Cirrus Logic Inc (CRUS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic 1st Quarter fiscal 2005 financial results conference call. At At this time all participants are in a listen-only mode. Later we will open up the call to your questions. Instructions for queueing up will be provided at that time.

As a reminder this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Mr. David Allen Vice President, Investor Relations and Treasurer. Mr. Allen, you may begin.

Thank you operator and 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 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 2nd Quarter Fiscal Year 2005 revenue, combined R&D and SG&A expenses and gross margin levels, as well as our expectations, estimates and assumptions regarding future revenue growth and 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 and our latest Form 10A for the year ended March 27th, 2004 as well as our other filings with the Securities and Exchange Commission.

For additional discussion of risk factors that could cause actual results to differ materially from our current expectations. Now I will turn the call over to Dave French - Dave.

Thank you, David and 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'll first quickly recap our results.

I would like to mention before proceeding, that our 1st Quarter revenue and gross margin were lightly above the high end of the guidance range we previously provided and that all financial numbers we discussed are in accordance with generally accepted accounting principles.

For the Q1 of 2005, which ended June 26th, revenue was $59.1 million up 18% sequentially over the prior quarter and 45% over the same quarter one year ago. Gross margin was up at 53.6%, combined R&D and SG&A expenses totaled $31.2 million. Net loss was $3.4 million and loss per share was four cents.

To assist those investor who's track our ongoing business activities on a non-GAAP basis in a manner consistent with first call estimates I would like to point out that our 4 cents per share loss in our June quarter of $3.4 million included $5.7 million of expense for acquisition and restructuring related items primarily amortization of inquired intangibles and also a $669,000 realized gain on marketable securities related to the sale of stock we acquired from our investment in Signal Integrated Products, Inc.

Taking these items into account our results calculated on the same non-GAAP basis consistent with first call would have produced a 2 cent profit based on 86.5 million diluted shares.

I'm encouraged by our progress in the June quarter and believe we are on track with our vision for Cirrus Logic which is to drive superior revenue and earnings growth through technology leadership and analog and mixed signal semiconductors for consumer industrial and automotive applications.

The June quarter witnessed continued revenue growth from our expanding analog and mixed signal products. We also reported a strong sequential year-over-year growth in demand for our video products, which include our integrated circuits for the emerging DVD recorder market.

Although there is some uncertainty about how quickly the DVD recorder market will grow, we believe that our strong design and activity with an expanding high quality video customer base positions us with an important revenue growth opportunity, which I will discuss later in the call.

Our June quarter results bolster our confidence that Cirrus Logic will achieve strong year-over-year revenue growth in fiscal year 2005 and a return to sustainable and growing profitability. Now John will discuss our financial results for the 1st Quarter of Fiscal Year of 2005, John.

Thank you, Dave. Our net revenue was $59.1 million up 18% from 50.2 million in the March quarter. Our revenue continues to come from a broad base of leading companies and consumer and industrial electronics.

Sales for the distribution channel accounted for 64% of our June quarter sales. Bose was our largest direct customer with slightly less than 10% of our June quarter sales. Bose purchases include our analog mixed signal and digital audio and video components for their home and automotive entertainment product line.

Historically we have discussed our products in terms of audio and video products. To better reflect the nature of our diverse product portfolio and the growing importance of our non-consumer analog integrated circuits and we have changed the name of our audio product catagory to analog.

The analog category will continue to be primarily composed of our audio converters. Our largest products upset of analog IC. Along with Integrated's circuits use and industrial and scientific applications, which continue to demonstrate strong, sustainable revenue growth.

Video, our emerging high growth opportunity, will remain unchanged. In the June quarter, our analog revenue was 50.7 million up 12% from 45.1 million in the prior quarter. Video revenue totaled $8.4 million in the March quarter, 65% increase from 5.1 million in the prior quarter.

Gross margin for the June quarter is 53.6%, an increase from 52.4% in the March quarter. Combined R&D and SG&A expenses were 31.2 million in the June quarter compared with 31.5 million in the March quarter.

Our net loss for the first quarter was 3.4 million versus a net income of 10.3 million in the 4th Quarter. Loss per share for the June quarter was 4 cents based on 84.4 million weighted average basic share, compared with earnings per share of 12 cents reported in the March quarter based on 86.7 million weighted average dilute shares.

The The June quarter results included 5.7 million of expense for acquisition and restructuring-related items, primarily amortization of acquired intangibles. The June quarter results also included a $669,000 gain, realized on the sale of marketable securities.

I would like to remind you that our March quarter results benefited from one time operating 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 and from a $2 million realized gain on the sale of marketable securities for investments we had in other companies.

The March quarter results also included 4.5 million of expense for acquisition and restructuring-related items primarily amortization of acquired intangibles. Our employee head count at the end of the June quarter was 768 compared with 767 at the close of March.

Although our total head count was flat we added a dozen technical support personnel near the Asian based design and manufacturing plants. At the end of the June quarter, 22% of our workforce was based in Asia. Up from 15 percent one year ago when our workforce totaled 892 employees.

Now on to the balance sheet. Total cash marketable securities and long-term investments at the end of the June quarter were approximately 198 million, down slightly from 200 million at the end of March. We ended the June quarter with $27.9 million in net receivables an $8.1 million increase over 19.8 million in the prior quarter.

DSOs, today's sales outstanding, were 43 days versus 43 days in the March quarter. Inventories were 41 million at the close of the quarter, up from 29.6 million in the prior quarter. The increase in inventories was attributable to an increase in demand we expect for seasonally stronger September quarter and need to build ahead as lead times at [inaudible] have lengthened.

Audio converters accounted for approximately half of the increase in inventory. Video IC contributed about a third of the increase. Net inventory turns consequently decreased in the June quarter to 2.7 from 3.2 in the March quarter.

We expect to see at least a 10% reduction in inventory levels starting in the September quarter as our customers begin their holiday production build programs. Our accounts payable and accrued liabilities increased to 66.7 million from 52.7 million at the end of March. The change was primarily due to increased purchasing activity in anticipation of higher sales in the September quarter.

Our capital expenditures were 3.2 million in the June quarter compared to 1.2 in the March quarter. Depreciation and amortization expense totaled 6.2 million, which was flat with the March quarter.

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

Thank you, John. As I said I'm pleased with last quarter's results. We came in slightly ahead of our own guidance and ahead of the street's top and bottom line consensus estimates.

We posted strong sequential and year-over-year revenue growth across each of our key product lines in the June quarter and we increased our gross margins for the fourth consecutive quarter.

Entering the seasonally stronger September quarter, I'm encouraged by our continued progress and excited about our ongoing efforts to improve both our top and our bottom line results.

And now I would like to provide more detail regarding Cirrus Logic's results in the June quarter and update on our major product lines and our outlook for the September quarter.

Our analog product line which includes audio converters, industrial analog components as well as DSP and embedded processors accounted for approximately 85% of our June sales the balance of our revenue is derived from video solutions.

And first, I would like to comment on the audio converter products which represent the largest portion of our analog revenue at approximately 40% of our total.

These components support a wide range of consumer professional and automotive entertainment applications. Revenue for those components increased approximately 10% in the June quarter, compared with the prior quarter.

We continue to see a wide array of design wins for this product group. We have traditional strength selling audio converters into high volume DVD and home theater applications and more recently we've seen an expansion in our opportunity in digital TVs and set top box applications. In digital satellite radios and in high-end car audio equipment.

To maintain our leadership in audio converters we recently introduced two new families of surround sound CODEC the first family designed to help manufacturers of audio video receiver products and automotive audio systems and second family targeted for manufacturers of DVD home theater and digital TV applications.

For system designers, the high level of integration in each of those families of audio converters, leads to simplified designs and higher performance at a lower bill of materials cost.

In addition to these two new audio converter families we recently announced two new multi-channel class "C" digital amplifier controllers that enable higher performance than competitive alternatives on the market.

These new pin-compatible products are tailored for home theater products including mainstream DVD receivers and mid-range audio-video receivers. The second largest revenue contributor in our analog product line is our industrial analog components.

Demand for these high precision industrial and scientific measurement applications continues to show strong growth. Sales of our power meter integrated circuits, for example, have been driven by new design wins in China, India and in other emerging countries we're monitoring electricity - electricity use is growing in importance.

In addition to these primarily residential applications, our integrated circuits are being adopted for industrial applications where cost and accuracy are driving conversion from mechanical to electronic meters. Our scientific measurement integrated circuits have also seen strong interest in growing demand.

Integrated circuits used in energy exploration for example, which typically have relatively long product lives are now entering a new multi year product upgrade driven growth cycle.

Now let's switch from our industrial analog products to our digital signal processing and embedded processors which also showed growth in the June quarter. This category includes digital signal processors for home, commercial and automotive audio applications and general purpose armed embedded processors. Our digital single processors or DSPs are primarily used today in audio-video receiver applications from companies, such as Harman Kardon, Morantz, Onkyo, Panasonic, Pioneer, Yamaha and others and in addition to audio video receivers we expect digital TV and set top box applications to fuel our DSP sales.

I would like to quickly comment on our embedded processor products while these arm 7 and arm 9 base products currently represent a very small fraction of our total revenue, we are pleased with early designing activity, particularly with our new general purpose arm 9 series.

The feedback we have from the channel and from customers directly for a variety of applications is encouraging and provides us with another source of diversified, high margin growth over the next several years.

The last category I would like to address is our video solution product area, an area that has received a lot of attention, obviously. Sales of video encoding and decoding integrated circuits currently represent a small part of our business, approximately 15% of June quarter sales, but one that provides significant long-term growth potential.

We believe that the worldwide for DVD recorders in calendar year 2004 will likely range from 8 to 10 million units with an upside potential sale of 12 million units up from approximately 4 million units of demand last year.

Based or our leading technology. The flexibility and programmability of our solution and our ability to help our customers achieve a very cost-effective bill of materials we believe we are continuing to hold strong merchant-market position for video encoding integrated circuits for DVD recorders. Our video solution sales in the June quarter, while somewhat below our April forecast were still up 65% sequentially, and up 178% on year-over-year basis to $8.4 million.

Our video integrated circuits are used by manufacturers of DVD recorders and also DVD receivers and players, as well as USBPC peripheral. Video recording applications accounted for more than half of our video revenue in the June quarter.

Customer demand for DVD recorders continues to be stronger in Europe and in Japan than it is in North America. It's our belief that the slower than expected growth so far in North American demand say result of several factors. Including lack of significant retail promotion, DVD recorder complexity and also confusion among consumers associated with various competing recording standards.

During the June quarter, our DVD recorder customer base expanded. During this quarter we began to shifting our first video solution that supports both the plus and minus RW recording standards. Supporting both poplar standards should reduce customer confusion and very importantly provides us with the opportunity to penetrate the Japanese market which represents approximately a third to half of today's worldwide market.

Looking ahead to the September and December quarters, we expect our list of video customers will continue to expand and include shipments to branded customers, such as LG Electronics, Samsung with whom we recently received our first DVD recorder order. And a number of exciting Japanese brands.

In preparation for the seasonally stronger second half of the year we increased our way for starts and inventories early in the June quarter. Further, we continue to believe that channel and retail inventories are generally in balance for our products.

Consequently we continue to expect to see higher sales in the September quarter, with a level of video sales as the biggest swing factor in projecting our second quarter revenue.

With that in mind our guidance for the second fiscal quarter of 2005 which will end on September 25th, is as follows: Revenues expected to be between $61to $68 million with revenue contribution by the following product categories:

Analog integrated circuits, which we formally described under audio category, is expected to be between $51 and $53 million, up from $50.7 million in the June quarter and $45.1 million in the March quarter, and video, with its high of due in part to the uncertainty surrounding North American consumer confidence and spending could range between $10 million to $15 million compared with $8.4 of revenue in the June quarter and $5.1 million in the March quarter.

Gross margin is expected to be in the range of 52-54% and combined R&D and SG&A expenses are expected to total $30 to $32 million.

With 45% year-over-year revenue growth in the June quarter, we're off to a good start for the fiscal year. And we remain confidant that our strong and expanding product portfolio with its core analog and mixed signal offerings will enable us to achieve strong year-over-year revenue growth in fiscal year 2005 and now we are ready for your questions.

Operator.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star key. We'll take a moment to pause for questions.

Our first question is from the line of (ph) Shawn Slaton with SG Cohen & Co.

Hi gentlemen, good afternoon. It's a nice quarter you are reporting. David, on the DVD side - the DVD recorder side could you help us understand what your exposure is to Asian manufacturers relative to other manufacturers for the current quarter and could you just talk a little bit about what you think the merchant opportunity is right now relative to the captive opportunity? Thanks.

Yeah, thanks, Shawn. On the DVD recorder business there really only are Asian manufacturers, just to put it into perspective as far as we can tell, even European brands and North American -- brands that are known as North American brands are associated with Asian manufacturers and I don't know any other way to answer that question.

We continue to believe that the market is 8-10 million units earlier we'd been talking about an 8-12 million unit market and I think 12 million is still a possibility so our thinking is that based on relatively slower rate of adoption in North America that we're more likely to be in the 8-10 million than towards the 12 million range on that.

In that market which is still doubling or maybe even tripling over last year's demand, we expect that our opportunity for non-captive or merchant market is as much as half of that total market.

So you are saying half of that and that is principally -- are you considering that principally Taiwan and I guess the recent data from Taiwanese government is saying that they're going to ship about 3 million units this year from the island of Taiwan; does that kind of correlate with what you are seeing and can you put that in a context of your opportunity of Taiwan versus others?

It's consistent with my views that up 3 million units will ship from Taiwanese companies. I don't know about location of manufacturers and many of the Taiwanese companies in that business actually manufacture in China. So look at Bang Kieu you look at Argus or Cyberhome and some of these companies have pretty substantial manufacturing bases in China. But that is in with what we think.

Okay, fair enough. Can I ask you a question on that; can you break out payables versus this line item you have this here on your balance sheet? Can you break out the payables from the other accrued liabilities?

Uh, yeah - accounts payable at the close of Q1 looks like $32.3 million and accrued liability at $34.4 million.

Thank you, guys.

Thank you.

Our next question is from the line of Jason Pflaum with Thomas Weisel Partners. Mr. Pflaum, please state your question.

Good afternoon. I guess the first question the end year gross margin looks like you had some nice expansion sequentially in the face of, I guess a resumption of growth in your DVD business, video business. Can you maybe just update us on some of your cost programs that maybe helped allow you to do that and maybe talk just generally about your gross margins going forward and how you expect that to trend perhaps as the video business keeps up a steady pace of growth here.

Yeah, Jason, on the gross margins we have had a pretty serious across the company effort over the past two or three years to continue to expand our gross margin profile and primarily through cost management, but not solely.

Our new products are typically oriented towards increasing gross margins in similar or related markets to those that we sold to in the past. On the cost side we also continue to drive down front and back end costs and we had a major program in the past year to sell some of our captive test equipment assets to a major manufacture (ph) Chiptech and in selling some of those assets and transferring them we expected when we announced that deal to save somewhere - annually somewhere between $5-7 million.

That program has had a pretty substantial favorable affect along those lines during the June quarter. Going forward we think that there is still some further room for improvement on that front and we'll continue to look for areas of improvement on that front.

As well as our new product momentum it's quite strong and I would say, we don't break out gross margin on product by product basis, it would be far too complex to do so. But generally speaking we have a good balance of performance enhancement, ease of use by our customers and improving gross margin for our shareholders right at the top of our list as we evaluate new product development programs.

So even as your video business perhaps ramps quicker than the other analog business you think there's some programs going on now that could keep the mix relatively flat or perhaps higher?

We think our mix will remain quite rich, even as video grows substantially.

Okay. Great and maybe just on the video side if you could help characterize your customer base there, maybe the number of customers you are shipping product to today and maybe compare to several quarters ago to give us a good sense.

DVD recorders, we have only been in this business for a few quarters our first substantial revenue in DVD recorders began in the September quarter really, last year.

We have announced several customer wins about half a dozen different manufacturers have been shipping and we added a few this quarter and somewhere between half a dozen and a dozen substantial customers building products based on our chip set.

And again we have been focusing on important brands because the value of this product and the prices that are being brought out to retail are still in excess of 200 and probably are going to stay close to that through this year.

We have shipped through Taiwanese companies like Bang Kieu and Argus which sells the Cyberhome brand and historically we ship and we have LG as one of our major customers and during today we mentioned Samsung from whom we received our first production order this past quarter and that's a pretty substantial opportunity for us to expand.

We've also seen some serious moves, not yet announced because they are not in production in the Japanese market, by Japanese brand and it's not in my mind while the product sells close to $200 the number of customers that matter, I think next year maybe that will become more important, but right now the quality of the customers that drive the most success, I believe.

The one with Samsung sounds interesting but is it one particular model or multiple models or one line of product sets for them?

Everything is done one at a time on some of these new designs, but they have multiple programs

And you mentioned multiple designs with multiple Japanese vendors; is that correct?

Yes.

And then lastly on the inventory front, looks like more than we expected sequentially, but you mentioned lead times had extended and that probably prompted a little more ordering on your part perhaps. How else should we think about the inventory growth there and maybe you could characterize where your lead times with your foundry partners are today?

Inventory grew obviously and in grew quite a bit. Seasonally this is a time of year when you want to be prepared. Our customers expectations on lead times are still very, very short like four weeks and below.

Our lead times on analog and mixed signal components tend to be 8-12 weeks most commonly and sometimes longer, even still, many products we have on the shelf. But we have diverse and pretty broad product line in that area.

Lead times on the foundry front in March and April time frame particularly for the analog businesses that expanded pretty substantially and we were seeing in excess of 13-week lead time for wafers during the March time frame now since then I have noticed, as well as you have all noticed a relatively different point of view on wafer fab fasting and I think lead times have come on the wafer front, but not so much on the analog space where we're buying at .5 micron, .3 5 micron and to some extent .25 micron and those are full and I personally feel pretty good that we did increase our inventory on the analog going into September period.

Which for our analog business has over the last three years averaged 10% or so sequentially growth over June. And we do expect however, to reduce our inventory in September and in the next two quarters after that, most likely by as much as 10%, John mentioned by September, if not more.

Okay.

Great. Thank you.

Our next question is from the Quinn Bolton with Needham & Company. Mr. Bolton please state your question.

Congratulations on a good quarter and first on the new DVD plus minus RW solution. Can you give us a little bit more color and is this now production qualified, is it just samples and the Samsung order is that just a plus solution or a plus minus solution?

Product is production qualified and moving into higher volume, supporting both plus and minus, the Samsung design is plus minus. What was the other part of the question?

I think that was mostly what I wanted to know whether it was production ready and whether Samsung was shipping that.

Switching gears you talked about increasing inventory and increasing wafer starts and early in the June quarter and now that lead times have at least peaked and maybe starting to come back in and do you anticipate reducing wafer starts in the September quarter and should we be worried about that and is that just part of regular inventory management?

Well, seasonally we do like inventory to be a little bit higher going into Christmas and we have always said that. We also have to take into account what goes on in the industry.

We have already reduced wafer starts since the end of April and the increase we had was at the end of March going into April and lead times appeared to be extending out notably. So we have already taken that action and we'll run lower wafer starts from May all the way through the rest of the calendar year barring any unforeseen demands and that allows to us take inventories down through the rest of the year. And I think that about summarizing where we are.

So more of a steady wafer start plan over the next 4-6 months then?

I would say we can drive substantial reductions in wafer starts from May, June, July, August, September and still drive substantial revenue growth.

So if you want to go look at wafer start run rates, it's already down substantially in spite of the fact that we still see September being as arguably as much as seasonally growth period.

And question about just the inventory and I think you mentioned 64% of revenue and could you remind us, one, how you recognize that play through and if it's on a sell in basis what your thoughts on inventory are?

Predominantly it's on sell out, not sell in, and then in North America and in Asia it's on sell out for select high volume products for DVD players and the like and actually pretty good percentage in Asian is on sell out. On products internationally where we have a long history of distributor who's are really just there to manage receivables more than anything and support fulfillment requirements and they have no return rights you, et cetera and not stocking distributors as a rule and it's on selling basis.

Any rough ideas to the split and maybe 60-40 sell out versus sell in?

I don't really have that data in front of me. I'm sorry. There is a pretty even split I guess I would have to say

Okay. Great and the last question and then -- just can you give us a sense to the embedded arm corp. and what the applications would be for those products?

Yeah, actually it's a pretty diverse set of applications and a lot of industrial measurement applications and a lots of overlap with the analog product line and a lot of drive why we invested in that area and data acquisition and we have some interesting higher volume applications in terms of network, home entertainment systems, things like that and we have got portable equipment that manages entertainment applications.

Kiosks, smart terminals and a very wide array of applications and that is something you hear about moreover time as it becomes more substantial in terms ever revenue, but that is an area that we see a good complimentary model to our industrial mixed signal base in that general purpose microcontroller business

Okay great, thank you. .

Thank you very much.

Our next question comes from Monness, Crespi & Hardt. Please ask your question.

Hey, guys, great quarter. I just had one question for you, will we see your cost cutting efforts continue and if so, when can you guys get spending below $30 million?

It's always a good thing to look at and we think over the course of the past few years we have been pretty aggressive on that front and looking for ways to optimize your business model.

I have always said particularly in the video where the anal cycle really peaks toward the North American end of year selling season, up through July, August, time period, we are working very closely with our customers to bring current year models into high volume production. And that is the single focus of the organization and I don't like to get people distracted on that.

Right about that time period, which is right around now customers shift attention to next year's model and products and sorting through a variety of products and assortments will be.

At that time, which is now, it's a good time to re-evaluate priorities and how we spend resources and look for improving efficiencies and we are on that and we think that is still ways to drive improving performance in our business, but we don't have anything specific to say today on that front and I think you should look for us to continue to optimize your business model.

Okay great. Thank you.

Thank you.

Our next question will be coming from Tyrone Lee with Piper Jaffray.

Nice quarter. Can you describe your shipment linearity through the June quarter and our expectations for the next quarter?

We don't actually provide detailed numbers on that, but I would say the June quarter is a little back end loaded and April is strong and I mentioned that May looked softer than April. But half of the quarter sales were in our five-week June quarter. And the month of June typically is a start of the calendar year spike in our customer's archive. So in other words, the back to school and then Christmas selling season in North America. So it's not so surprising of a period for us.

Okay and can you kind of describe your visibility and confidence in your guidance?

Yeah. On visibility I would say we always wish we had greater visibility and over the past few quarters requiring a little bit more of our revenue in terms of business in given quarter and June in the same ballpark.

While our book to bill was around 1 or slightly above 1 and slightly backlog coming into June, sorry coming into the September quarter where we entered June and revenue estimates are higher in September than June and looking from ratio perspective our visibility is a little bit down.

However, this is the time of year the bigger piece of our business is or analog business and over ring sequential growth over September June and so we have actually based on all of the uncertainties out there, scaled that back in providing our guide on our analog business and so as far as confidence going into September, it's the hot time of year. We feel good about our strategic position and where our new products are coming out.

Fair enough and nice quarter and thanks a lot guys.

Thank you.

Our next question will be coming from Brian Alger with Pacific Growth Equities.

High guys, good quarter.

Thank you.

Certainly didn't see the strength in analog coming and good job there and you said 40% from the audio portion of it and then you kind of broke it down between industrial and scientific and I'm wondering if you could maybe give us the relative size of each those segments?

Well, generally speaking the 40% number was 40% of the total revenue of the company, which is almost half of the analog. The mixes kind of move around and so we're going to get away from reporting specific numbers there because you can read too much into the movements from one to another.

Industrial is certainly lower than the audio converter area. And the slides, actually we have some slides on the web, which you might find helpful, that kind of show the shape with industrial being two-thirds of the size of the audio converter and the embedded processor front.

And within the video sales I think I heard you say that about half of that was recorders?

I said over half.

Is it 2/3rds or closer to 1/2.

We said 1/2.

That is fine. And I'm wondering within that records business is there any mix signal products, for example a lot of DVD recorders and DVD receivers are using a lot of mix signal products and doing D/A to A to D conversion and does that show up in the video line is it physically a video device or back on the analog side.

We are pleased that in these high volume applications and we sell very successfully in DVD players as you know and DVD recorders and we report them in the analog business.

Okay. Great. And then just wondering it seems as though we have a fairly wide range on the September video number, 10-15; is that spread all North America or what is causing that sort of range?

Well, I think that the predictability in a that market and uptake is probably difficult in the marketplace and that is what causes a little wider range than many people might like. On the other hand that is what it is. I think that predominantly we still are going to get most of our revenue in European end markets.

Okay and last question within that video market, you described about half of that being non-captive and do you have a sense of what your market share might be as we kind of exit this calendar year?

Forecasting market share I probably won't get into that game right now. We indicated based on last year that we probably did 15% of the total market, 35% of the captive market, which we felt pretty good after only being in the business six months we didn't get hold share or gain share this year and we won't forecast a specific number.

Nice quarter.

Thanks, Brian.

Our next question will be coming from Allen Adler from AA Enterprises. Mr. Adler, please state your question.

Hello David.

Hi Al.

When you talk of a market from 8 to 10 million and potentially 12 million; what is key to get to the 10 million to the 12? Is it advertising? Consumer acceptance? Are there any product improvements unnecessary? And from your standpoint for you to get a bigger share there you are looking at product wins or is it too late in the year for that?

I think that the growth drivers are what the growth driver typically would be, and it's price first and probably second. Ease of use and confidence on the long-term value of a product that a consumer might purchase and what that means is clarifying the standard debate.

And I think by offering equipment through branded companies, who have a long history of providing high quality user interfaces and easy to use product that support multiple standards and service the last issue and driving down the cost below $200 which I think drives a significant growth opportunity for the marketplace and as far as winning versus the other guys, I think that having our customers more successful than their customers is the key issue.

And I think the kind of quality of customers that we are bringing in this year is a real good sign and a lot of that is based on programmability and flexibility of our systems so our customers have been able to adding a lot of value in ease of use and aesthetic quality of this product that they are are presenting to the customer that is still in excess of $200 and maybe $300 or more for integrated hard drive versions. So that's what we think are the key factors.

Once again ladies and gentlemen, star one on your telephone keypad if you would like to ask a question at this time. Our next question from Shawn Slaton with SG Cohen. Mr. Slaton, please state your question.

Hey David, this is just a follow-up. I think it was Cyberhome I've been reading about that had pretty dramatic number of failures in the field for their recorders. Is that impacted you guys at all? Thanks.

I don't think I have ever seen anything quoted as a "Dramatic return rate" for Cyberhome.

Or any of your important customers on the DVD recorder side. Are we capable of manufacturing an inexpensive DVD recorder that lasts more than three months right now and obviously it's not your chips causing these failures?

I think our customers ship high quality product and I think they are doing a good job of that. I think there are a bunch of issues about standards and inner-operability and compatibility and that's always true in the early stages of a new application and I have heard anecdotally people saying that there was a huge return from best buy to some customer and the customer referenced only shipped 10-15,000 units into that retailer.

So I think that some of that has been blown out of proportion. But there have been returns you know, I think a lot of that is normal and particularly in the early stages of the product and I think that the new versions are better than the older versions and support for multiple standards will make it better still.

Getting the price point down and I don't know if you have ever tried to play DVDs on old DVD players today and still interesting compatibility issues there.

It's worse on DVD recorders today than it is on $40 DVD players, but I think it's coming down the curve pretty aggressively and I think our customers are doing a great job at servicing the real needs of consumers.

So we should be focusing on price points and user experience and not this speculation of field failures and things of that nature and out of box failures, if I understand you?

Yeah, and again, I will reiterate and I don't want to deny that there's been returns to retailers from customers because that always happens, but the specific things that have been talked about No. 1, not caused by Cirrus Logic and not generated by Cirrus Logic returns and I think blown out of proportion based on my knowledge shipping to each retailer and that is way I see it.

Thank you.

Our next from Justin Martos with Graham Partners. Mr. Martos please state your question.

Yeah, just wanted to find out within the DVD guidance from 10-15, is it more dependent on the growth of the DVD r or just the general DVDs?

Definitely DVD Rs.

And with your inventory level you said at least 10% or bit end of year or next Question from floor: and what would make it go down by 10%

September and more later.

And then you are just being cautious regarding the analog growth in September, regarding the estimates that you are putting out and you referenced earlier, usually 10%; is that correct?

Relative to the history we have and I have looked at in every way and last three years it's hard to say represent normal. On the other hand if you average out the last few years and maybe you come to some kind of normal and sequential growth on analog, but interest is a lot of unknowns and we think it's the more appropriate path to take right now.

Thank you.

Thank you.

Gentlemen, there are no further questions in queue.

Okay well , operator and thanks to you to your questions and time and continuing interest in Cirrus Logic We look forward to talking with you when we report our 2nd Quarter financial results on October 20th and in the mean time we hope to see many of you at the upcoming summer seminar in Boston on August 5 and/or at the SG Cohen Fall Technology conference also in Boston on September 10th. Again thank you very much and good afternoon

This concludes today's conference and thank you for your participation and you may disconnect your lines at this time.