Cirrus Logic Inc (CRUS) 2005 Q3 法說會逐字稿

Welcome to the Cirrus Logic third quarter fiscal year 2005 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will open the call for your questions. Instructions for queuing 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 over to your host, Mr. John Kurtzweil, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you very much, Megan. Good afternoon. And thank you for joining me today. On our call is David French, Cirrus Logic's 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 the fourth quarter of fiscal year 2005 sales, gross margin levels and combined R&D and SG&A expenses, as well as expectations, estimates, and assumptions regarding our future sales 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, our latest annual report on Form 10-K for the year ended March 27th, 2004, as well as other filings made with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from our current expectations. Now, I'll turn the call over to Dave French. Dave?

Thank you, John. And thanks to all of you who are joining us here today. For those of who you have not yet had a chance to read our press release, I'll quickly recap our results.

And I'd like to mention before proceeding that all financial numbers in our press release today are, unless otherwise noted, in accordance with generally accepted accounting principles. For the third quarter of fiscal year 2005, which ended on December 25th, net sales were $44.0 million. Gross margin was 39.1 percent. Combined R&D and SG&A expenses totaled $25.1 million. And net income was $2.5 million. Net income per share was $0.03.

To assist those investors who track our ongoing business activities on a non-GAAP basis, I'd like to point out that our net income of $0.03 per share in the December quarter, or $2.5 million, included non-GAAP adjustments totaling $6.5 million. This net $6.5 million adjustment includes, among other factors which John will discuss later on the call, a $15.2 million income tax benefit, a $2.3 million benefit from re-claimed goods and services tax for the years -- 1997 to 2000, a $600,000 legal expense accrual reduction associated with the prior patent transaction, all partially offset by $6.5 million of expenses, primarily for amortization of acquired intangibles, restructuring related items and abandonment of software as well as a $5 million net inventory charge.

Taking these items into account, as generally done by many of the analysts covering Cirrus Logic and contributing to First Call, our results calculated on a non-GAAP basis would have produced a $0.05 per share net loss based on 84.8 million shares outstanding, which is in line with the current First Call mean estimate. We provided a detailed GAAP to non-GAAP reconciliation on our website, which is www.cirrus.com. We use non-GAAP financial numbers to assist us in the management of the Company because we believe that this information provides, oftentimes, a more consistent and complete understanding of the underlying results and trends in our business. Let me point out that our own reconciliation differs from the First Call approach I just discussed in that our reconciliation includes the $5 million net inventory charge, thus resulting in an $0.11 cent per share loss on a non-GAAP basis.

As we mentioned in our December 16th press release, results in this quarter were negatively impacted by the continued slow demand for consumer integrated circuits, including audio converters used in DVD players. Sales of our ICs used in DVD recording applications were also below our expectations which we had going into the just-completed quarter. However, we are somewhat encouraged by the prospects with new DVD recording programs at top-tier branded accounts such as LG Electronics, Samsung, and Sony, and by the sell through activity which several of our other customers experienced during the September -- or during the December quarter.

In mid-December, we also announced that we took actions to better align our resources to address our anticipated market opportunities and to reduce operating expenses. During the latter part of the quarter, we implemented a new product line organizational structure.

We also initiated a work force reduction and began some facility consolidation activities, which are expected to provide quarterly savings of 2 to $3 million beginning in the March quarter. Furthermore, as noted in our release, our results exclude $2.2 million of December quarter shipments to one customer for which we have been as yet, unable to confirm what amounts should properly be recognized.

Under the new product line structure, we are now operating with 4 product lines. Terms of sales, mixed signal audio products is our largest product line. Under the direction of Jason Rhode, this product line is focused on home audio, home video applications, professional audio applications, automotive, portable and console and personal computer audio entertainment applications. Our second largest product line in terms of sales is our embedded products line.

Craig Ensley is managing this product line, which addresses multi-channel audio, networked audio, audio consulting, general purpose ARM microcontroller and communications applications. Our industrial product lines provide some very exciting market opportunities and generates the highest gross margin of our 4 product lines. Headed by John Paulis (ph), this product area is targeting industrial process control, analytical instruments, power meter, seismic and consumer utility applications.

Finally, our fourth product line is our video products group. Led by Kenyon Mei, this product line supports our customers' DVD recording products.

Later in this call, I'll address each of these product lines in more detail and discuss some of the activities at the recent consumer electronics show in Las Vegas. But now, John will discuss our financial results during -- or for our December quarter of fiscal year 2005. John?

Thank you, Dave. Our net sales in the December quarter were $44 million, compared with $51.3 million in the September quarter.

These results do not include 2.2 million of product shipped during the December quarter, for which we have been unable to determine the -- what amount should be properly recognized as revenue in the December quarter. Consequently, the Company has not included this in the revenue for the quarter and has deferred recognizing the revenue until such time as this determination can be made.

Using our new structure, which we are in the process of implementing, our quarter-over-quarter sales were as follows. Mixed signal audio products contributed 22 million in the December quarter, compared with 24 million in the September quarter. Embedded products was 11 million in the December quarter, compared with 11.8 million in the September quarter. Industrial products provided 7.9 million in sales in the December quarter, compared with 11.2 million in the September quarter.

And video products, which under the new structure targets recording applications and does not include decoder chip sales for DVD receiver applications, contributed 3.1 million in the December quarter, compared with 4.3 million in the September quarter. In prior quarters, decoder IC sales for DVD receiver applications were included in the video product line. In the September quarter, this contributed $693,000 to sales. In the December quarter, decoder ICs for DVD receivers were 1 million, and are included in our embedded products line.

Our international sales were 65 percent in the December quarter, compared with 63 percent in the September quarter. Sales to distributors represented approximately 58 percent of our sales in the December quarter, and we had no single direct customer representing more than 10 percent of our sales. Gross margin for the December quarter was 39.1 percent, compared with 44.7 percent in the September quarter.

The December quarter gross margin was adversely impacted by a net charge of 5 million for excess and obsolete inventory. I will give you a further breakdown when I discuss inventories in a few minutes. Gross margin was also impacted by the deferred revenue previously mentioned. Without the net inventory charge and the deferral of the revenue, our gross margin would have been 52.8 percent.

Combined R&D and SG&A expenses were 25.1 million in the December quarter, compared with 31 million in the September quarter. Our December quarter SG&A expenses benefited from a $2.3 million favorable resolution of a goods and services tax audit for the years 1997 to 2000. This SG&A expense reduction was partially offset by 242,000 in legal expenses related to a discontinued product line.

During the December quarter, we recorded a net charge for restructuring and other charges of 3.1 million. In comparison during the September quarter, we incurred 4.1 million for restructuring and other charges. During the December quarter, we incurred a charge for amortization of acquired intangibles of 3.4 million, which is the same as in the September quarter.

Also during the December quarter, we eliminated an accrual for legal expenses of 593,000, which were associated with a prior patent transaction and deemed no longer necessary. Interest and other income was 1.2 million, with interest income contributing 946,000 of that amount in the December quarter. We expect to be able to maintain this level of interest income in the March quarter. In comparison, interest and other income was 599,000 in the September quarter. Lastly, we realized an income tax benefit of 15.2 million resulting from the December 2004 expiration of the statute of limitations for the years in which certain potential U.S. federal tax liabilities existed and for which we had previously accrued. The December quarter income tax benefit was partially offset by $100,000 of income tax expense consisting primarily of foreign withholding and foreign income taxes, the same level as reported in the September quarter.

Net income for the December quarter was 2.5 million, compared with a net loss of 15.1 million in the September quarter. Net income per share for the December quarter was $0.03, based on 86.2 million diluted weighted average shares, compared with a loss of $0.18 reported in the September quarter. Our employee headcount at the end of December was 659, compared with 724 at the close of September. We expect to end the March quarter with approximately 600 employees through previously announced work force reduction and attrition.

Now, on to the balance sheet. Total cash and marketable securities at the end of December increased to 178.4 million from 177.7 million at the end of September.

We ended the December quarter with 21 million in net receivables, compared with 28.7 million at the -- in the December -- or, excuse me, in the September quarter. DSOs, or date sales outstanding, were 44 days, compared with 51 days in the September quarter. After a $7 million charge for obsolete and excess inventory, with 5.3 million associated with our video product line, offset by inventory sold that were previously reserved for 2 million, our inventory at the close of the December quarter was 32.3 million. In comparison, inventories at the end of September quarter were 42.6 million. We believe inventories in the distribution channel also decreased in the December quarter by 7.5 million.

Net inventory turns were 3.3 in December, compared with 2.7 in the September quarter. Accounts payable at the end of December were 14.9 million, compared with 22.4 million at the end of September. Deferred revenue associated with distributor activity at the end of the -- at the end of December remained flat with the prior quarter. Our capital expenditures were 1.2 million in the December quarter, compared with 2 million in the September quarter.

Depreciation amortization expense totaled 6.2 million, compared to a 6 million in the September quarter. Included in these expenses was 3.4 million for amortization of acquired intangibles for both periods. I'd now like to turn the call back to Dave French, who will provide an update and outlook on our products and market. Dave?

Thank you, John. Now, I'd like to provide an update and outlook on Cirrus Logic's major product lines. I'll also share some of the highlights from the recent consumer electronics show in Las Vegas, where we hosted more than 100 customer meetings. I'll begin with the mixed signal audio products, which contributed half of our December quarter sales.

Semiconductor components in this product line are used in a wide array of consumer, professional, and automotive entertainment applications. As we indicated in our December 16th release, demand for consumer ICs were negatively impacted by continuing slow demand across many of the markets into which we sell, including audio converters used in DVD players. Sales of our mixed signal audio products declined approximately $2 million sequentially during the December quarter from the previous quarter. The drop-off in sales was due, in part, to lower demand for our 2-channel digital-to-analog converters, or DACs, sold to Chinese DVD player manufacturers with whom we continue to have a large market share.

Based on our current outlook, we believe that inventories of DACs for Chinese DVD player manufacturers remain high and could take another 3 or even 6 months to be worked off. In addition, we believe our 2-channel DAC sales for inexpensive DVD players will face increasing competition over time from companies offering system chip solutions that integrate the D-to-A converter function. However, I'm encouraged that despite the current DVD player market conditions in China, our overall DAC sales actually increased sequentially during the December quarter, as we expanded sales of these products to other markets such as digital set-top boxes and satellite radios.

Looking ahead, keys to our success in fiscal year 2006 for the mixed signal audio product line involve the following -- continuing to expand our sales in established markets, such as home theater systems, professional audio equipment, and audio entertainment applications in automotive solutions. Secondly, continuing to expand our sales in emerging markets, such as audio converters for digital televisions, satellite radios, and DVD recording applications, 3 exciting growth opportunities for which we have established a strong, early position with a wide array of analog components.

Third, expanding our product portfolio with sales of Class-D amplifier integrated circuits, focusing on digital television and automotive applications in particular. And fourth, successfully launching a new low-power integrated circuit family targeting portable applications, allowing us to re-enter one of the higher growth audio subsegments.

Now I would like to switch from our mixed signal product line to our embedded product line. This set of products includes our multi-channel audio DSPs, or surround sound DSPs, general purpose ARM based processors, networked audio components and communications products.

This product line represented about a quarter of our sales during the December quarter. At CES earlier this month, we received several awards including an innovations 2005 design and engineering award for our Intelligent Room Calibration audio software. This advanced software, targeted at mainstream audio/video receivers, enables consumers to quickly and very easily replicate the acoustics of state-of-the-art movie theaters in their own living rooms. Onkyo and Harmon Kardon, 2 leading audio manufacturers, have already introduced several new surround-sound receivers in North America which feature this technology.

Our audio/digital signal processors or DSPs are also seeing increased customer interest from a variety of applications beyond our traditional audio/video receiver market, including automotive audio systems, digital televisions, networked audio and set-top box solutions. Samsung, for example, chose Cirrus Logic's DSPs to power their DirecTV H10 personal video recorder because of our ability to deliver superior audio processing along with high definition broadcasting. To maintain our audio leadership, we've also incorporated Microsoft's Windows Media Audio 9, or WMA 9 professional decoder onto our flagship audio DSP in anticipation of increased high-definition audio and video content for home theater systems.

Our ARM-based controllers are also experiencing increased design activity from a wide range of applications, including a variety of entertainment devices, industrial applications, POS terminals, and Voice-over-IP equipment. Our 9 Series of ARM controllers delivers a high level of integration, low system building material costs, and a customer-friendly interface, and strong system software support for the most popular operating systems.

Couple of examples of our recent success in this area include -- in the consumer market, an embedded controller which was selected for an affordable instant message or IM product called Zipit Wireless Messenger. This recently-introduced hand-held targets young consumers and takes advantage of the popularity of Wi-Fi and instant messaging. Another ARM embedded products powers the control for media controller. That is key to an automated home system that delivers digital music entertainment and highly sophisticated automation of household tasks, such as lighting, temperature control, and security monitoring.

Our networked audio products based on a proprietary CobraNet technology were also recognized at CES this month, with an innovations showcase award.

With the introduction of 3 digital audio network processors from our CobraNet Silicon series of products, we're making it possible for commercial and professional audio manufacturers to significantly lower the cost of deploying networked audio systems. With a single chip approach, manufacturers now have much simpler and cost-effective solutions. For market applications such as ceiling speakers, mixers, power amps, signal processors, intercom systems, power amplifiers, and even paging systems. By targeting this wide range of applications with new integrated circuit components, we expect to expand our networked audio revenue stream from one based on a licensing model to one which includes the sale of cost-effective integrated circuit.

Now, I'd like to turn to our industrial products line, which generates our highest gross margin and contributed approximately 18 percent of our December quarter sales. These products include integrated circuits used in a diverse array of DC measurement, power metering and energy exploration and monitoring applications. Our December sales in this product line were actually down about $3.3 million sequentially, due in large part, to the revenue deferral mentioned earlier. Despite the third quarter results, we expect this product line to be a significant growth driver for us during calendar year '05 and '06. Finally, let's switch to our video products line.

Under our new product line structure, sales of video ICs for recording applications accounted for roughly 7 percent of December sales. In the December quarter, we continued to focus our strategy on capturing additional design wins with the top-tier branded accounts including LG Electronics, Samsung, and Sony. The integrated circuit sales ramp for new video recording products with these customers was not sufficient in the December quarter to offset weakness in order rates from other video customers and distributors. On the positive side, we believe these other video customers and distributors made substantial progress, and have now worked through most of their excess inventories.

High system costs and complexity coupled with confusion over standards have constrained retail sales for DVD recording products throughout calendar year 2004. We believe we made significant progress in addressing these issues.

And at CES earlier this month, we introduced a DVD recorder reference design which includes audio and video ICs designed to break the $100 retail price barrier during calendar year 2005 and make DVD recorders more compatible and much easier to use. As we look forward for the March quarter, we have limited visibility, and we remain cautious with regard to channel and customer inventories as well as end consumer demand. While we believe that we will see a continued reduction in component inventories in many of the markets we serve, our guidance, our continuing expense management efforts, and our operating plan reflect our caution.

Our guidance for the traditionally seasonably weak fourth fiscal quarter, or March quarter, which ends on March 26th, which does not -- I remind you -- include an estimate for the recognition of the deferred revenue from the third fiscal quarter mentioned earlier, is as follows. Net sales are expected to be between 40 and $42 million. Gross margin is expected to be between 51 and 53 percent.

Combined R&D and SG&A expenses are expected to be between 25 and $26 million. Completion of the restructuring activity announced on December 16th, 2004, is expected to result in a charge between 1 and $2 million. And net inventory is expected to be reduced by at least 3 to $5 million through our ongoing activities. Despite some disappointments during the third quarter and a number of unknowns going into the March quarter, I remain confident that our mixed signal and our analog technology leadership and our focus on selective consumer industrial and automotive markets provide solid opportunities as industry-wide inventories are further reduced.

As I discussed on today's call, I'm encouraged by the excitement that we experienced earlier in January at the consumer electronics show and our progress in penetrating the top-tier manufacturers, as well as the level of design in activity across a number of our key product lines, as well as, and maybe mostly, by our continuing efforts to substantially reduce our cost structure and to drive revenue growth and return to ongoing profitability. We're now ready for your questions. Operator?

Thank you, sir. 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 key pad. 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 keys. Once again, if you do have a question, you may press star, 1 on your telephone key pad. Our first question today will be coming from Rini Bhattacharya of Monness, Crespi, Hardt.

Hi, guys.

Hi.

Okay. I have 1 good question for you. So, it seemed that throughout the course of last year, there were several points in the industry where we saw inventory build and it happened multiple times. Right now, what are you seeing as far as your current revenue? Is the product that you're shipping at a consumption rate? Or are you still seeing inventory falling through? Where are we in that right now?

That's a good question. It's our assessment, looking backward to the middle of 2004, it seems apparent that we, as well as many other people, were shipping and getting revenue at rates that probably exceeded end demand.

In other words, there was an inventory-building process going on in many areas. During the second half of calendar '04, it's been our view, difficult to substantiate scientifically but it's been our view that our ongoing revenues are actually running at a level lower than end market demand.

In other words, our customers and various suppliers to the end customers are in a process of reducing inventories and becoming more accustomed to shorter and shorter lead times. We think that that's continuing. It's our view -- it's my view, I'd say, that that's still true in March. That the end demand is probably somewhat higher than our current revenue might read -- might suggest.

All right. And have you guys taken any strategic position in regards to the video business? Have you changed in your strategic decision, sorry?

Well, we get a lot of questions on that. Obviously, we're more than a bit disappointed about our video business performance during calendar year 2004.

I don't think we were alone in that. However, we were disappointed and we've taken actions to further reduce our spending, as we've pointed out. Much of that has been associated with the video activity. During the March quarter, while we have some really great strategic progress, we're still not at the level of financial execution in that product area that I find acceptable. And we have to drive substantial improvement over the near term.

So we remain committed to doing that. There are several activities ongoing that we think can have a significantly positive effect. We're working closely with some key branded accounts. And we remain committed to further improve the financial performance of that activity.

Okay. Thank you very much, guys.

Thank you.

As a reminder, ladies and gentlemen, if you would like to ask a question, you may press star, 1 on your telephone key pad. Our next question will be coming from Quinn Bolton of Needham & Company.

Hi, Dave. Hi, John. I guess the, sort of, $64,000 question, sort of a follow on to the previous question about inventories. If you think you're shipping below consumption today, you know, how much below? Is that -- is it a 2, 3 million kind of bogey? Is it a 5 million? You know, where do you -- how much above your current ship rate do you think end market demand pull is? And then I got a couple of follow-ons.

Yeah. That's a good question. And as I mentioned earlier, we don't really have a good system to scientifically track that particularly as the evolution of the supply chain for the end customers in China, we're cruising along at a pretty substantial clip.

But, you know, our revenue peaked during '04 during the June quarter at $59 million. And our revenue was is as we just announced. There is not a lot of signs that end demand has substantially changed through that time period. Now, what that means in terms of how much below, and consumption rates we're actually shipping at, I think that's open to a lot of interpretation. I'd probably stop short of quantifiably opining on that.

Okay. I figured I'd give it a shot. Next question, just, I think you talked on the mixed signal audio business, that the group as a whole was down about 2 million, and a lot of the weakness came from the DVD 2-channel DAC business. But think I think you went on to say that your overall DAC revenues were up quarter-to-quarter. Just wanted to clarify that. And if that's accurate, then, what other part of the business was actually down to account for the overall decline of $2 million? Is it professional audio? Was it some other part of the business?

Well, seasonally, yes, we don't break all that out because there's a lot of moving parts, it's an incredibly wide array of customers. There's no one custom that buys a substantial amount of product. But we did see seasonally that DVD recorders ran a little bit behind, which is a consumer of the analog components.

We saw automotive slow down, which is seasonally normal during that time period and not a surprise at all. The other DAC applications that were driving growth including DTVs and including satellite radio and, I think, set top boxes also looked pretty good, but that was planned for. So, you know, that's -- that was already baked into the numbers. Now, seasonally, it is also normal after November to see a falloff in consumption for major brands of mid- to high-end home theater equipment, particularly the Japanese and the mid- to high-end Korean brands.

Most of that product they like to ship into the retail channels in North America and Europe by boat because of the dollar value per pound. And it's a pretty long channel to get that on shelves. And so, we usually see a falloff in the second half of the quarter for that kind of product as well.

Okay. 2 quick -- 2 more quick ones. Dave, you mentioned, sort of, the Class D amps as a potential revenue driver in calendar '05. Was just wondering if you might be able to, sort of, put some order of magnitude or timing of that ramp. I imagine it's fairly small today. But what kind of expectations might we think about for that business?

Yes, it's fairly small today. It will remain fairly small in 2005. Might become noticeable, but won't be a big driver.

Our approach to that market might be conceived to be a little bit different than some of the other established people. We put together a foundry-based strategy that allows us not only to service the modulator or digital components within the system, but also the driver function as well, the power function itself.

And by putting together a complete solution, we'll be able to not just address the 20 percent of the market that's in the modulator, but, you know, a much more -- higher percentage of the overall opportunity. We also will follow a more traditional analog mindset in building our business in that space, in that, we'll not use price to build our market position. We'll identify applications that take advantage and can offer value, or offer money for the value that that technology brings to the market.

Digital TVs, in order to put high performance audio systems with a reasonable amount of power in them cannot get the heat out of the box using traditional systems, even at 40 watts a channel. We think there's a lot of value in a good, high-performance Class D solution. Likewise, automotive systems. There's a lot of costs, ancillary costs in the car associated with the weight and energy dissipation associated with traditional analog solutions. And it saves them money if they put together an audio system based on Class D technology at equivalent price points. So, unlike some other people, we're not going to just bomb the price to try to open the market.

We think we can offer value where it really matters, because we've got a lot broader focus on such a wide array of audio applications. But the net result is that it's going to grow more like an analog market than like an explosive system chip market. The good side of that is we should be able to generate pretty good margins out of it. But -- so, it'll be a small business in '05 and start to really be noticeable, we think, in calendar '06.

Okay. Great. And last quick one, I promise. Looks like the inventory correction hopefully wraps up, at least mostly wraps up, by the end of the March quarter, plus I think you tend to see better seasonality normally in the June quarter. What is your thoughts that March kind of the trough quarter, and we get an inflection point and start to see sequential growth resuming in the June quarter? Is that a pretty safe bet? Not trying to ask you to quantify it, but just in terms of the inflection point.

Yes, I'm not giving June guidance here. But there is a debate. Some people think that for consumer products, it could be over by the end of March or some other segments maybe it keeps going.

Some people think that there's still a little bit of hangover going into the June quarter. The big issue is that if you look at our business over the past several years, if you look at March compared to June, inventory notwithstanding, the seasonal trends in the fourth quarter to our first fiscal quarter period are traditionally quite strong.

Now, we've got lead times at a level right now which I don't think can go any lower. And usually when lead times bottom out, and sometimes they start stepping up, that usually happens this time of year. If you recall 12 months ago, it was an entirely different universe. There is a reasonable likelihood that's going to happen, but that's very difficult to predict or call. And we're certainly not making a June call right now.

I understand. Okay. Thank you.

Thank you.

Our next question is coming from Tore Svanberg of Piper Jaffray.

Yes, good afternoon. Dave, when we look at your revenue guidance for the March quarter, could you give us some visibility metrics and maybe also where we stand today with backlog?

Yes, qualitatively, Tore, coming in the quarter, our backlog coverage was quite low. Lower than usual. Hence, our guidance, which showed normal seasonality decline. We don't actually specify that.

I think that if you look too closely, it can be kind of misleading. So, I mean, lead times and order rates in January have been running better than I expected. Most of the business is short lead time, which means it represents turn business. So, we're filling at a rate which is better than one might normally expect off of a backlog coverage level which was worse than what one would normally hope for. All that means is that if things continue after the lunar new year like they're going right now, we're probably on the right curve relative to history.

Okay. Very well. If we look at the portable audio market, are there any key platforms or design wins that you're trying to get in 2005, you know, just so we can monitor those?

Well, we're going after a number of the most exciting designs and, you know, including all the ones that you all get really excited about. We're not going to come out and claim those wins until we've got them.

Great. And then also a question on the industrial business. I think it was down sequentially in the fourth quarter. Should I really view this going forward as a new business for you and less cyclical? Or do you think it will match more seasonal trends?

Yes, actually, I think you mean it was down sequentially in the third quarter, the quarter that we just completed, fourth calendar quarter, our third fiscal quarter --

Yes.

-- which is true. We had that one customer issue where we actually deferred revenue on shipments that we made and we're just trying to sort that out. And normally there's not a lot of seasonality.

I mean, it's a traditional analog industrial instrumentation kind of market. Not a big discernible trend on seasonality normally. I think there's been some issues through calendar 2004 in the seismic area, where demand was increasing rapidly and there was a catch up or matching of supply to demand process going on. Maybe we're there now. But I think that calendar '05 should see some growth in that space on a relatively steady basis.

Great. And just finally back to Class D just so I get a better feel of your strategy there. Could you just give me a list of some of the closest competitors you'll have in that market?

Yes, I think Apogee with ST has set up a pretty good position out there with a good, low cost, reasonable solution. Texas Instruments, certainly, is doing a very good job. There are other suppliers of pieces of the solution, but that don't have a comprehensive solution. Philips, particularly, has good back-end components on the driver side.

Great. Thank you, very much.

Thank you.

Our next question will be coming from Adam Benjamin of Jefferies & Co.

Thanks, guys. Just a couple of questions here. One, with respect to the DVD market, can you talk a little bit about whether the weakness that you're experiencing on the DAC side, is that specific to DACs, obviously, exacerbated a little bit by the integration? But is it -- is it largely a DAC issue or is it a combination of the continued DVD inventory overhang?

I -- good question. I think it's mostly an inventory issue, not an integration issue as of today. And in fact, our best estimate is still that we've got an inventory situation in the March quarter, maybe still in June quarter, but certainly in the March quarter we believe that it is. And in spite of that, we think that DVD DAC consumption is bottoming out this quarter and probably has a greater likelihood to go up from here than down even as MEDIA-TECH and other players bring out their 2-channel integrated solutions.

So, I think that by the end of calendar '05, of course, I believe, that the inventory overhang will be gone. And the major effect there will be further integration of 2-channel DACS. Half the market, however, in DVD players either deploy 6-channel solutions or deploys to a consumer population that has some level of concern about the audio quality of the output of their DVD player. And in those areas, our non-integrated DAC solutions are likely to remain the predominant solution. So that's still half of a market that could be around 120 million units this coming year.

So, Dave, if you could quantify, would you say it's 75, 25, meaning 75 an inventory issue and 25 integration? Or is it more like 90, 10?

I don't want to sound too scientific. So your estimates might -- might confuse that. But I would say it's more like 90, 10 than 75, 25 right now.

Okay. Great. And then, on the profitability target. Can you guys look out, you know, a couple quarters and give us some view as to when you think you could reach break even?

Well, yes, that's always a good question. You know, we're not guiding June right now. So without that, it's kind of difficult. We can say that we remain committed on both the spending line and on the gross side.

We think the inventory situation is behind us in either March or June on the analog side. We're committed to repairing the financial performance in the video product line. And our seasonal history between March, June, and September is -- has been quite favorable in almost every year. So, you can take that, but I -- we're going to stop short of giving any financial guidance for June this time.

Okay. And then, lastly, just to follow up on the revenue breakout with respect to the industrial analog business. I guess the 2 million -- had to do with that group, but it appears that there's a significant decline in the current quarter in that business if I've got my estimates correct for the prior quarter. Is that correct?

In total industrial, yes, we actually -- John mentioned those numbers. I think it was 11.2 million for industrial in Q2, or September, and roughly $8 million, or just under $8 million in Q3. And in that regard, that's just over $3 million, and 2.2 of it was associated with that 1 customer issue we mentioned.

Does that have to do with any reclassification in terms of your 4 units that you guys have been reporting, which is different from your prior quarterly reports?

No.

Okay. That's it. Thanks.

Thanks.

Our next question will be coming from Dan Morris of CIBC World Markets.

Hi, guys.

Hi.

I have a quick question regarding the portable audio market and the new IC family you're developing. What's the timing on this MP3 chip? And how do you plan to attack SigmaTel?

We're not planning to pursue, right now, integrated single chip solutions like SigmaTel. We're going to stay close to our area of expertise in offering the highest performance analog and mixed signal catalog components. And we think in certain categories of portable equipment that that will be a preferred implementation and we'll continue down that path.

Okay. Now, you also referred to some of the constraints that DVD record industry faced in '04. What do you estimate the total unit shipments were for '04 for the whole market?

I think 8 to 9 million units.

Okay. And going forward, in '05, '06, do you have any expectations there?

Our current estimates are in the $14 million area -- 14 million unit area.

Okay. You also mentioned your DVD record wins at Sony, Samsung, and LG, can you clarify how many SKUs you have at each account?

I don't have the details of that. Between those 3 accounts, it is over 10 SKUs.

Okay. And are there other merchant suppliers at these accounts?

Yes, there are. Certainly, LSI Logic through the CQ product line is servicing, through designs that were established a long time ago, many applications in branded and unbranded accounts.

Did you say LSI Logic?

Yes.

Okay. Is there anyone else?

They're the biggest competitor in that class of accounts.

Okay. Last quick question. Is that Sony design win, is it an ODM win or is it a direct Sony design?

There's more than 1, from both ODM and internal design.

Okay. Great. Thank you, very much.

Thank you.

Thank you. Our next question is coming from Brian Alger of Pacific Growth Equities.

Hi. This is Jaisri Vatza for Brian Alger. Question on DVD record. You know, you're looking at the market in '05 as about 14 million. Could you speak to the Blu-ray and what you see as a potential impact in the current sales of DVD recorders in '05?

I don't think it's going to be a big volume driver in '05 because of the cost and because of the limited availability of content. I do believe that the talk of Blu-ray will actually be a negative influencer on total consumption of DVD recorders this year, as it will further confuse consumers.

Okay. And then on the DVD record itself. It seems to be that there are -- there's more and more interest on the combination products, those with hard disk drives and DVD record. Is that a kind of trend that you're seeing that you see yourself participating long term, or is it more the plain-vanilla-type DVD recorders?

I think the most popular branded solutions right now are combinations DVD writers and hard drives, like you mentioned. And maybe even more so, combination DVD writers and VHS solutions in a single box. And I would say the latter, probably, is shipping more units. The former tends to be priced 50 to $100 higher.

But I think that that will continue to be the case. I think that in order to step down to the mainstream where there's price elasticity, in today's market, it's a little bit different than it's historically been. $200 is not as magic as it once was.

However, it's my belief that $99 is. And as we get closer to Thanksgiving day this year, I believe there's a great likelihood that you'll see a number of boxes that get down into the 2-digit numbers for the stand alone, plain vanilla. And I think that's when you'll start to see a shift to a more normal distribution of units versus price.

Did I hear you say 2-digits?

Yes. Under $100 retail.

Okay. Final question -- you may have addressed this already -- is the Chinese DVD player market. What is your sense on where it's going? There's been a lot of excess inventories and stuff. How do you see it shaking out in the first quarter?

I think that they're going to continue to drain inventories during the March quarter. And I think they'll be close to the bottom by the end of March. But I think there's reasonable likelihood there'll still be some constraint remaining in terms of there still might be too many manufacturers at the end of March and that may have to narrow a little bit further, which is equivalent to having too much inventory in the channel overall. At the end of June, I think it should be --

Okay. Got it. Thanks.

Yes, thank you.

As a reminder to participants, if you do have a question, you can press star, 1 on your telephone key pad. Our next question will be coming from Alan Adler of AA Enterprises.

Dave, how are you?

Good, Al.

Can we just back up just a little bit, conceptually? If the analog business in the previous quarters was in the 43 to 45 range, and just saying you inch that up to the 50 million range and 50 percent gross margin, and your other expenses you say you're going to get down from the 31 level to 25, 26, basically that's break even.

So, what is the other business doing for you? You've got 3 or 4 product lines. Someone goes up and all, and now that you've broken out, but maybe you could comment on what the R&D and selling expense is against those specific product lines. And is that business ever worth it?

I got, Alan, a little bit lost on the question. Was the -- ?

If you take the audio business and you break it out --

Right.

-- you're close to break even. Right?

Okay.

I mean, you've got 43, 46 million last quarter in that business. I don't know exactly what the number is this quarter. If you can grow that a little bit, you're at 50 million a quarter, times 4 is 200, and a 50 percent -- round numbers, 50, 51 percent -- gross margin is 100 million, and 25 million a quarter operating expenses between R&D and SG&A. So you're at break even there and then you can grow. What is the rest of the businesses -- the DVD businesses, the China business, doing for you, going forward?

Well, the video business -- I think I understand the question. The video business, as I said earlier, is a negative to the P&L right now. It's an investment business. It's underperformed. We're highly disappointed over 2004.

We're committed to substantially improving the financial contribution of that product arena in the very near future. Because at current levels, I think, if I understand what you're observing, is that it's likely that our investment in video is greater than our return on an ongoing basis. And, you know, and while we got a lot of shared expenses and we don't break all of that out because of that, but we have to improve the performance, financially, of our video product area. And we're committed to doing so.

Sir, this does conclude our call for today. Do you have any closing remarks?

Yes. Once again, I'd like to say thank you to all of those that have joined us here today.

I'd point out that we're -- we will be attending the Thomas Weisel Partners Technology Conference on February 8th in San Francisco, and we look forward to talking to you there. And we will be announcing our fourth quarter fiscal year 2005 financial results on April 27th. And we look forward to joining you then as well. And again, I appreciate your time and interest in Cirrus Logic. Thank you.

Thank you, ladies and gentlemen for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.