Cirrus Logic Inc (CRUS) 2005 Q4 法說會逐字稿

Welcome to the Cirrus Logic fourth quarter 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 for your questions. Instructions for queueing up will be provided at that time. As a remind, this conference call is being recorded for replay purposes. I would now like to turn the conference over to Mr. John Kurtzweil, Senior Vice President and Chief Executive Officer. Mr. Kurtzweil, you may begin.

Thank you and good afternoon. Joining me on today's call is David French, Cirrus's Logic's President and Chief Executive Officer.

Before we begin I would like to remind you that during the course of this conference call, we will make projections and other forward-looking statements regarding among other things our estimates for first year revenues, gross margin levels and combined R&D and SG&A expenses as well as expectations, estimates, and assumptions regarding our 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.

By providing this information, we under take no obligation to update or revise any projections or forward-looking statements whether as a result of new development or otherwise. Please refer to our press release issued today which is also available on our website at www.cirrus.com.

Our latest form 10K the year ending 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, John, and thanks to all of you who are joining us here today. For those of you who have not yet had a chance to read our press release, I will quickly recap our results I would like to mention before proceeding that all financial numbers in our press release today are unless otherwise noted in accordance with General Accepted Accounts Principles.

For the fourth quarter fiscal year 2005 which ended on March 26th, revenue was $40.4 million, gross margin was 53.1 percent.

Combined R&D and SG&A expenses totaled $22 million, net income was $2.5 million, and net income per diluted share was $0.03 cents. For the full fiscal year of 2005, revenue was $194.9 million.

Gross margin was 47.9 percent. Combined R&D and SG&A expenses totaled $109.2 million, and the net loss was $13.4 million in loss per share was $0.16 cents. To assist those investors who track our on going business activities on a non-GAAP basis as generally done by the analysts covering Cirrus Logic and contributing the first call, our quarterly results in the most recent quarter calculated on a non-GAAP basis would have produced a $0.03 cent net loss per share based on 85.1 million shares outstanding.

This non-GAAP result compares favorably with current the First Call mean estimate of net loss of $0.04 per share. We have provided a detailed GAAP to non-GAAP reconciliation on our website at www.cirrus.com, and we use non-GAAP financial numbers here to assist us in the management of the company because we believe that this information provides a more consistent and complete understanding of the underlying results and trends in our business.

Before we discuss our results more fully, I'd like to spend a moment discussing recent news regarding Cirrus Logic's intent to divest its digital video product line. A successful divestiture of this product line will enable us to focus more sharply on our high margin analog and mixed signal and embedded integrated circuit product lines where broad consumer automotive and industrial market base.

It's within these markets where we have more than 600 customers serving more than 3,000 end customers worldwide. Focusing our managerial and financial resources on these core strengths will position Cirrus Logic for sustainable profitability and long-term growth. Our long-term business model is to drive gross margin up to 60 percent and operating profit towards 20 percent.

Cirrus Logic is committed to becoming a consistently profitable company which better leverages its engineering and intelectual property resources to achieve growth. Later during this call I'm going to provide more detail regarding our on going business operations but now John will review our financial results in more detail for the March quarter. John?

Thank you, Dave. Our net sales in the March quarter were 44.4 million compared with 44 million in the December quarter. Using the new product line structure, our quarter-over-quarter sales were as follows. Mixed signal audio products contributed 20.9 million in the March quarter compared with 22 million in the December quarter. Embedded processor products were 10.1 million in the March quarter compared with 11.1 million in the December quarter. Industrial products provided 5.7 million in the March quarter compared with 7.9 million in the December quarter.

Video products contributed 3.7 million in the March quarter compared with 3.1 million in the December quarter. Historical revenue reflecting our new product structure will be on our website at www.cirrus.com for fiscal 2004 and fiscal 2005. Our international sales were 70 percent in the March quarter compared with 65 percent in the December quarter. For the fourth fiscal quarter, sales to distributors represented approximately 63 percent of our sales and we had no single direct customer representing more than 10 percent of our sales. Gross margin for the quarter was 53.1 percent compared with 39.1 percent in the December quarter. The December quarter gross margin was adversely impacted by a net charge of 5 million per excess and obsolete inventory.

Gross margin was back in the range of our previous consolidated model during the fourth fiscal quarter. The video product line gross margin for the fourth fiscal quarter was approximately 54 percent compared to the third fiscal quarter video product line gross margin loss of approximately 150 percent. Combined R&D and SG&A expenses were 22 million in the March quarter which included a 3 million favorable sales tax benefit compared with 25.1 million in the December quarter which included a 2.3 million favorable sales tax benefit. In the fourth fiscal quarter, research and development and selling, general, and administrative expenses associated with the digital video product line were estimated to range between 4 million to $4.5 million.

During the March quarter, we recorded a net charge for restructuring and other of $485,000. In comparison during the December quarter we incurred 3.1 million for restructuring and other charges. During the March quarter, we incurred a charge for amortization of acquired and intangibles of 3.4 million which is the same as in the December quarter. This includes 3.2 million related to the digital video product line. Net interest and other income was 1.2 million with interest income contributing 962,000 of this amount. We expect to maintain this level of interest income in the June quarter.

Lastly , we realized an income tax benefit of 6 million resulting from the expiration of the statute of limitations per year in which certain potential previously accrued tax liabilities existed. The March quarter income tax benefit was partially offset by 258,000 of income tax expense consisting primarily of foreign withholding and foreign income taxes. Net income for the March quarter was 2.5 million and net income per share for the quarter was $0 .03 cents. Based on 86.2 million diluted weighted average shares which is compared with a net income per share of $0 .03 cents reported in the December quarter. Our employee headcount at the end of of March was 603 compared with 659 at the close of the December quarter. Now on to the balance sheet.

Total cash and market able securities at the end of March increased to 179.7 million from 178.4 million at the end of of December , and we expect to see this increase by 2 to $5 million during the June quarter. We ended the March quarter with 18.6 million in net receivables compared with 21.1 million in the December quarter. DSOs or date sales outstanding were 42 days compared with 44 days in the December quarter. Inventory at the close of the March quarter was 26.6 million. Inventory related to the digital video product line as of March 26 was valued at 5.6 million. In comparison, inventory for the company at the end of the December quarter was 32.3 million.

We believe inventories in the distribution channel also decrease in the March quarter. Inventory turns were 2.8 in December. Period accounts payable at the end of March were 10.5 million compared with 14.9 million at the end of December and deferred revenue associated with distributor activity at the end of March remained flat with the prior quarter. Our capital expenditures were $286,000 in the March quarter compared with 1.22 million in the December quarter. Depreciation and amortization expense totaled 5.8 million compared with 6.2 million in the December quarter. Included in these expenses was 3.4 million for fore amortization of inquired intangibles for both period. Now back to you, Dave.

Thank you John.

Before I provide an update and outlook on Cirrus Logic core product lines I'd like to summarize the estimated performance of our company excluding the effects of the video product activity in the past quarter.

I mentioned earlier that our non-GAAP loss for the just completed fourth quarter was $0.03 cents per share. The video productivity included in that result generated revenue of $3.7 million and gross profit of approximately $2 million and showed R&D and SG&A expenses of approximately 4 to $4.5 million. From this you can see that Cirrus Logic's core business break even revenue point on a GAAP basis is pretty close to the $36.7 million revenue which we shipped during the March quarter.

Now I'd like to provide an update and outlook on Cirrus Logic's core product line. I'll begin with mixed signal audio products which contributed $20.9 million of our March quarter revenue, a decrease of $1.1 million for the prior quarter during which is traditional a seasonally weak quarter.

Semiconductor components in this product line are used in a wide array of consumer, professional and automotive audio applications. As we have previously discussed, over the past few quarters we have seen a decline in demand for digital to auto - - or digital analog audio converters or DAC for DVD players. Recent however we have seen a reversal in this trend. As inventories in China appear now to have bottomed out.

In addition we've been focusing our efforts towards newer high growth markets such as digital televisions, satellite radio, advanced set-top boxes and advanced DVD recording applications among others.

As one example we've expanded our analog to digital or A to D converter audio converter product group offerings in the past two years enabling us to gain share in the high end consumer and professional audio segments. Furthermore Cirrus Logic continues to demonstrate leadership in integration of multi channeled audio CO DECK functions allowing us to increase the value we bring to our customers in consumer and audio application as cross a wide range of price points. We expect improved financial results and continued high margin in this product area in the near term based on customer demand and current visibility.

Further, going into calendar 2006 we anticipate stable audio DAC revenues and growth from our substantial new A to D converter and CO DECK product investments which we've been making in the past calendar year. I'd like to turn now to our industrial product lines, which includes integrated circuits designed into a variety of DC measurements, power metering and energy exploration and applications these products generate our highest gross margins and represented $5.7 million of our March quarter sales. Down from $7.9 million in the December quarter due primarily to excess inventory build up in the seismic expiration area.

Despite the revenue decline in the March quarter, we foresee improving sales in the June quarter due to improved demand across each of the industrial product categories. The long-term growth products are prospects within these markets are promising due primarily to the strong acceptance of our proprietary seismic and D C measurement product lines and our unique skills intellectual property in high precision data conversion applications. We continue to increase our investment in these areas and plan to expand our portfolio for high precision industrial products while the near term opportunity for us in the industrial product area will be driven by continuing capital expenditures strength in the energy expiration market.

Medium to long-term growth in this product will be aligned with U.S., European, and China's overall economic growth. Finally, I'd like to comment on our embedded product line which represented $10.1 million of our March sales down from 11.1 in the December quarter. Our products within this category include our audio DSPs, general purpose ARM-based microcontrollers and networked audio components. Our embedded technology is complementary to our analog and mixed signal products and it often shares common markets and customers such as BOSE, Harmon Kardon and Samsung.

During the March quarter we added to our growing family of integrated circuits for networked digital audio applications with a new family of chips that integrate our 32 bit audio DSPs with our award winning CobraNet audio networking technology. CobraNet technology is a leading standard for delivering real time uncompressed digital audio over standard ethernet. These audio system processors offer tremendous value for manufacturers of professional, commercial, and now high end consumer networked audio products. During fiscal year 2006 we expect to see a substantial increase in adoption of our CobraNet technology by a wide array of leading professional and consumer audio companies enabling revenue growth in fiscal year 2007.

Now in terms of guidance, as we begin our new fiscal year we are a fundamentally stronger and more focused organization. We are poised to leverage our company's core expertise, our broad intellectual property base our propriety product line to drive significant improvement in our financial performance. We've completed the final stages of our strategic test in manufacturing outsourcing plans and continue to look for ways to reduce our cost structure to become an even more efficient organization.

We have a solid base of more than 3,000 active end customers where our products command high margins. We continue to invest in new products that will strengthen our position and capitalize on new market opportunities. While fiscal 2006 or calendar 2005 is likely to be a challenging time for semiconductor companies in general, we will make meaningful progress this year toward our 60 percent gross margin and 20 percent operating profit business model.

I remain cautious even though our visibility has improved in the past several weeks. I'm encouraged by the solid bookings trend in our core analog and mixed signal product lines in the first month of the new fiscal year, it appears to me that the worst of the industry wide inventory imbalance is behind us. And like the inventory levels reflected on our balance sheet, overall channel inventories of Cirrus Logic products have decreased and now seem to be at a healthy level. Let's turn now to the outlook for Q1 of our fiscal 2006 which ends on June 25th.

This guidance excludes our estimates for the video product line which I will provide to you separately. Our guidance is as follows: Core revenues expected to range between $40 and $41 million an increase sequentially of 9 to 12 percent from the March quarter. Gross margin is expected to range between 55 and 57 percent. And combined R&D and SG&A expenses are expected to range between $20 and $22 million. Inventories expected to be reduced by up to $2 to $3 million through further operational activities resulting in a modest lengthening of our lead times.

For the video product line, product shipments will have a value of between $6 million and $8 million with associated gross margin between 44 and 46 percent in addition to the numbers just now referenced plus combined R&D and SG&A expenses up between $4 and $4.5 million during the June quarter. We also expect the inventory in the video area to decrease by $2 to $3 million. As I discussed on today's call, I'm enthusiastic about the enhanced focus at Cirrus Logic, and I'm looking forward to improvements in our financial performance through fiscal 2006.

I remind that you in recent months we one restructured into product centric business units, two, improved the efficiency of our outsourcing manufacturer model to allow for better gross margin, and three, we've announced now our intent to divest in the video product line. We've aligned our business and development around our core strength and high precision analog and mixed signal technologies and we will leverage our considerable engineering and intelectual properties resources towards growth in existing markets as we focus on creating new market opportunities. This new structure will enable improved execution on new product introduction as well as demand creation and lead us toward our 60 percent gross margin and 20 percent operating profit business model. Operator, we are now ready for questions.

Thank you, gentlemen. At this time we will be conducting the question-and-answer session. [ OPERATOR INSTRUCTIONS ] our first question is from Brian Alger of Pacific Growth Equities.

Hi, guys, good afternoon.

Hi.

Let's see, first, I want to understand the non-GAAP number. As I'm hearing it , you're adding back in $3 million in the sales expense for SG&A and mathematically I'm guessing you're pulling out the income tax benefit. Is Is there anything else -- and, of course, the amortization. Are those the three things that are being excluded?

Yes let me just march through real quick Brian. $2.5 million of net income GAAP, $3 million of SG&A income tax benefit we take out of that. $6 million of other tax benefit we take out of that and then we add back in 3.9 million of amortization and restructuring costs and that gives you about $2.5 million of loss on a non-GAAP

and the SG&A adjustment was 3.0?

Yeah.

Okay. Great. Moving forward, you're obviously forecasting a pretty good growth rate for the video business here in the June quarter. Why are you selling it?

Fundamental we think that the analog and mixed signal businesses that represent the core of Cirrus Logic hold very good promise, and they we think it's going to be easier for us to drive substantial value if we focus on that class of products. And yes , we do think that the video products that we've been selling are going to drive substantial growth during the current quarter.

And does that mean that after the current quarter you're anticipating the revenues to drop off on the video business?

No. I do not anticipate that, but on our P&L, we didn't indicate timing on when we expect to close a transaction, but no, June and September look like pretty good quarters for that business.

I guess I'm a little confused then because you said the inventories on the video business will be coming down pretty dramatically as a percent of inventory for the video business in the June quarter. Unless you you had expectations that you wouldn't see the growth in September that wouldn't really make sense, would it?

Yeah. If you sell more than you thought you were going to sell in a current quarter, then you're going to reduce inventories even more than you had planned, and those are the dynamics that are occurring.

Okay. So will you be ramping up production of video products in the June quarter to support September's shipments?

Yes. We've actually been buying a few wafers for the video product line.

Great on the mixed signal business, you said that you saw a trend reverse with regards to the audio DACs for the DVD market. Does that mean we're going away from integrated audio DACs and DVD players or is it just that the inventory has been chewed through and we're now seeing kind of a refill in the channel?

My view continues to be the same as before, that the integrated solutions still will only represent a quarter to a third of the total market this year. And that the lift we will experience in June revenues over March is really a return to buying patterns that represent ongoing demand as contrasted with December and March, where buying patterns were probably lower than actual demand is our customers were depleting inventories.

Okay. Great. And with the other income expected to be flat, it sounds like on a non-GAAP basis, we should be looking at a profit for the June quarter F we kind of line up the middle of your guidance range. Is that basically what you guys are seeing?

Absolutely.

That's the first non-GAAP profit in a long tile, isn't it?

June last year, I think we did.

Yeah. So I guess I've got to say congrats on that. Nice job, and look forward to growth from there.

So do we.

Our next question comes from Daniel Gaulldtuck [ph] with CIBC .

Hi, guys congratulations on exiting the video business and the return to non GAAP profitability. I want to ask what other end markets -- first of all, how would you explain the growth rates or growth prospects of your core end markets and what's going to drive that, number one. Number two, are we going to to see Cirrus make a logical step or considering your core competency is making some sort of step into the MP3 SOC market.

Let me answer the second part of your question first. The answer is no we do do not plan to pursue SOCs for the MP3 market we do plan to pursue portable audio converters which will be applicable in a third or maybe 50 percent, the mid to high end MP3 players which are oriented towards higher quality audio performance. There probably will be in that segment non-integrated audio output devices to drive the highest capability, but in any case, the driving growth opportunities for us in the -- are overall we've seen a continuing 10 to 20 percent growth rate in audio-related integrated circuits.

Now, there's been a big bubble in the past year with system chip companies that's selling to MP3 players and it will last another 12 months and it will start tailing off, but the overall spending patterns on digital audio products has continued to go up in the last several years and we've seen it in our consumer audio product line as a component of our overall company for the past few years as we've been focusing on that arena. I think that market is likely to accelerate in total dollars spent rather than slow down as rapid growth in the installation rate of digital televisions has a pull-through effect for increasing performance surround sound audio systems in the home which we have very good market share and participation in.

We also see that the proliferation of IPOD has created a phenomenon where now we feature our contacts in retail and other parts of the value chain a lot more attention and a lot more money getting considered to get put into new applications, new capabilities, new surround sound home theater equipment in the home to complement the arguably very expensive portable gear that people are buying today as we go through this fad.

all we think overall we think digital audio is going to grow in consumer around 10, 20 percent a year for the next several years. We think we will gain share. We are getting into the portable space which we haven't participated in for a long time with a product family that we'll be introducing during the first half of this year. We continue to see a growing footprint growing opportunities in automotive applications though the car market is not that good right now if you look at the opportunity for entertainment electronics in automobiles that's looking very lucrative in spite of the fact that the automotive market itself is not necessarily doing that as well.

Our biggest customer is BOSE We also sell pretty substantial numbers to Harmon Kardon and Delphi and several others but that opportunity to grow in the automotive is substantial in the next few years.

What would be your reason to not getting into MP3 SOC?

Probably it's peak is if not already here is soon to come we're not pursuing a strategy of a hot products business we we plan to offer a diverse portfolio of highly proprietary high value added analog focused products to a wide array of customers, and we think by doing that we can offer a very good business model we think we generate very good and very consistent results and we think we've got enough strength in base business in our core product areas where it's easy for me to look at some of these hot product opportunities and say, you know, that's just not as good a business.

And then finally , who would you characterize is your main competition in the consumer markets and how would you characterize their momentum?

I think you got to say good things about Wolfson in the audio converter market area. They've got great technology and great products. Of course, we didn't have a single offering in the portable space that we've introduced in the past five years until this year. We think our competitive offerings will do quite well against them going forward but they've really established a good position out there in portable applications. Now they have a strong position in portable player I think. They have a strong position in XBox, I think.

I think those two applications have been a great opportunity for them. I think going forward they might be a less good opportunity than what they've been up 'til now, but I think the breadth of our customers and the breadth of our design rates and the breadth product portfolio and the kind of gross margins we can generate I think at the end of the day will put us in a much better position.

On the TV side are you suggesting - - are you going after the Micronus market?

Yes, Micronus has done extremely well in analog TVs and they really had a lock on that business, my hats off to them on that. With the on set of most of the design activity in display markets going towards digital applications there has really been an open playing field down there. Micronus has good technology and good capability and they are pursuing that market but with an opening up of the opportunities to any good company which hasn't been true in the analog TV business for quite a while, he think that we can compete and get our fair share of mid to high end TVs and even some of the lower cost TVs with the breadth of products that we're bringing to that marketplace so we've already seen some acceptance in some of the earlier DTV applications, both high def and standard def digital TVs not only of our audio CO DECKS and audio defs but also embedded DSC in many cases.

Finally let me give you a little more question, what will be your strategy to getting to the 20 percent operating margin goal? Is it going to be a combination of cost cutting ? And where do you think the cost cutting is going to come from?

Well, pretty simple stuff. We're going to drive gross margins up, and we've already taken a lot of the steps that are going to enable that, and we'll just let the results talk about that as they come in. But operating expenses have continued to come down in this company and we continue to have a big focus on being as efficient as we possibly can. The simplification of our business by announcing the intended divestiture of the video business is going to help us even further, is going to allow us some degrees in freedom by reducing our spending in dollar terms and obviously as a percent as well, and so basically that's it.

I mean, spending guidance for the current quarter and SG&A and R&D is 20 to 22 million. 20 percent operating profit on a 60 percent gross margin goal instead of you've got to get revenue 2.5 times that to be at the model so yes , it requires a little bit of growth.

All right. Well, thank you very much.

Thank you.

Our next question comes from Jason Pflaum with Thomas Weisel partners.

Yes, good afternoon. Maybe just to start, can you give us a sense on the timing of the divestiture of your recorder business? Is there a number of months that you have in mind that you're contemplating here?

Yeah. Contemplated number of months or maybe less, but what I contemplated doesn't really matter getting it done is a key issue. I think speculating on timing other than to say that we're interested in moving rapidly, is probably not that helpful.

So likely in the next three to six months is a fair assumption?

Well, it's difficult to speculate on that. Obviously we wouldn't have announced it if we didn't want to get it done pretty quickly, but it's hard to predict timing on those sort of things

Okay. Maybe just to touch on your margins, can you provide a little more color as far as the margins by your core business segments? Obviously you mentioned industrial the highest, but can you give a little more color as far as what we're talking about?

Well, qualitatively always tell you that the industrial business runs higher because it runs notably higher than the other two, but the other two are about the same, and we're still not talking specifically about gross margins in the segments at a quantifiable level or in the product groups at a quantifiable level.

Okay. Just taking from a higher level moving towards your 60 percent gross margin target, is it going to be largely mixed driven or are there other levers that you're pulling to get there over time?

We've taken a lot of action to reduce spending over all, to get a more efficient supply chain, to get a lot more streamline flows of our products from various manufacturers we've got relatively empty fabs out in the marketplace. We've got pretty good new product stream over the course of the past six quarters that are coming out in many cases much higher gross margins than their predecessor products. We've already taken a lot of the actions that ultimately will get us there, and no, it's not a mix issue.

Not mix, okay. And just for perspective, you may have mentioned this in the call, but there was the core gross margin this quarter and what was it the last couple of quarters, if you could break that out?

We hadn't been breaking out going past and I don't know that we have that data but I can say this past quarter well, if you go back to the December quarter we actually have if you recall a $5 million inventory write down. a big chunk of that being in the video area. Some of that products sold in March so actually the resulting gross margin in video during March was actually pretty strong and not a lot different than the rest of the business so they were about the same in the March quarter. On an on going business, the video gross margins are expected to be lower than that, but we did give guidance in the release on and in the script today on the core business gross margin at 55 to 57 during June without video.

Right. Okay. And then just lastly, you mentioned that your visibility has improved over the last month or so. It seems like the business has picked up. Is that momentum continued and is your guidance predicated on continued momentum or would that present outside to your guidance for your core business?

I'm assuming that the strength in the order pattern through the first four weeks of the quarter are going to tail off a little bit because it's been very strong, and I think it's better to take a pretty cautious view right now.

Okay. Great. Thanks, guys.

Thank you.

Our next question comes from Quinn Bolton with Needham company .

Hi, guys, few questions, one just on the digital video divestiture, if you can't come to terms with the potential buyer, are you committed to shutting that business down? And then I've got a few follow-ups.

We'll come to terms with the buyer.

Okay. Good. Then turning to the core business, looks like analog gross margins if I did my math right were about 53 percent in the just reported quarter you're guiding them up to 55, 57. Can you be a little bit more specific as to sort of where that increase comes? Obviously, the industrial business I think you've guided to a revenue rebound, so I'm sure that's part of it. But are you seeing some of these cost reductions, wafer cost reductions, other operational efficiencies in the core business? Is that 55 to 57 percent level likely to trend higher or is there an inventory write down that maybe affecting the June quarter guidance? Any more color you can give would be helpful.

Let me go through all those angles. Not a mix improvement, so it's not because industrial is up. Actually industrial is a percentage is not going to be noticeably different in June from what it was in March. We've got it per growth in all of our product groups in June an that continues to look to be the case, and we did announce some actions over the course of the past few months to improve our spending rate in cost to goods across the board, and so there has been just some systemic improvements in the company a lot of system improvements in the gross margin line on all our products. We've got a lot of the new products that have come out are shipping now as a higher percentage of revenue, and that's driving gross margin up as well.

And we think that that's going to allow us a lot of improvement, and I think this is the first time we've talked about a 60 percent gross margin model for the company. A lot of the actions -- the analog business you've got to realize also that things don't happen as quickly as in in some other areas so a lot of the actions not the vast majority of the actions required to get to that model on a gross margin line have already been completed and it's a matter of them coming to full fruition from that perspective, and so the answer to the last part of the question was are they tending upward and the answer is yes .

Okay. A question for you, Dave, just in terms of looking to divest the digital video business. You got some pretty good customers there. You've announced wins with Samsung, Sony, LG Electronics, these are big consumer electronic companies. Can you talk about the risk of upsetting these customers as you sell the and any potential negative impact on sales of your audio embedded DSP or other mixed signal product I mean is is there a risk there if the buyer of digital video doesn't support the customers that there are repercussions on your business?

No. There's not any repercussions on our business one number , two why would you buy that business and not support LG, Samsung and Sony. I have no doubt about the desires of the potential buyers to support at least as well those big customers as we have or would be able to continue to support them. And so I'm quite confident they will get an improving level of focus, a committed organization that sees great hope, and a separate situation from Cirrus Logic's core analog business. .

Okay. Great. Thank you.

Thank you.

Our next question comes from Renney Bhattacharya with Monness, Crespi & Hardt

Hi, guys. Dave, you said that you'll need some growth to reach your operating expense targets, which will take some time, but is there a chance we can get to see your 60 percent gross margin target in the for foreseeable future?

Yeah, actually putting that out there, I think about six months ago for the organization actually we set the internal higher targets than that and has really stimulated a lot of pretty focused as we've gotten more and more focused on the analog business here and generated actions across the organization that as I mentioned a little bit ago which we think can get us there as the results of those actions and the benefits of those actions come to full fruition, so yeah, I think it's difficult to predict when we're going to get operating expenses of 40 percent of the revenue even though we think we managed that flat to down. We don't know if the revenue is going to grow a lot. Right now it looks like it is, but looks can be deceiving in semiconductors, so but the gross margin line I think we're going to get there in the reasonably - - reasonable period of time, anyway.

Okay. And also you spoke about inventories bottoms and channel inventories decreasing. What does this mean for bookings in the June quarter?

Well, right now the -- I alluded to a little bit obliquely earlier, the bookings thus far this quarter have been strong, and if we're to keep up, it would be pretty exciting. I think it's best to take a pretty conservative view on that, even though all the dynamics, it's been very broad it's been wide array of customers wide array of products wide array of applications all showing very good strength in the first four weeks of this quarter, so if things keep going the way they are, it's going to be a pretty interesting time here. Even with a very conservative view on bookings tailing off notably for the last nine weeks of the quarter we're better prepared than we were 90 days ago in being able to meet the guidance.

So what percent of the guidance is already booked?

We don't probably get real time updates on it. We've indicated that in the past couple of quarters, coming into a quarter we needed over half in turns, last quarter even notably over half. I don't think we gave out a number, but it was well above half. The current quarter is a bit lower going into the quarter and as I mentioned the first few weeks of the quarter have put us quite a bit ahead of where we were 90 days ago in meeting what we need to do for this quarter. And we're also going into a seasonally strong period of time it's very unusual for bookings to tail off in the towards the middle to second half of the quarter but I just want to be pretty cautious on that.

Okay. Well, congratulations, guys.

Thank you.

Our next question comes from Adam Benjamin with Jefferies .

Thanks, guys. Couple questions. First, Dave, you mentioned the CobraNet business, and you said that there would be a substantial increase in adoption rates in fiscal '06 allowing for growth in fiscal '07, so how should we read that? Are you just saying that the revenue contribution doesn't hit until fiscal '07 or does it start hitting in '06 but not significantly until '07?

It's a relatively small product line for us. I'll just give you a small bit of history without boring people on that is that five years ago we were only supporting very, very large scale audio network systems, things like Disney Land - World not even Disney Land, Disney World and the Senate buildings and House of Represent buildings, things like that. In the past three years we brought it down to lower price points so now we've got audio networking systems that hit the price point for traveling band systems and things like that, so that actually grows to market a little bit, but it's still only relatively modest-sized opportunity.

In the past year we brought the price down further such that we can connect high performance low latency audio over standard ethernet at $ 20 to $30 a node so high end consumers we can address now so we're seeing a lot of audio, so now we're at the low end of professional equipment so all the instrument people, all the audio equipment vendors for professional and entertaining equipment vendors, and now we're starting to see high end consumer media servers and things like that designing in CobraNet and we think that, that's when it starts to open up a market that looks like 10s to millions of dollars. But it takes ta a while to get there. We'll get some endorsement from names that a little more well-known in main stream high end and consumer this year which we think will drive much more meaningful revenue for calander '06 or fiscal '07.

Okay. Just to go back to the low power products, you mentioned that you'd be introducing that in the first half of the year. Should we assume that you have working silicon today and that you're working with customers and then when you introduce the product, you would be -- you would already be shipping to customers or is that something you'd introduce the product and then you'd be talking to customers and sampling with them after that?

Well, you should assume it takes a bit of time to go from working silicon to real business. I mean, even in the space where you take a working product into even fast moving guys like gaming machine companies and high volume M P3 player companies and things like that and still take 6 to 12 months to generate revenue. So its not going happen right away but

I guess what trying ing to ask you is when you say you're introducing in the first half, does that mean you're introducing it in terms of you have a product, or you have a product today?

It means we've got some technology that's probably not going to go to mass production until the second half of the year.

Okay. With respect to industrial, it tailed off this quarter, and I guess there was some inventory workdown, with respect to going forward, can you talk about which areas will be the drivers for that business?

Yeah. To some extent, seismic certainly is looking good for the second half . It has had a little bit of a lull. It was really good second half last year. Had this problem with end demand kind of not growing as fast as what some people would hope in and March. Looks like June and September and December are shaping up pretty well so looks like it's going to drive growth in that sector. Power meters continue to go up although it's a small piece of that overall deal. Measurement has been reasonably strong, but that's kind of depending on European economy and U.S. industrial economy, and it's been okay but not real strong right now. It's hard to tell where that's going the second half of the year. Seismic definitely looks good the second half of the year, though.

Just to go back to one other question on the divestiture, if per chance, I know your goal is to sell this business, but if you weren't able to sell this business, have you set out any time line out there like by the end of the September quarter that you would just shut the business down?

We have plans, conversations, contingency plans, and absolute commitment. To speculate and talk broadly about those is probably not helpful for anybody.

Okay. Thanks a lot.

Thanks a lot.

Our next question comes from Heidi Pun with Piper Jaffray .

Hi, guys. I'm calling on behalf of Tori Spawnberg. Give n the growth opportunities you're seeing in the next couple of years can you discuss how you're looking to allocate R&D by end markets going forward and my second question is will this the tax rate for the quarter?

Growth opportunities mentioned earlier, midrange to high performance audio applications are seeing continuing growth over the past few years and I think it's a continuing - - that market will continue to grow over the next few years at 10 to 20 we percent a year and we think we will gain share as we re-enter the portable audio market and continue to drive stronger share and professional applications and drive very good participation in mid to high end home entertainment.

We also see the likelihood that mid to high end home entertainment where our position is very strong. The growth rate could easily accelerate driven by a few factors. One is a lot of money being spent on high performance displays or DTVs, having a pull-through effect on upgrades on home theater equipment. We also see an opportunity driven by expanding opportunities just with the broader adoption of M P3 players like IPODs getting a lot more attention on mid to high end digital entertainment, digital audio entertainment applications. We are the leading supplier of chips traditionally in the analog space in this arena and we think we continue to drive good if not improving shares in that arena.

We also see automotive applications driving some pretty good growth opportunities for us for audio our biggest customer is BOSE and we think we are migrating quite nicely from only the higher priced automobiles to the more midrange automobiles opening up a substantially broader serviceable market for ourselves and we think in that space we can dramatically increase our revenue over the next two to four years. We think that can drive some pretty good numbers for us.

On R&D allocation, we are going to expand our portable audio component line such that we hope to broadest product portfolio in the marketplace within the next couple of years. We're also going to have a very successful we believe product portfolio in the class E or digital amplifier area for digital televisions and other digital architected entertainment applications and we're also moving into the drivers themselves for which requires high voltage processes where most of the value is for class D amplifiers in the drivers themselves we've got some silicon some technology we're improving out there looks quite promising for substantial growth going into calendar 2006.

And in the industrial area, we're ak accelerating or ramping up our investment in the industrial area as quickly as we can find very high precision, very highly skilled analog engineers but new product develops in that area tend to have long cycle to financial payback so it's those new products in advanced high performance, high precision measurement applications, probably won't generate a large amount of growth for a few years to come.

Are you saying that by percentage you're not expecting to alter the distribution between the end markets much?

Not that much, no. Not that much.

And my second question was will lift the tax rate for the quarter.

On the tax rate our expectation we will probably spend 100 to 200,000 on the quarter for taxes and that's about it. We have enough NOLs that we don't really calculate tax rate per se as others.

Thank you.

[ OPERATOR INSTRUCTIONS ] . Our next question comes from Alan Adler with A A Enterprises.

David, hello. The business that you'll be left with, I assume is cash flow positive, doesn't require any major CapEx, so what's your plan for the pile of cash that you've accumulated over the last two years and would you consider a serious stock buyback of significant proportions?

What are we going to do with the stock up cash? We're going to grow it , of course. And then we have no specific intent to spend that money on a cash buyback or anything else at this stage.

Just going to let it sit there?

Well, we'll certainly consider through our internal processes with the audit committee and investment committee to try to find ways to get more return and we will also continue to evaluate alternatives such as stock buybacks. Up 'til now we've not done that, but the new business model looks like it will be a substantial cash generator going forward, and we may change our position on that sometime in the future:

We We have a follow-up question from Brian Alger.

Hi, guys, just want to come back to the disposition of the video business. I know it's difficult to certainly for legal an your intents of sale purposes to talk about whether or not that goes, but from modeling, from a modeling perspective, the bookings rate and it is order rate that you're seeing for that business , would you say it's fair to think of them tending in a seasonal pattern?

Seasonal pattern? Of course they will trend in a seasonal pattern. I'm not sure what that means, however.

I guess I'm looking at modeling and unfortunately I can't predict when you guys will sell the division and, you know, I don't know if anybody really wants to buy it to begin with, so we we've got to keep that in our model and moving beyond June and obviously you're not providing guidance for it.

We did provide guidance for it. It's 6 to 8 in revenue. 44 to 46 in gross margin and spending 4 to 4.5 million in addition to the other guidance which excluded that.

No, I understand that. I'm saying beyond.

I think September is likely seasonally September should be higher than June and it looks right now that September will be higher than June to me right now in this business.

That's all I was looking for. Thanks.

Spending will be about flat.

Oh, great.

Thanks.

Gentlemen, we have no further questions at this time.

All right. Well, thank you operator, and thank you all for your attendance today and your questions and your on going interest in Cirrus Logic. We hope to see many of you at the upcoming C communications and technology conference on May 11 in New York and at the Piper Jaffray technology conference on May 1st also in New York thank you very much and have a great day.

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