Cirrus Logic Inc (CRUS) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second quarter and fiscal year 2005 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will open up the call to your questions. Instructions for queueing up will be provided at that time. As a reminder, this conference is being recorded for replay purposes. I would now like to turn this conference call over to Mr. David Allen, Vice President Investor Relations. 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 I -- before we begin, I'd like to remind you that during the course of this conference call, we will make projections or other forward-looking statements regarding, among other things, our estimates for third quarter fiscal year 2005 revenues, combined R&D and SG&A expenses, and gross margin levels, as well as our expectations, estimates, and assumptions regarding our future revenue growth and profitability. Please keep in mind that these statements are predictions that are subject to the 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 27th, 2004, 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 Dave French. Dave?

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'd like to remind -- to mention before proceeding that all financial numbers in our press release today are in accordance with generally accepted accounting principals. For the second quarter of fiscal 2005, which ended September 25th, revenue was $51.3 million. Gross margin was 44.7%. Combined R&D and SG&A expenses totalled $31 million. Net loss was $15.1 million and loss per share was 18 cents.

To assist those investors who track our on-going business activities on a non-GAAP basis in a manner consistent with analyst estimates as reported to First Call, I'd like to point out that our 18 cent per share loss in the September quarter -- or $15.1 million -- included $8.0 million of expenses, primarily for amortization of acquired intangibles and restructuring-related items, as well as a $3.9 million net inventory charge. Taking these items into account, as done by analysts contributing to First Call, our results calculated on a non-GAAP basis would have produced a 4-cent loss per share, based on 84.7 million basic shares outstanding, in line with current First Call consensus estimates. We provided a detailed GAAP to non-GAAP reconciliation on our website, cirrus.com. We use non-GAAP financial numbers to assist us in the management of the Company because we believe that this provides a more consistent and complete understanding of the underlying results and trends in our business. We will include the reconciliation on cirrus.com on an on going basis to provide current as well as historical information. Our reconciliation differs from the First Call approach I just described, in that our reconciliation does not include the $3.9 million net inventory charge, which would result in an 8-cent per loss -- loss per share on a non-GAAP basis.

Let me briefly recap some of the challenges which we faced during this last quarter. Historically, our September quarter has been typically back-end loaded with slow months in July and August followed by very strong sales during the month of September. Unfortunately, this year we did not see the sales surge we normally experience during September, and as we indicated in our September 23rd press announcement, sales of audio digital to analog converters or D/A converters for DVD player applications and sales of video integrated circuits to DVD recorder manufacturers were lower than we had expected. In retrospect, we see three major factors contributing to this year's unusually slow September order patterns. First, we believe that a number of DVD player manufacturers ordered ahead of demand for certain integrated circuits during the March and June quarters and stock piled D/A converters in order to avoid being caught short on supply while analog fab lead times were lengthening. Secondly, we suspect that tightening of bank lending practices in China during the summer months made it difficult for some manufacturers to obtain needed financing, resulting in a narrowing of the manufacturing base, there. And the third major factor, we believe, appears to be related to a more aggressive posture by certain companies to enforce intellectual property rights against companies in China. These issues, in total, contributed to an 18% decline in our audio converter revenue in the September quarter, compared with the prior quarter.

Demand for our video integrated circuits was also lower than expected due to slower consumer product adoptions, particularly in the North American market. We believe the adoption rate was impacted by consumer confusion over recording standards, high retail prices, and difficulties with user interface solutions on many of the existing models. As a result of these issues, we saw changes in delays in customer production plans, which led to significantly lower demand for our video integrated circuits in the September quarter than we had expected. Despite the slower than expected growth in the DVD recorder market during calendar year 2004, we're still encouraged by a number of strategic design wins with top tier accounts such as LG Electronics, Samsung and Sony, which are now entering volume production. Later in this call I will address our plans to achieve better results in this market ,as well as some of the other exciting analog markets in which we are competing. But for now, John will discuss our financial results in more detail for the second quarter of fiscal year 2005. John?

Thank you, Dave. Our net revenue in the September quarter of fiscal year 2005 was 51.3 million, compared with 59.1 million in the prior quarter, and 50.1 million in the second quarter 1 year ago. In the just-completed quarter, our analog revenue was 46.3 million, compared to 50.7 million in the prior quarter and 42.1 million, or a 10% increase year-over-year in this product area, year-over-year. As a reminder, our analog category is comprised of audio converters, analog integrated circuits, which are -- which are primarily used in industrials and scientific applications, and DSP and embedded processors. Our video IC revenue totalled 5 million in the second quarter, compared to 8.4 million in the June quarter. Our international sales declined 70% -- declined from 70% in the June quarter of fiscal year 2005 to 63% for our September quarter, in part, due to weakening demand from Chinese DVD player manufacturers in the slower-than-expected ramp of new DVD recorders. Sales to distributors, once again, represented more than 60% of our sales in the September quarter, and we had no single end customer representing more than 10% of our revenue. Gross margin for the September quarter was 44.7%, compared with 53.6% in the June quarter, and 51.9% in the year-ago period. The September quarter gross margin was adversely impacted by a net charge of 3.9 million for excess and obsolete inventory, with analog and video products accounting for approximately 2.1 million and 1.8 million, respectively. Without that net charge, our gross margin would have been within our target range of 52.3%.

Combined R&D and SG&A expenses were 31 million in the September quarter, compared with 31.2 million in the June quarter and 32.6 million in the September quarter 1 year ago. On August 25th we announced actions to reduce these expenses by 2 to $3 million per quarter starting in the December quarter. In the September quarter we took a restructuring charge of 4.1 million related to these actions. This charge included 1.5 million for the workforce reduction and facility consolidation activities, and an additional related non-cash asset writeoff of 3.1 million for CAD tools we will no longer be using. During the second quarter of fiscal 2005, we also bought out a long-term lease in Colorado for $4.3 million, which produced a favorable impact and lowered the restructuring charge by $500,000. Interest and other income, which is primarily interest income, was 599,000 in the September quarter, compared with 630,000 in the June quarter, and 255,000 in the same quarter 1 year ago. Our net loss for the second quarter was 15.1 million, compared with a net loss of 3.4 million in the first quarter. In the September quarter, we reported -- in the September quarter 1 year ago, we reported net income of 21.1 million, which included benefits of 31.7 million, resulting from other various positive events. The loss per share for the September quarter was 18 cents, based on 84.7 million basic weighted average shares, compared with a loss per share of 4 cents reported in the June quarter, and a net income of 25 cents per share in the September quarter 1 year ago. Our employee headcount at the end of September was 724, compared with 768 at the close of June. The decline in headcount was primarily the result of previously-announced cost-cutting actions in August. At the end of September, 26% of our workforce was based in Asia, up from the 18% in the same quarter 1 year ago, when our work force was 861 employees.

Now onto the balance sheet. Total cash and marketable securities at the end of September were down -- or were 178 million, down from 198 million at the end of the prior quarter. The decline was primarily due to our inventory build in the June and September quarters and the 4.3 million lease buyout previously mentioned, as well as expenses associated with the workforce reduction. We ended the September quarter with 28.7 million in net receivables, compared with 27.9 million in the prior quarter, and 21.9 million 1 year ago. DSOs, or days sales outstanding, were 51 days, compared with 43 days in the June quarter and 40 days in the September quarter 1 year ago. After the 3.9 million net charge for obsolete and excess inventories, our inventory level at close of the September quarter was 42.6 million. In comparison, inventories at the end of the June quarter were 41 million and 25.1 million in the same period 1 year ago. As noted in today's press release, we have reduced wafer starts across all of our major product lines and expect to reduce our inventory levels this quarter and make further reductions in the March quarter.

Net inventory turns remained flat over the last 2 quarters at 2.7, compared with 3.8 in the second quarter 1 year ago. Accounts payable at the end of September were 22.4 million, compared with 32.3 million at the end of the June quarter, and 14.3 million in the September quarter 1 year ago. Deferred revenue associated with distributor activity at the end of September -- at the end of the September quarter was 7.9 million, compared with 6 million at the end of the June quarter, and 4.4 million in the September quarter 1 year ago. Our capital expenditures, they were 2 million in the September quarter, compared with 3.2 million in the June quarter, and 8.4 million a year ago. Depreciation and amortization expense totalled 6 million, compared with 6.2 million in the June quarter and 6.9 million in the September quarter 1 year ago. I'd now like to turn the call back to Dave French who will provide an update and outlook on our products and markets. Dave?

Thank you, John. Now I'd like to provide a more detailed update and outlook on Cirrus Logic's major product areas. These product areas include audio converters, which represented approximately 40% of our September quarter sales; industrial analog components, which contributed approximately 35% of the quarter's sales; DSP and embedded processors, which represented approximately 15% of September sales; and finally, video integrated circuits, which provided approximately 10% of our September sales. Audio converters, our largest product area, support a wide array of consumer, professional, and automotive entertainment applications. These include DVD players, DVD receivers and recorders, audio/video receivers, car audio amplifier systems, as well as emerging opportunities for digital satellite radios, digital TV's and new set-top box applications, to name a few. As I had discussed earlier in the call, a number of factors largely related to the Chinese DVD player market negatively impacted the demand for D/A converters in the September quarter. The decline in audio converter sales in the September quarter accounted for almost 60% of our sequential fall-off in total sales. While we now believe that much of the excess audio convertor inventory has been consumed, this is difficult to confirm with any certainty. Consequently, our outlook is based on the belief that our audio D/A convertor sales will continue at levels much lower than we experienced during the June quarter. Looking beyond the December quarter, we expect to introduce several new audio convertor products that will augment our existing product families and expand our revenue opportunities in the emerging markets mentioned earlier.

Our industrial analog integrated circuit products accounted for slightly more than a third of our September quarter sales. These products include the integrated circuits used in a diverse array of DC measurement, power metering and energy exploration and monitoring applications. Demand for these products remained relatively strong during the September quarter, and we're encouraged by the outlook for fiscal year 2006, as well, for these new products. To drive growth in this product category, we're working to expand our integrated circuit portfolio beyond the high-precision DC measurement applications we support today to include some higher-volume applications that also provide attractive analog gross margin opportunities. By expanding our product offerings to our existing customer base, this could significantly increase our DC measurement revenue opportunity over the next several years. Integrated circuits used in residential and industrial digital power meters continue to represent another exciting opportunity for us, particularly in countries such as China and India. In the September quarter we introduced a new single-phase power meter IC that enables manufacturers of residential meters to measure consumers usage more accurately and at lower cost. We expect the same dynamics that apply today in China and India will fuel additional sale opportunities in Eastern Europe and in South America for our integrated circuits. Our integrated circuits used in energy exploration and monitoring applications are also receiving very strong demand. These IC's typically have relatively long product life cycles, and even prior to oil prices hitting recent highs over the last month or 2, our customers had already entered into a new multi-year product upgrade and capital expenditure phase. We believe that the current environment further expands a very exciting, on-going, and long-term opportunity for Cirrus Logic.

Now I'd like to switch from our analog -- industrial analog products to our digital signal processor and embedded processor components. This set of products represented about 15% of our September sales. Our DSP integrated circuits are sold into a number of consumer entertainment applications, including audio/video receivers, digital televisions, advanced digital set-top boxes, home theater -- home feature in a box applications, and DVD receiver products. Among our recent DSP initiatives, we introduced advanced software into our duel-core audio DSP families, that will enable consumers to quickly and very easily tune their living room acoustics with their home theater system, optimizing their listening experience. Audio leader, Onkyo, has already introduced 2 new audio/video receivers into the North American market, featuring this technology at mainstream price points. While our general purpose embedded processors currently represent a considerably smaller source of revenue for us, we are excited about the market's reception of our Nine-Series of ARM-based processors. These integrated circuits are capable of supporting a wide range of applications, including point of sales terminals, remote controls, and industrial scanners, to name just a few. The diverse design engagements we are pursuing could create significant revenue growth opportunities in fiscal year '06 and beyond.

Now let's switch to video. Sales of video encoding and decoding integrated circuits totalled $5 million, or approximately 10% of total September revenue. Our integrated circuits go into three major video applications -- DVD receivers, which are sold primarily to Bose; PC peripherals, which are sold to industrial leaders, including ADS and Pinnacle; and finally, DVD recorders. We're encouraged by a number of strategic design wins with top-tier accounts, such as LG Electronics, Samsung, and Sony, that are now entering volume production. Shipment of our circuits to these world-class companies validates the accomplishments that video team has made over the past 2 years. Initial shipments to top-tier brands also support our belief that we offer our customers innovative products with several important differentiators, including, a complete product solution at a cost-effective bill of materials, a software structure that allows customers to add features and expand their retail product offerings, a consumer-friendly user interface, and recording and playback support for multiple disc formation, including plus-R, plus-RW and dash-R, dash-RW standards. We believe that the introduction of products that support both of these popular recording standards will help alleviate consumer confusion about standards and format compatibility, which have been barriers thus far to mass adoption to DVD recorders.

Our outlook for the December quarter, which has typically been a strong quarter; is cautious. We believe that the audio convertor inventory imbalance in the supply chain is in part, but not completely behind us. Consumer spending for the holiday season remains a large unknown. And retailers continue to operate with very short lead times when ordering products from our customers, adding to a level of uncertainty for component suppliers such as Cirrus Logic. And while we are encouraged by the long-term demand trends in customer designing activity for our high-margin industrial analog products, announcements by other analog IC companies suggest that even this segment of the semiconductor industry is experiencing a near-term correction. Despite these challenges, I'm encouraged by the progress we are making to build a much stronger Company. With new products, with expansion into adjacent markets for our existing products, and with continuing efforts to reduce our cost structure, lowering our revenue break-even point, and accelerating our return to a growing level of profitability. Our guidance for the third fiscal quarter, which will end on December 25th, is as follows. Revenue is expected to range between 50 and $55 million, with revenue contribution from the following product categories -- our analog product sales are expected to range between 43 and 46 million, and our video integrated circuit sales are expected to range between 7 and $9 million. Gross margin is expected to range between 51 and 53%. Combined R&D and SG&A expenses are expected to range between 28 and $29 million. And now, we're 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 that 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 keys. One moment now while we poll for your questions. Our first question comes from Mark Grossman with America's Growth Capital.

Great, thanks. Hey, Dave, given that the December quarter is weaker than normal, what's your sense now of what the seasonal decline in the March quarter will likely look at? Do you think it'll be more moderate than previous years, given that December is a lot weaker than expected?

I believe that the industrial product line strength, which are typically not too seasonal, maybe not even seasonal at all, and the new product cycles that were in would indicate if December is, as we've cautiously guided, you know, a flattish quarter, then we think, you know, generally speaking, the seasonality in March should be better than normal on a sequential basis. Maybe it won't even be a down quarter at all.

Great. And on the industrial products, that's a business that was sort of under-invested in for a while and refocused on. Can you talk about which segments of that business you think you're getting the most traction, in terms of new design wins over the last few quarters?

Well in the industrial space, it's been a wide range of applications, and the good thing about our industrial product category and the growth that we've seen over the course of the past several quarters in that space is that it's highly fragmented and offers a good growing breadth of support for our outlook in that space. We've seen some good success in power metering applications, as we've seen a move, more and more, towards digital metering as the way of the future in the industrial space. We've seen seismic oil explorations, capital expenditures expanding, as predicted, pretty consistently over the past year. And then further, accelerate -- or at least demand on us -- has been further accelerated, it appears, as energy prices have continued to go up. We've seen our embedded processor product line, which is a relatively new introduction for us, and it's complimentary to our broad-use industrial analog components, getting a lot of interest in factory floor applications, industrial control applications, point of sale terminals -- a wide array of low to mid-volume applications, which when added up, offers a really strong general base for diverse product portfolio going into our fiscal year 2006.

Okay, great. And last one. You mentioned bringing inventories down in the current quarter and next quarter. Where would you like the inventories to be at, exiting the fiscal year?

Exiting the fiscal year? At the end of March, we'd like to get close to our model of 4 turns.

Okay, great. Thanks a lot.

Thanks a lot, Mark.

Our next question comes from Tore Svanberg with Piper Jaffray.

Yes, good afternoon. Dave, based on your guidance, could you give us some more color on your visibility there, maybe as far as backlog or how much turns you need in order to get there?

Yes. Generally speaking, I would say, Tore, that turns business still has to be at a pretty good level during December to hit our guidance. We think we've been a little bit more cautious than previous times going into this time of year because of a lot of macro issues that we really have a hard time predicting. All that being said, the analog business and the industrial space is showing better visibility, but lead time expectations -- it appears from our customer community in the consumer side of things, and in the video side of things -- is very, very short. So, we still see a pretty good level of turns requirement during the current quarter.

Okay, very well. And you also mentioned some design wins in the DVD recorder market with LG, Samsung and Sony. Could you give us, maybe, a time frame on the ramp of these projects?

Yes, in each of those 3 cases, which have been a pretty serious strategic emphasis in establishing the long-range merits of that product activity. The ramp is already underway, at least in existing design at LG, and there's other designs going into production during the current quarter there. Both Samsung and Sony are ramping to production this quarter, in fact, the first part of this quarter. And that's the premise behind the growth that we factored into the revenue guidance for December.

So would that mean that you could maybe see your video business being up in the March quarter based on this ramp?

Yes, actually, you know, we didn't guide March, obviously, but we did show a pretty good growth in December in our guidance off of a poor performance in September. And at those levels, with the ramp at those pretty significant, in fact, market leadership tier-1 accounts, I think that the possibility seriously exists for growth in the March quarter, even though that's traditionally been a seasonally slow period.

Great, thank you.

Thanks.

Our next question comes from Shawn Slayton with SG Cowen.

Hi, gentlemen, good afternoon. Hey, Dave, can you give us your view of the state of the DVD player industry in China right now? You gave some level of detail, but can you drill down maybe one other level? And can you articulate to us what you believe your audio CODEC share is in the DVD player market? Thanks.

It's really an audio DAC, just to put in perspective, DVD players don't typically have a CODEC.

Okay.

That's a nit.

Sure.

I don't want to declare myself an expert on the Chinese manufacturing community, so I would, I would step a little bit back from your inquiry there. We do have a pretty good breadth of exposure in that our audio D/A converters are probably are in more than 60% of the DVD players manufactured in China on an ongoing basis. And so we do get a pretty good breadth of feedback from the customer community over there. We've seen a number of customers that have bought substantial amounts previously, who no longer are in the business, in the narrowing of the manufacturing channels over there as I mentioned during the script. That may or may not be as we anticipate or have interpreted related to credit requirements tightening up, and therefore difficulty for them to get the capital that they need to continue to manufacture, you know, in a relatively tight margin environment there. So there's fewer suppliers over there servicing, what we think is pretty consistent level of demand. We think that global demand really didn't slow down for DVD players, but we think it got a little too hot in the supply side, and now we're kind of correcting for that. We also saw that lead times really stretched out at beginning part of calendar '04. For our own products and maybe other people's products, I don't know, but for our own products they were. And maybe people bought more components than they should have, in retrospect. And so we've got fewer suppliers servicing a consistent demand, shortening lead times, so, you know, at least on a temporary basis, too much component inventory out there in our customer's shops, and so that's been slowing down. My view -- End market demand for DVD players is still pretty strong. You know, so I think that once this inventory correction is all the way behind us, I think they'll be running, you know, on average, somewhere between 30 and 40 million units a quarter, manufacturing of DVD players worldwide, the vast majority of those in China during this time of the year. And that is a pretty high-volume market. So we think it's, generally speaking, still a good place to be.

Okay, and last question. Can you share with us what, you know, kind of, maybe, your intermediate term, or your longer term model is from an operating structure perspective? You know, gross margin, not margin, thanks.

Yes. We think that at the -- as we constrain our investment levels as a percentage of sales, and even in dollar terms to where we are or even lower over the next several quarters, we still think we're investing in new product areas with a technology foundation where we can grow faster than the industry as a whole. So if the sector is a 5 to 10% gross sector, we think at these levels and the products cycles that we've been contributing in, we can maybe grow 15% to 20% on an average, annually. We think, with that in mind, we can continue to drive gross margins in the low to mid-50% range, 50 to 55%. We think that we can manage SG&A and R&D expenses downward as a percent, and even downward in dollar terms to move towards a 25 to 30% spending model, which would allow us, we think, to drive towards a 25% operating income model.

Okay. And actually, let me follow up with 1 other question. So the DACs on the DVD player side, year-over-year price pressure, what's the scenario there?

Well, we're pleased on the pricing side that our presence in a wide array of differentiated analog components -- we don't see a lot of tactical price pressure. So, we have planned price declines over a multi-year period in order to open up new applications, but we don't have a lot of tactical price pressure in the proprietary product space that we get most of our revenue from.

Okay. Thank you.

Yes, thanks.

Our next question comes from Brian Alger with Pacific Growth Equities.

Yes, hi, this is Jase Reveltza for Brian Alger. A couple of questions if I may on DVDs, recorders. Can you tell us what your -- what portion of your overall video revenue comes from DVD recorders?

We mentioned that there's 3 general types of products between PC peripherals and DVD recorders, but we don't -- we don't actually break it out between product type.

Would it be fair to say it's a significant portion of the overall video revenues?

Yes.

Okay. Another question on DVD recorders. Are you seeing any ASP erosion going into the next quarter, considering it's kind of a high-demand quarter for DVD recorders?

We've established most of our pricing plans previously, as we've worked with tier-1 companies and we're running the mid to high-teens right now. Again, we've really shifted our resources over towards the tier-1 branded accounts, who develop longer-term relationships, and particularly with the average selling prices well over $150, and maybe even up to 300 or $400 on tier-1 brands in many cases, the component prices being established ahead of time are good enough for them to go penetrate that market. The big issue is how quickly can they develop the volume for the demand in that market.

So I take it, then, that you're not seeing price pressure on DVD recorders just yet?

Not really. Not on tier-1 accounts, no.

Okay, thank you much.

Thank you.

Our next question comes from Rena Botichario with Moness Krespian Heart.

Hi, guys.

Hi.

I had a question on your analog business. If we were just looking at the analog segment of the business, do you think it would be feasible for us to model 15% operating margins?

Yes, that's -- of course, we don't actually report our results by product grouping or product line. On the other hand, we've been pretty clear that our video business has been -- our video product area has been taking a pretty significant level of development resource. Generally speaking, if you look at our gross margins on the analog products in the mid to upper 50s, and you look at kind of direct expenses that we can identify, it's pretty fair to say there's a good comparison between our products and their financial contribution, you know, to look like a 15% to 20% operating product kind of area.

Okay. Thank you, very much.

Thank you.

Our next question comes from Quinn Bolton with Needham Company.

Hi, a few questions, if I could. Just first on the audio converter business. I know you talked about the weakness there, primarily coming out of the DVD player market. I was just wondering if you could size that? Is that roughly 25% of the total audio converter business, just some sense of what portion of total audio converters DVDs represent would be helpful.

Yes, we don't actually break it out at that level, but it's -- it's a sizable -- well, it has been a sizable portion, historically. It's probably in the 10% to 15% range, you know, something like that now.

10 to 15, okay. So the next question is, it looks like a lot of the DVD chip vendors like Zoran, ESS are talking about integrating the audio DAC functionality into their chipsets. And to the extent they do that, does that totally remove the need for your DAC? Does that just move to a -- you know, does that move you to a higher-end DAC in the higher-end systems? Could you just talk about, you know, how the competitive landscape changes, maybe, over the next year to the extent DAC functionality is provided on the DVD player SOC?

Yes, and that's a pretty good nuance that's worth picking up. You know, D/A -- like I mentioned, audio D/A converters for DVD player applications probably 10 to 15% of the audio convertor line, which is like 40% of our total revenue. So you're talking about something like 5% of the Company's revenue. It's already gone down by a substantial margin this past quarter, so it's not such a big issue. The integrated solutions from Mediatech and maybe some day from Zoran support 2-channel solutions only, which is some percentage of the market. We also -- we sell 2-channel offerings. We sell 6-channel offerings. For surround sound DVD players, 2-channel is obviously not enough, so the integrated solutions will not address those markets. Likewise, the integrated solutions will not address branded end customers. Tier-1 brands want to pass Dolby certification. We've got some evidence that the integrated solutions have audio quality which is horrible, which for the very low end of the market doesn't matter, but for the high-end brands will be an issue. So we expect that a relatively low percentage of the DVD players sold worldwide in the next 2 or 3 quarters will convert to the integrated solutions, maybe 10, 15% of the total. But within a couple years, we think that most of the DVD players will probably use the integrated solutions. So it's something that over a period of time, we would expect that that will continue on an integration road map so that we'll have a flat-to-down revenue contribution from that product space, which is in the 5% range of our total revenues. And that's been factored in, into our guidance, as well as a belief that there's probably still a little bit more inventory to drain out there in the audio D/A convertor space in that marketplace.

Okay. Sort of, you know, if DVD's, you know, become less of a driver of the audio convertor business, are there other consumer applications, maybe portable audio players or MP3 players or LCD TVs where you see, you know, better opportunities for either new converter content or greater content per devices as those new markets start to emerge? And can you just talk about some of those markets that you're targeting?

Yes, you know, well we already saw the decline on the DVD player side. So, you know, we saw more last quarter than, you know, what we think in total we'll see for the next 5 quarters in that space. So, just to keep it in perspective. Offsetting that, we've been proliferating our product offerings to be able to address digital television applications, to address automotive applications, where we see a tremendous opportunity for us to move, you know, from cars typically that have been 40,000 and $50,000 cars to get down to $25,000 cars and that opens a huge market for us, over a difficult-to-predict period of time. We see set-top boxes, particularly digital set-top boxes wanting to offer superior sound capability to compliment the Hi-Def or almost Hi-Def video streams that they'll be bringing out at, granted higher end-user prices, but they need to offer a complimentary level of improvement in the audio performance. We've seen satellite radio applications emerging as a significant driver for our audio DACs. We've seen some other portable opportunities for our new low-power product line that we're bringing out in the second half of the year, and also our digital amplifier line, our pulse width modular amplifier line. So we see a lot of opportunities to more than offset what we've already seen as the major decline in the DVD player audio chip business.

Okay. And, then, just one question on the video business. You mentioned the Sony and Samsung wins that are starting to ramp into production. Can you just give us a little bit detail as to whether those are plus and minus-R/RW? Are they targeted for the North American market, are they targeted Europe or Asia? Just a little bit more of, sort of, how those products are going to be positioned in the market.

Yes. All 3 of those are focused on duel support, in other words plus and minus.

Okay.

RW and R. As I think you'll see all branded people go after, and I think that's, again, going to slow down Mediatech's encroachment into the space and the whole China market being expanded and all that kind of stuff. Secondly, LG is focused with our products, or our components more in Europe in the near term, and less in North America, partly because the North American market was slow to develop this year. Whereas the other 2, the Samsung, Sony seem to be more, in the immediate term, more focused on the North American market. But all 3 have global expansion of market share objectives that are pretty aggressive.

Okay, great, thank you.

Thank you.

Again, ladies and gentlemen, if you have a comment or a question, please press star, 1 on your telephone keypad. And please be advised, if you are using a speaker phone, you may need to pick up your handset before pressing the star keys. Our next question comes from Burt Kekish with The Langer Partners.

Good afternoon. This is Burt Kekish talking for Mark Langer The Company has been growing for research and acquisitions, however, at this juncture in the competitive marketplace and given the small size, wouldn't it also be -- make more sense to move the poisoned pill and consider merging with one of the majors in the semiconductor industry? Wouldn't that be about the best way of maximizing shareholder value?

That's a pretty speculative question. I think I don't really know how to speculate in that same regard. I think that I'll probably stop short of directly answering it. I think that, generally speaking, consolidation in this industry, if there's a particular initiative or desire in that direction, I don't think our poisoned pill is intended, nor would it be taken as a preventive measure against that. It's only one to assure that the Board has some level of control, or in it towards the maximization or optimization of shareholder value.

Very good. Thank you.

We have a follow-up question from Shawn Slayton.

Hey, Dave. Can you speak a little bit about, maybe, the higher-end multi-channel audio? It appears it's really weak this holiday season. Can you speak a little bit to that and maybe your view of the market over the next few quarters? Thanks.

Yes. Actually, we don't see it weak right now at all. I mean, the first half of calendar '04, the year-over-year numbers and the multi-channel, at least in North America, have been doing 35 to 50% year-over-year. And, of course, that's really not sustainable, and it's coming off a relatively low base, but even the second half we've seen some pretty good, if not very good response in that space for our components. All the way from the $300 price point all the way up to the several thousand dollar price points, where we have even stronger market share. Now, our numbers, again, are highly affected by Bose, who is our largest direct account, I think you know. And their product offerings that they brought out this year appear to be very strong, and are seeing very, very good acceptance. So, that may color my judgment a little bit, but we see that marketplace as being very good. And, in fact, offsetting some of the weakness on the low-end video-centric DVD video player-style applications.

Okay, thanks.

Yes. Thanks.

Gentlemen, we have no further questions at this time. Do you have any closing comments?

Yes, Operator, thank you. And thank you, all, for your attendance and for your questions here today and for your continuing interest in Cirrus Logic. We look forward to talking with you when we report our third quarter financial results on January 19th. And in the meantime, we'll be at a number of upcoming conferences, including Silicon Hills Summit here in Austin, Texas on October 28th; the AA Classic Financial Conference up in Monterey, California on November 8th and 9th; the Deutsche Bank 2004 Global Semiconductor and Semicapital Equipment Conference on November 10th in Las Vegas, Nevada; and the Lehman Brothers T4 Technology and Telecom Trends For Tomorrow Conference in San Francisco, California on December 8th through 10th. We look forward to seeing you at one of these investor events, and thank you for your attendance here today.

Ladies and gentlemen, this concludes today's teleconference. Thank you, all, for your participation. You may disconnect your lines at this time.