Cirrus Logic Inc (CRUS) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic fourth quarter and fiscal year 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 call over to Mr. David Allen, Vice President, Investor Relations and Treasurer. Mr. Allen, you may begin.

Thank you Operator. Good afternoon and thank you for joining us today. On the call today are Dave French, Cirrus Logic's President and CEO, and John Kurtzweil, Cirrus Logic's Senior Vice President and Chief Financial Officer.

Before we begin I'd like to remind you that during the course of this conference call we will make projections and other forward-looking statements regarding, among other things, our estimates for first quarter fiscal year 2005 revenue, combined R&D and SG&A expenses and gross margin levels, as well as expectations, estimates and assumptions regarding our future revenue growth rates and expected return to operating profitability. 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 issued today, 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 with the Securities and Exchange Commission for additional discussions 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. Dave?

Thank you David and thanks to all of you who are joining us today. For those of you who have not yet have a chance to read our press release, I will quickly recap our results. I'd like to mention before proceeding that our fourth quarter results were in line with the guidance we previously provided and that all financial numbers we discuss are in accordance with Generally Accepted Accounting Principles.

For the fourth quarter of fiscal year 2004, which ended March 27th, revenue was $50.2 million, gross margin was 52.4 percent, combined R&D and SG&A expenses totaled $31.5 million, net income was $10.3 million and earnings per share were 12 cents. For the full fiscal year 2004 revenue was $196.3 million, gross margin was 51.3 percent, combined R&D and SG&A expenses totaled $127.7 million, net income was $46.5 million and earnings per share were 54 cents.

Fiscal year 2004, I believe, will be remembered as an inflection point for Cirrus Logic. During this year we substantially refreshed and expanded our already broad offering of analog and high-performance mixed signal semiconductor products. We also introduced exciting new digital audio chips for consumer, automotive and industrial applications. Based on our estimates we established a merchant market leadership position for DVD recorder applications, an emerging high-growth product category. As a result, I am encouraged about our opportunities in the new fiscal year. Based upon our design wins and our current visibility I believe we can achieve 25 to 35 percent revenue growth during the current fiscal year and return Cirrus Logic to operating profitability. Our fiscal Q1 guidance of 56 to $59 million in revenue, representing 38 to 45 percent year-over-year revenue growth, gives an indication of our confidence level in achieving our objectives.

I'm also pleased to introduce on this call John Kurtzweil as our Senior Vice President and Chief Financial Officer. John's primary focus will be to work with management as we continue to examine our expense structure and to ensure that operating expenses are properly aligned to optimize earnings growth. John's background includes more than 25 years of corporate financial management experience, including public company CFO experience with ON Semiconductor Corporation and Read-Rite Corporation. John and I will be participating in an expanded set of investor conferences over the next few months, and I hope you'll take the opportunity to meet with John at one of these conferences. And now John will provide the financial details for the full fiscal year and for the fourth quarter. John?

Before I begin I'd like to say that I'm pleased to join Cirrus Logic and be part of this management team. Cirrus Logic is a company with outstanding technologies and a broadly diversified intellectual property portfolio, a great set of products, a blue-chip customer base and a strong balance sheet. I look forward to being part of the team driving revenue growth and ensuring our expense structure is appropriate as we move the company towards sustained profitability. Now I'd like provide the financial detail for the full year and fourth quarter.

Though our revenue for the second half of fiscal 2004 was 16 percent higher than in the first half of the year, total revenue for 2004 declined from the prior year. Revenue for the year was 196.3 million compared with 262 million for fiscal 2003.

The decline was a result of several factors. A few notable items included -- an and inventory overbuild of audio products in the retail channel during the second half of fiscal year 2003; the absence of Xbox component sales in fiscal year 2004; and lastly, a substantial reduction of sales of non-integrated video DACs for DVD player applications.

On the positive side gross margin increased to 51.3 percent for fiscal year 2004, up from 50.5 percent in the prior year, the highest level in over a decade.

Our combined research and development and selling, general and administrative expenses were 127.7 million, a decline of 41.2 million over the prior year.

Aided by a number of onetime events, the company significantly improved its balance sheet from a year ago and reported a net income of 46.5 million, or 54 cents per diluted share, compared with a net loss of 199.2 million, or a loss of $2.39 per share in the prior fiscal year.

Turning to the fourth quarter, net revenue was 50.2 million compared with 55.3 million in the third quarter, in line with our seasonal expectations for the March quarter. Audio revenue, which includes digital audio, analog and mixed signal applications, was 45.1 million, a little better than we expected compared with a 44.6 million in the third fiscal quarter. Video revenue in the fourth quarter was 5.1 million compared with 10.7 million in the prior quarter. Demand for video products in the March quarter was down, we believe, primarily because of a large pre-holiday inventory build by DVD recorder manufacturers, coupled with minimal retail price declines in this emerging market. We expect our video sales to rebound this quarter to approximately 9 to 10 million as new models begin production.

Gross margin for the fourth quarter was 52.4 percent compared with 52 percent in the third quarter.

Combined R&D and SG&A expenses were 31.5 million in the fourth quarter compared with 30.4 million in the third quarter. This increase was due to several factors, including anticipated expenses related to the Consumer Electronics Show in January, employee health benefit costs effective with the new calendar year and legal fees associated with our lawsuit against Wolfson Microelectronics.

Our net income for the fourth quarter was 10.3 million versus net income of 39.4 million in the third quarter.

Earnings per share for the fourth quarter were 12 cents, based on 86.7 million diluted shares, compared with earnings per share of 46 cents reported in the third quarter, based on 86.4 million diluted shares.

I'd like to point out that our fourth quarter result benefited from a realized gains on the sale of marketable security investments we had in other companies of $2 million. In addition, the company's fourth quarter results also benefited from a onetime expense reduction of $17 million related to a transaction with Broadcom Corporation for certain US and foreign patents associated with the business that Cirrus Logic exited several years ago. The fourth quarter result also included 4.5 million of expense for acquisition and restructuring related items, primarily amortization of acquired intangibles.

In the third quarter the company reported net income of 39.4 million or 46 cents per diluted share, which included a onetime expense reduction of 45 million associated with a favorable litigation settlement with Western Digital Corporation. The third quarter results also include a 4.1 million of net expense for acquisition, legal and restructuring related items, primarily amortization of acquired intangibles.

Our employee headcount at the end of the fourth quarter was 767, down from 805 at the close of the third quarter. Although our total headcount declined, we did increase our headcount in strategic locations, namely in the technical support function close to our customers' Asian-based design and manufacturing centers.

Now on to the balance sheet. Our balance sheet continued to improve in the fourth quarter. In an effort increase our interest income we extended the maturities on a portion of our cash investments. In doing so the balance sheet classification of some of these investments moved from cash and cash equivalents into marketable securities and other investments. Total cash, marketable securities and other investments at the end of the fourth quarter were approximately $200 million, up from 182 million at the end of the third quarter.

We ended the fourth quarter with 19.8 million in net receivables, a 1.1 million increase over the prior quarter. DSOs -- or days sales outstanding -- were 36 days versus 31 days in the third quarter. Net inventories were 29.6 million at the close of the fourth quarter, up from 26.8 million in the prior quarter. The increase in inventories was attributable to an increase in demand we see for the June quarter and the need to build ahead as lead times at wafer fabs have lengthened. Net inventory turns in the fourth quarter were 3.2 compared to 4.0 in the third quarter. As I mentioned before, we built inventory in anticipation of higher June quarter sales.

Our capital expenditures were 1.2 million for the fourth quarter compared with 584,000 in the third quarter. Depreciation and amortization expense totaled 6.2 million compared with 6.5 million in the third quarter.

I would now like to turn the call back to Dave French, who will provide an update and outlook on our products and markets.

Looking ahead, I believe that the market outlook for the June quarter and the remainder of calendar year 2004 appears quite strong and that each of our major product lines will experience growth over the coming quarters. Now I would like to share with you some updates regarding each of these major product lines.

Audio products, based on our strong analog and mixed signal technology base, continue to be the core of our business. These products are used in a wide range of products, from home entertainment systems, to professional audio equipment to highly specialized industrial mixed signal applications. Demand for our audio analog and mixed signal products has remained strong and we continue to enjoy a very healthy market share in those areas where we compete. For example, according to the market research firm TSR there were approximately 100 million DVD players manufactured in calendar year 2003. We believe more than half of these units contained Cirrus Logic audio D-to-A converters.

During the March quarter we also introduced a new audio converter family, the CS4344, which is designed with features, performance and pricing that is expected to maintain our audio leadership. In fact, over the past two years Cirrus Logic has introduced 27 new mixed signal converter products for the professional and consumer audio markets. Cirrus Logic offers a broad portfolio of products, priced competitively and with superior audio quality. These are the qualities that have made us the leader in these markets.

From a design in standpoint we're also pleased that our audio converters have been recently incorporated into a wider range of digital satellite radios, expanding our sales opportunity in this growing market. And in addition to the audio market, Cirrus Logic continues to focus its core analog and mixed signal technology to serve targeted industrial applications. Sales into these applications generally enjoy very high gross margins and typically benefit from very long life cycles. During the March quarter sales of these components strengthened, largely from increasing demand for power meters, high precision measurement application and seismic products.

Our digital signal processor sales, predominantly into audio video receiver applications historically, declined in the March quarter. However, we're seeing improved demand for these chips this quarter based on recent design in activities. The outlook moving forward has improved due to the introduction this past quarter of a powerful and feature-rich 32-bit floating point DSP family. We are working to broaden the markets for our DSPs to include mid and high-end automotive audio systems, digital television applications and mainstream set-top boxes. In each of these exciting applications we have already established new business engagements with well-known mainstream brands.

Also this past quarter Cirrus Logic announced the upcoming availability of a reference design for a completely new market category which we call the home theater recorder. This reference design brings together the characteristics of a home theater audio video receiver, including a digital amplifier, with the features of the DVD recorder all in a single box. Bundled with home theater speakers we could see this new product from several consumer electronics firms this calendar year.

The last category I'd like to address is our video solutions. Our video product line, which features complete hardware and software reference designs for DVD receivers, DVD recorders and USB peripherals for personal computers, saw a slightly larger than expected sequential revenue decline during the March quarter. Looking forward, however, I'm excited about our new design in activity, analyst projections for the overall market and our merchant market leadership position. Cirrus Logic's reference designs have allowed many of our customers, such as Mustek and CyberHome to take a early leadership position in this rapidly growing market. In fact, as a testament to our leadership position in the merchant market for DVD recorders, earlier this year Cirrus Logic announced that its sales of video encoder chips surpassed 1 million units. With this leadership position, we expect our video sales to rebound this quarter to levels approaching our December quarter sales as manufacturers start to ramp production of new DVD recorder and DVD receiver models.

Supporting these new product introductions BenQ began last quarter buying our video chips for use in their super drives, which they will in turn sells to other OEMs who will build and sell complete DVD recorder systems. New products manufactured by Bose, LG Electronics -- one of the world's largest DVD player manufacturers -- and Mustek, selling under their own and a number of other retail brand names, will also help drive our video sales growth. And, in addition to these existing customers we are encouraged by our new design in engagements with other companies, including other Tier 1 firms in Korea and even in Japan, which we believe will lead to increasing sales through the rest of this year and into next year.

In the DVD recorder market, which is expected to see worldwide unit sales double or possibly triple this year, we continue to focus on technology integration and cost reductions, as well as growth in market share. We expect our customers will bring DVD recorders to market at retail prices below $200 before the December holiday season is even underway. In addition, Cirrus Logic is already focusing on next generation DVD recorder products. New reference designs announced at the Consumer Electronics Show in January will feature integrated hard disk drive support, which will enable not only personal video recorder or TiVo-like functionality to record and pause live television, but also new in demand consumer features like playback of divX video streams, photo album management and the ability to use your DVD recorder product as a digital audio jukebox. The jukebox, or iPod-like functionality, will give consumers the ability to store and enjoy their entire CD collection from one central device, conveniently located in the living room.

I should point out that in addition to providing the necessary video encode and decode chips for DVD recorders, our reference designs also feature Cirrus Logic audio converters. This ability to offer a more complete solution than our competitors has been key to our success with video customers thus far, and will be a continuing strong factor for Cirrus Logic moving forward. To capitalize on this opportunity we're adding staff in Asia to better support our video customers and we're now highly focused on leading consumer electronic brands. LG Electronics' selection of Cirrus Logic validates this strategy, and they are scheduled to begin production this quarter of the first DVD+-RW (ph) recorder based on our technology. And later this year we expect to ship video chip sets for use in a major Japanese brand DVD recorder that should be on retail shelves in North America in time for the December holiday season.

In the DVD recording market the key drivers of success are strong and proven technology, reliable and consumer-friendly software, cost competitiveness and the ability to give manufacturers the support they need to get to market quickly. Cirrus Logic is strong in each of these areas and I believe we're positioned extremely well to capitalize on this growing market opportunity.

To summarize, I'm pleased about the progress we have made this last fiscal year in our video product and market activities, and I'm very excited about the opportunities we have in both our video and our audio product lines over the next several quarters. And with respect to the June quarter specifically, I'm encouraged by the early indications. We have stronger confidence in our earlier assessment that retail inventories of consumer electronics goods are generally low. And at Cirrus Logic we see strong interest and revenue growth opportunities in each of our major product lines. In addition, we're strategically on track toward our market share objectives and with this renewed confidence we will continue to invest in new product development and customer support in key areas, while staying very focused on managing our expenses to maintain positive cash flow and to drive toward profitability. And so, for our first fiscal quarter of 2005, which will end on June 26, 2004, we expect revenue to be between 56 and $59 million. Gross margin is expected to be in the range of 51 to 53 percent and our combined R&D and SG&A expenses are expected to total 30 to $32 million.

And now, we are ready for your questions.

(OPERATOR INSTRUCTIONS) Jane Weinbow (ph), Monness, Crespi & Hardt.

This is Leeny Batacharia (ph) calling in for Jane Weinbow. Great quarter and great guidance. I had a question. One of your competitors spoke about ASP erosion on the encoder/decoder solution for the DVR with ASPs going from 20 to $18. What would you say is a fair assumption for year-over-year ASP erosion?

I think 20 to $18 versus 10 percent decline is a fair assessment if you say shipping and low volumes. I think it's more likely through our integration plan that price reduction on a year-over-year basis is more likely to be 15 percent or slightly higher as we ramp pretty significant volumes during the current year.

Second question would be is LG your second biggest customer right now?

On video or total? We actually sell into LG out of our audio product line, as well as our video products. And we still sell substantially more audio product to them than video. I'd like to point out that we have no direct customers that represented 10 percent of sales during the past quarter or during the past year. LG is one of our biggest customers overall, however, yes.

Should we expect any other major customers to pop up in the coming quarters, possibly in the June quarter?

In video in particular? Yes. We've got some pretty interesting design activities going on right now that I think will generate some exciting introductions.

Thank you very much.

Brian Alger, Pacific Growth Equities.

This is Jay Scriebach (ph) for Brian Alger. I had a question on the audio. It looks like it's back to being a very significant portion of your business. Could you give us some color on how the audio revenues broke out between your three components -- analog, DSP and mixed signal?

Audio has always been a substantial percentage of our business. And you are right -- it continues to be. We don't actually break it down at lower levels. There's a lot of moving around and it's quite a diverse and fragmented product portfolio and quite a fragmented customer base. And so we find that breaking it down at any levels lower than that are kind of difficult to track. But certainly more than half is analog -- well over half is analog and mixed signal proprietary product.

That helps. To the video side, you mentioned that DVD recorders obviously are a good chunk of the overall video revenue. Could you give us some color on again what kind of percentage you're looking at over there?

We reported in the past few quarters that the DVD recorder applications specifically has represented roughly 75 percent of our total video revenue number.

Okay. Last question on DVD recorders. Again, there's all kinds of forecasts on how many units are going to ship this year. Do you have any sense of what you're going with and how much you expect to ship yourself the full year for the calendar year 2004?

We leave market forecasting to the market forecasting experts, and most of them are in the range of 8 to 12 million units of shipments for DVD recorders specifically in calendar year 2004 worldwide. We've always said that we intend to be the number one merchant supplier of encoders and decoders into this market. As a large percentage is captive, probably almost half, we think that we have a good opportunity at least to come to somewhere between 25 and 30 percent market share overall. And the growth will really be driven by how quickly OEMs bring down the retail price points, primarily in the North American market, which really hasn't yet been developed.

Thanks guys.

(OPERATOR INSTRUCTIONS) Tores Sandberg (ph), Piper Jaffray.

Dave, could you give us a little bit more color on your guidance, specifically in terms of visibility? I know you probably don't give out your backlog number, but could you give us at least some indications on your confidence in those numbers?

It's always difficult to tell and it's difficult to predict where customers are going to go. But we did have a really good bookings quarter in the fourth fiscal quarter that we completed at the end of March. Book-to-bill was the highest it's been in a couple of years, substantially over one. To put that in perspective, the fourth quarter of fiscal '03 a year ago is probably about the lowest book-to-bill we've had in a long period of time and in a seasonally challenging period such good bookings has really built our confidence for the whole year. And then coming into this fiscal first quarter, we came in with backlog coverage that was better than we have had in quite some time, which puts us in a position where we still rely on some turns business obviously, even substantial turns business. It's good to see the backlog so much higher now than it was a year ago. Sorry, a quarter ago.

Very well. You mentioned that the decline in your video business was also attributed to pricing not coming down as much as expected. Why do you think that is?

It's difficult to get into the minds' of retailers. I think on such a new application, after Christmas 2002, which was an extremely challenging Christmas for retailers in North America, I think everybody was trying to find ways to make a little bit better margin on anything new and exciting. And I think that on such a new application in North America, I think they just decided to see if the market would bear something over $300 and really start to take off. And on the one hand I think they got some pretty good sell-through. I think the sell-through after Christmas has been quite a bit higher after they moved a little bit lower on pricing.

That is very fair. Finally, you mentioned some design wins in digital satellite radios. Could you talk a little bit more about your content in a system like that?

It tends to be limited to mixed signal components. It's only a dollar or less per box. But the unit volume is going up pretty significantly in that application space.

Thank you very much.

(OPERATOR INSTRUCTIONS) Shawn Slaten, Ferris Baker Watts.

Nice quarter; solid guidance. Can you hear me?

Yes.

David French, could you walk us through your integration strategy for your DVD recorder chipset? And how do you see -- how are you guys going to continue to win your fair share of that opportunity here for this calendar year? Can you just kind of give us -- without giving too much away talk to us about your strategy and how you see the market playing out towards the path of the integration?

In 50 words or less I think that in calendar year 2004, from our take, the battles have already been fought. We feel very good about this year. We saw some possible new competitors coming onto the scene, but they really didn't show up. So this year I don't think is really an issue.

I think maintaining our growing our market share coming out of 2004 into 2005, we're looking to drive towards continued price decreases; we're looking to continue to help branded customers, the top tier branded customers, add value through software based on our superior and more adaptable architecture. And then we're looking at ways to integrate front-end and back-end technology before anybody else can. We've got some real interesting programs that we think will pan out in a reasonable period of time to be able to do that for calendar year 2005.

So given your experience with these type of high-growth end markets, when do you think there's going to be what I will call kind of a killer integrated device that serves this market? Are we 18 months away? Are we a year away, two years away? What do you think?

I think that the hardware will be created to drive that as early as late this year, early next year. I think that's not the key issue. The key issue is to combine that with the software that provides the features set and simplicity that the end customer demands, in addition to the drive to $99 retail. And I think certainly that possibility exists for production in time for Christmas '05. I think you'll start to see the same kind of curve on volume or demand versus price through time that you saw in DVD players. And 2005 is really the big year where that's going to happen.

You guys have made some good improvements in your cost structure. Can you walk us through what your ongoing cost reduction strategy is for this calendar year? Has most of the low hanging fruit been exploited in that fashion?

Once you pick the low hanging fruit, then there's the next lowest hanging fruit. I think we will continue to look pretty closely. It's great to have John on board to help out. He's got some really good cost and tightness experience in some of the businesses he has worked in in the past. I think there is opportunities to continue to refine our spending structure, and we're going to keep working that even as we try to drive some very aggressive market share. And I think there's still some progress we can make.

Also, can you just on a rough basis characterize your turns for March? Just rough percentage.

For the just completed quarter?

Yes, the just completed quarter. What were your turns?

Turns booked and shipped same quarter? They were very high as a percentage of the total -- higher than usual. And we haven't quantified them because we think once you start doing that then you have got to start modeling that, and there's so many factors involved -- lead-times from our supply chain, the lead-times our customers give us, things like that. But suffice it to say, March was real high and I think June could be a little bit lower.

Hank Beinstein, Gagnon Securities.

Dave, great quarter. I wonder if you could give us a little further breakdown between the SG&A and the R&D components of your financials.

On the March quarter just completed, if you turned on the press release to the tables -- John can you --?

Yes, I'll take that one. For the quarter the research and development in the March quarter we had 16.9 million in R&D and then for SG&A we had 14.6 million.

Is the R&D trending up? Are you investing new dollars in new applications at a significant rate?

Obviously this represents a pretty aggressive spending level to drive superior growth, but I don't think we need to be increasing that any.

And lastly, you indicated that there may be some new major customers in the Far East, specifically Korea and Japan. When do you think you'll be announcing any of those contracts?

I think that of course we announce them, we announce them. Until we announce them they are really difficult to schedule events and dependent upon a lot of activities from our customer. We can say that we think that they're going to generate revenue during this year, and so obviously they have got to get out there before Christmas. Our policy is to tend to announce those sort of designs either as our customers begin volume production or even more likely when our customers are actually stocking in retail shelves.

So it's not at the time you first start to ship?

We usually try to wait until they are actually shipped into retail, which for the holiday season here in North America, that might be as late as September.

Again, great quarter. Thank you.

Mr. Allen, there are no further questions at this time. Do you have any closing comments?

Yes, thank you. And thank you all for your questions and also your continuing interest in Cirrus Logic. As I said earlier on the call, we see strong interest in growth opportunities in each of our major product lines and with strong execution we have the opportunity to achieve 25 to 35 percent revenue growth in the current fiscal year. The management team and I are committed to delivering innovative products to our customers and delivering improved top and bottom line financial results to our stockholders as the new fiscal year progresses.

We look forward to talking with you when we report our first quarter financial results on Monday, July 26th. In the meantime John and I hope to see many of you at the upcoming conferences -- J.P. Morgan Technology Conference in San Francisco on May 5th; the Piper Jaffray Technology Conference in New York on May 19th; the Smith Barney Citigroup Semiconductor Conference in Monterey on June 2nd; and the CIBC Technology Conference in New York on June 9th.

Thank you all and have a great afternoon.

This concludes today's conference. Thank you all for your participation. Have a great day.