Hi, gentlemen. Good afternoon. Just a housekeeping. Any 10 percent customers? Probably not, but did you have any?

No direct 10 percent customers. We have a couple of distributors which occasionally come up as 10 percent customers at this time. The most recent quarter, Mimic Group, which has the world -- nearly worldwide franchise with us and focuses moreso on North America, and OnStar, which is an Asian-based distributor.

Okay.

And each of them services a wide number of end customers.

Very good. Your guidance says that you're going to generate cash again in the current quarter. Is it safe to say that we have turned the corner from a cash neutrality perspective here going forward?

Well, two corners ago we had $115 million in cash, and now we have 180 million in cash (multiple speakers). On an operating basis, we were slightly cash positive on an operating basis this past quarter, and the guidance indicated we would be off of 180 coming in, we would get to 177 and 181 coming out. So certainly it looks like we are around that cash neutral area anyway. And that is now going into one of, if not the slowest quarter seasonally for this product space.

Thanks. The ChipPAC arrangement, how much of that -- is the majority of that implied in your March quarter margin guidance, or are we going to see some potential margin expansion in the June quarter as well from ChipPAC?

I think there is still improvement in the June quarter.

Okay. Last question. Using the consolidated semiconductor market for 2004 as a baseline, can you characterize what you believe to be the growth rates of the end markets you have exposure to or the growth rates for your audio and video respectively relative to that consolidated semiconductor market?

Yes. In general terms, obviously it is not particularly guidance, but we see people forecasting semiconductors. The demand for semiconductors worldwide, maybe it's going to grow between 15 and 20 percent this coming year, an estimate which we tend to believe is probably a pretty fair estimate. I think the markets that we are in, including digital audio, the expansion of digital audio into automotive applications, the continuing proliferation from 15 to 20 percent of homes of surround sound system, installations to some higher number, in addition the taking-off of the video digital video recording applications from just 3 million units this past year to 30, 40, 50 million units the next few years, and the general growth trends of digital entertainment applications, which have a lot more semiconductor content, maybe by as much as a quarter of magnitude more than their predecessors like VCRs and analog cameras and all that old stuff. I think the growth rate in digital entertainment is going to be arguably for chips and digital entertainment boxes could be twice what semiconductors as a whole would be over the next several years.

Very good. Let me ask you one more question. Exiting December, do you have a feel for what I will call the captive DVD market was relative to the merchant DVD market? What was Mushusita (ph) and Philips versus the rest of the world, and what is that trend going to be over the next several quarters?

That is a good point in talking about DVD recorders. (multiple speakers). DVD recorders, the demand was something between 3 and 4 million units by most of our research estimates. Out of that 3 or 4 million units most people believe that the captive solutions were 50 to 60 percent of that total support for that demand. So it is only 40 or 50 percent merchant available out of the 3 or 4 million units.

It is our belief, and we have seen concurring reports from independent research, that indicates over the next two or three years the captive portion will go down to as little as 20 or 25 percent of the total market. So the growth rate going from 1 million two years ago to 3 million or 4 million units this past year, to 2 or 3 times that this year, to 50 million units in 2006, actually understates the growth and size of our opportunity as a merchant supplier.

Thanks for that. I appreciate it.

Jason Pflaum, Thomas Weisel.

Good afternoon. Can you characterize the current pricing environment on the recorder side of your business and your expectations over the next couple of quarters?

Yes. Do you mean on a system basis or on a component basis?

On the component basis.

We have put together a long-term (inaudible) manufacturing and product plan starting from this past year and up for the next several years that can support very aggressive system cost reductions while supporting our gross margin model by working on integration of multiple functions and fewer and fewer chips obviously.

And the component -- on the apples-to-apples basis, the value of the components that we sold between $20 and $25 of value in 2003 should drop down to somewhere between $15 and $18 of value in 2004.

Okay. Have you seen any -- are you bumping into any of the Asian competitors? Are you seeing any more pressure from the Mediatechs of the world?

On video encoding, we were surprised if not shocked that Mediatech did not introduce a product during calendar year 2003. It is my belief they will sometime in the very near future.

Then if we look at retail price points on the recorders, where do you think we will exit the year at? Do you think we will see well below $250?

Retail price points for DVD recorders?

Right.

Well below $200 by the end of this calendar year.

Well below $200. Okay. Shifting gears a little bit, looking at your operating expense guidance, it looks like it is flat to up a couple of million. What is the driver there? Are there more legal expenses that we should expect, or was that just a conservative figure?

Well, there is some seasonality. For the March period, we have significant expenses for the Consumer Electronic Show that mostly come in the March period. There are some expenses from an annual calendar basis that tend to float up in the first calendar quarter related to taxes, costs, employment costs and things like that.

Generally speaking, there have been several quarters in a row we have reduced our ongoing R&D and SG&A expense, I guess now seven quarters in a row. We're going to keep that pressure on. It is always difficult to see at the detailed level, but we continue to expand a little bit on our new product development and customer support in Asia to offset some of those savings.

Great. Then one last question if I may. Regarding your ChipPAC outsourcing arrangement, did you receive any benefit in the December quarter, or do we expect to see the lion's share of that in March?

There may be a very small amount of benefit of that arrangement during December. There is a significant beginning of that benefit in March, and as I mentioned earlier, there will be further benefit we see in June.

Given that there is a large chunk happening in the March quarter, I guess I would expect your gross margins to be a little bit higher, at least your guidance. Is there some margin erosion in your business, or are you just being conservative in your outlook?

Well, there is not any specific margin erosion we have played into the March quarter, although it is always difficult to predict how things are going to come out. So we have tried to be a bit on the conservative side.

And also some mix issues I guess with the recorders growing faster?

Well, yes. Obviously we have a pretty wide product line, and mix is difficult to predict anyway.

Terrific. Thank you very much.

Rob Adams, Adams, Harkness & Hill.

Thanks, guys. Obviously you have a pretty diversified product offering in DVD-R with a chipset and an integrated solution. Can you just help me figure out where does that integrated solution belong? What is its market niche, and when if ever do you see that as a mainstream kind of product?

I think we continue to bring out our product portfolio for video recording to support numerous form factors, to support numerous -- use of numerous drive manufacturers. As you know, the DVD recorders are mostly built today using standard off-the-shelf DVD-RW drives just as you find in personal computers.

We see that changing. As our components are integrated onto a single board solution, we already have three versions of this sort of design -- a single board solution integrating our electronics with the electronics from inside the drives to reduce costs, to reduce interface costs, to reduce overall chip count, things like that, and we see that as that consolidation accelerates during calendar year 2004, and especially in calendar year 2005, we think that more and more customers in Asia will be able to capitalize on the higher levels of integration that we continue to bring to them and at the same time reduce their overall system costs by finding ways to build two-layer boards with very low-cost componentry utilizing on our more integrated solutions. Not all customers are able to do that very effectively right now.

Okay. Okay. Would you say, though, that the integrated solution is an important component of a DVD recorder at a 129 kind of price point, or do you think you can get there right now with current chipset solutions?

I think 129 will be difficult with current solution. I think we can get noticeably below 200, but 129 will require that we break open the DVD-RW drives, integrate the electronics on a single board between the drive and our video processing technologies, and then integrate a little bit the digital semiconductor components into a single component sometime toward the end of calendar 2004 to support that move down significantly below 149.

Okay. Great. Thanks very much.

Brian Alger, Pacific Growth Equities.

Hi, guys. Just a bookkeeping follow-up. The press release and your comments earlier mentioned that there was $4.1 million in other charges included in the quarter. Just looking at the amortization of intangibles and the highlighted restructuring charges, we get to obviously 4.3. I am wondering if you can reconcile that? Did we actually have a credit on the legal front, or was there something in terms of a reversal on the deferred stock comp?

Yes. In fact, it is accredited, and the legal expenses turned out to be accrued a little bit too much expense on the WD in the be prior quarter as we ended up closing that quicker than we thought we would.

Was there any deferred stock comp?

Yes, there is a little bit in there. I don't have that number. If you want, we will pull that number up. Bear with us one moment here. $470,000 in deferred stock comp.

You made about a 600,000 legal credit?

Exactly.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Randall Hunt (ph), LibertyView Capital.

Hi, guys. You built a strong cash position and expect it to remain fairly (inaudible) over the next quarter. Could you give us a sense of your financial policy, why hold such a large cash position, and are you considering any options in using that cash?

Well, we do not have a policy that precludes having so much cash by any means. Right now since our cash has increased so noticeably in a relatively short period of time here, we have been trying to respond quickly and understand the best way to deploy that cash to get the maximum return, and we are investigating our options right now to try to maximize that return, even as we keep that cash on our balance sheet in the most useful way.

Are you currently authorized to buy back stock, and do you have any thoughts on doing that?

We do not have any stock buyback program that is authorized, and obviously that would require our Board approval to do that.

Okay. Thanks.

Okay, sir. As there are no further questions at this time, I would like to turn the conference back over to you.

Okay. Thank you very much for the questions and also for the continuing interest in Cirrus Logic. We do look forward to talking with you when we report our fourth-quarter and full fiscal year 2004 financial results on April 28th of 2004. In the meantime, we also hope to see many of you at the upcoming Thomas Weisel Partners Technology Conference in San Francisco on February 3rd, and a webcast for this event will also be available on www.cirrus.com.

Thank you again for your time and attention today and good afternoon.

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