Cirrus Logic Inc (CRUS) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you this standing by. Welcome to the Cirrus Logic first quarter fiscal year 2006 financial results conference call. At this time, all participants are in a listen-only mode. Later we open up the call for your questions. Instructions for queueing up will be provided at the time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Mr. John Kurtzweil, Senior Vice President and Chief Operating Officer. You may begin.

Thank you, operator, and good afternoon. Joining me on today's call is Dave French, Cirrus Logic's President and Chief Executive Officer. Before we begin, I'd like to remind you that during the course of the conference call, we will make projections and other forward-looking statements regarding, among other things our estimates for second quarter fiscal year 2006 revenues, gross margin levels, combined R&D and SG&A expenses, operating cash and restructuring charges, as well as expectations, estimates and assumptions regarding our future revenue growth and profitability. Keep in mind that the statements are predictions that are subject to risks and uncertainties that may cause actual results to differ materially.

By providing this information, we undertake no obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to our press release issued today, which is available on our Website at www.Cirrus.com, our latest Form 10-K for the year ended March 26, 2005, as well as our our 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.

Thank you, John. And thanks for all of you who are joining us today. Before I get started, I want to summarize for you the key highlights from our first fiscal quarter of 2006. First and foremost, the Company has returned to profitability on an operating basis, a And second we have confirmed our focus on analog and mixed signal products since our divestiture of the video product assets. And finally, the Company has demonstrated improving fundamentals, with 19% sequential revenue growth on the core product areas, combined with lower distributer and customer inventory levels. For those of you who have not yet had a chance to read our press release, I'll quickly recap our results. I'd also 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 first quarter of fiscal 2006, which ended June 25th, revenue was $52.8 million. Revenue for our core analog and mixed signal product lines was $43.7 million. Gross margin was 51.7% overall, and gross margins for our core analog and mixed signal product lines were 56.3%. Combined R&D and SG&A expenses totaled $28 million. Combined R&D and SG&A for our core analog and mixed signal product lines were $22.5 million. Net income was $26 million, and net income per diluted share was $0.30.

Now I'd also like to provide those investors who track our ongoing business activities on non-GAAP basis, as is generally done by the analysts covering Cirrus Logic and contributes to First Call. Our first quarter results calculated on a non-GAAP basis and for our core product lines would have produced a $0.05 net income per share, based on 86.2 million diluted shared. This non-GAAP result compares favorably with the current First Call mean estimate of a profit of $0.02 per share. This non-GAAP number does not include the revenue and associated costs with the digital video product line and certain non-recurring items, which John Kurtzweil will discuss in a few minutes.

We've also provided a detailed GAAP to non-GAAP reconciliation on our Website at www.Cirrus.com. And we use non-GAAP financial numbers, I'd point out, 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. Later during this call, I'll provide more details regarding our ongoing business operations, but now John will review the financial results in some detail for the June quarter.

Thank you, Dave. Our net sales in the June quarter were 52.8 million, compared with 40.4 million in the March quarter. The revenue for the first quarter included 43.7 million related to our core analog, mixed signal, and embedded integrated circuits, an increase of 19% over the prior quarter. Using our product line structure, our quarter-over-quarter sales were as follows. Mixed signal audio products contributed 23.4 million in the June quarter, compared with 20.9 million in the March quarter. Embedded processor products were 12.5 million in the June quarter, compared with 10.1 million in the March quarter. Industrial products provided 7.8 million in the June quarter, compared with 5.7 million In the March quarter.

And video products, which will not be an ongoing product line of the Company, contributed 9.1 million in the June quarter, compared with 3.7 million in the March quarter.

Historical revenue breakdowns for the product lines may be found on our Website.

Our internal sales were 71% -- excuse me, our international sales were 71% in the June quarter, compared with 70% in the March quarter. We had one OEM customer, LG Electronics, at 11% of sales and one distributer, Mimic Insight [ph] at 22% of sales. These two customers contributed more than 10% of sales during the quarter. For the core products of the business, we had no direct OEM greater than 10% of sales. Gross margin for the June quarter, 51.7%, compared with 53.1% in the March quarter. The June quarter gross margin for the core products of the Company was 56.3%, which was in line with the guidance given for the quarter. The video product line gross margin for the quarter was approximately 29%.

Combined R&D and SG&A expenses were $28 million in the June quarter, which included 5.4 million related to the video product line and 1.1 million for a loss contingency on excess space we leased out at our Company's headquarters here in Austin, Texas. The net operating expense related to our core business was $21.4 million.

In June, we received $25 million payment related to a settlement and release of all claims between Cirrus Logic, Fujitsu, Amkor Technology and Sumitomo Bakelite. The net amount, less legal expenses, recorded during the quarter, was 24.8 million. In the statement of operations, we recorded the legal costs associated with the litigation to make this-- we recorded associated with the litigation to make this statement more transparent for you to use. Also, we have recorded the amortization of acquired intangible assets to R&D, both in the current period and historically. Now that the sale of the video assets is complete, the amortization of acquired intangibles is expected to be less than $200,000 on an ongoing quarterly basis.

Interest income for the first fiscal quarter was 1.1 million. Net income also included a $338,000 gain on the sale of marketable securities and a $302,000 foreign tax benefit. Net income in the first quarter was 26 million, or $0.30 per diluted share, based on 86.2 million shares. In the prior quarter, the Company reported a net income of 2.5 million, or $0.03 per diluted share, based on 86.2 million shares.

Now I will review the reconciliation of our GAAP earnings of $0.30 per diluted share to our on-GAAP earnings of $0.05 per diluted share. As Dave mentioned earlier, we use non-GAAP financial numbers to assist us in the management of the Company because we believe that this information provides more transparency, consistency, and completeness to help understand our underlying results, business trends, and how we internally manage the business.

As provided on our Website, we arrive at our non-GAAP EPS of $0.05 per diluted share by making the following adjustments to our GAAP statement of operations. First, we exclude the digital video product sales of 9.1 million from revenue. Next, we exclude the estimated associated expenses, as best as we can identify them, of 11.8 million. This includes an estimated 6.4 million in cost of goods sold, 3 million in R&D, and 2.4 million in SG&A. We also exclude the net gain of 24.8 million related to the legal settlement mentioned earlier. We exclude the 1.1 million loss contingency on excess space. And finally, we exclude the combined gain of approximately $700,000 on the sale of the marketable securities and the foreign tax benefit. All of these items combined will result in a non-GAAP revenue of 43.7 million, non-GAAP net income of 4.3 million, and a non-GAAP diluted EPS of $0.05. We have provided a detailed GAAP to non-GAAP reconciliation on our Website, www.cease us.com.

Our employee headcount at the end of June was 560, compared with 603 at the close of the March quarter. Our headcount after the sale of video assets is approximately 430.

Now on to the balance sheet. Total cash and marketable securities at the end of June increased to 214.5 million, from 179.7 million at the end of March. We ended the June quarter with 23.5 million in net receivables, compared with 18.6 million in the March quarter. DSO's, or day sales outstanding, were 40 days, compared with 42 days in the March quarter.

Inventory at the close of the June quarter was 19.5 million, or 17.9 million, excluding the digital video product line inventory of 1.6 million. In comparison, inventory for the Company at the end of the March quarter, was 26.6 million, which included approximately 5 million of digital video product line inventory. In addition to reducing our inventory, we continue to closely monitor our distribution inventory levels, which we believe are down approximately 25% from one year ago. Net inventory turns were 5.2 in March for the entire business, including sales of the digital video product line. Net inventory turns for the core business were 4.3.

Trade accounts payable at the end of June were 14.5 million, compared with 10.5 million at the end of March. Our capital expenditures were 668,000 in the June quarter, compared with 286,000 in the March quarter. Depreciation and amortization expense totaled 2.8 million, compared with 5.8 million in the March quarter. Included in the current quarter expenses was $690,000 for amortization of acquired intangibles for the digital video product line assets that are no longer part of the Company. And now back to you, Dave.

Thank you, John. Again, I'd like to summarize that our core products generated revenue in the most recently completed quarter of $43.7 million and generated a non-GAAP net income of $4.3 million, and a non-GAAP EPS of $0.05.

I will now provide a little more detail on each of core product lines. I'll begin with the mixed signal audio products, which contributed $23.4 million of our June quarter revenue, an increase of $2.5 million, or 12% sequentially. Semiconductor components in this product line are used in array of consumer, professional and automotive audio applications. I'm encouraged by the strong rebound in growth of our mixed signal audio products this quarter, as we experienced revenue growth across most identified application areas.

I'm also pleased to point out that earlier this week we announced the introduction of our latest mixed signal audio product, the CS42L51 low power stereo audio CODEC. This product represents the first in a new family of new audio products oriented towards low power applications such as MP3 players, smart phones and digital camcorders. The initial product introduction for this family demonstrates our commitment to expand beyond traditional areas of business strength for Cirrus Logic and to drive revenue growth in the hottest growing markets segments. The 42L51 audio CODEC delivers excellent analog audio performance for battery-powered application and it beats competitive alternatives by enabling system designers to reduce the physical size of end-products and simplify the recording and playback of digital music, resulting in a great listening experience for consumers. For the entire mixed signal audio product line, we expect continued revenue and gross profit growth during Q2, based on recent customer demand and current visibility. In addition, we will continue to look for new market applications where we can leverage our leadership analog technologies to drive additional growth and profit.

Let me turn now to our analog industrial products. This product line includes the integrated circuits designed into a variety of DC measurement, power metering and energy exploration applications. These products generate our highest gross margins and represented $7.8 million of our June quarter sales, up $2.1 million, or 25% sequentially. Growth in this product segment was bolstered by solid revenue contribution, in particular by our seismic products. While the industrial products group met our expectations for revenue growth this quarter, recently launched product development programs in this area indicate that the longer-term growth prospects within the markets are promising, due primarily to our proprietary seismic and DC measurement technology and our unique skills and intellectual property in high precision data conversion applications. Looking ahead, we expect this product line to continue to provide high margins and some revenue growth in the near term. And opportunities exist for more significant growth, driven by energy exploration capital expenditures, which could even further accelerate demand for our seismic products.

Finally, I'd like to comment on our embedded product line, which represented $12.5 million of our June quarter sales, up from $10.1 million in the March quarter. Products within the category include our audio DSBs, general purpose arm-based micro-controllers, and networked audio components. Our embedded technology is complementary to our analog and mixed signal product technology, and it often shares common markets and customers such as Bose, Harmon Kardon and Samsung. Similar to our other product lines, our embedded products experienced growth within most major product and market categories. Among the highlights this quarter, Marantz, a world leader in advanced home entertainment, has entered volume production with a new series of audio-video receivers. These products are based upon our flagship CS49500 32-bit audio digital signal processor and feature our award-winning intelligent room calibration software solution for optimizing the sound experience in the home. Additionally, we've seen strong endorsement of our CobraNet networking audio technology as the market standard, as many leading equipment manufacturers have begun to adopt our family of CobraNet silicon solutions. We continue to achieve multiple design wins across a wide variety of consumer and industrial applications for our arm-based family of micro-controller products.

Looking ahead, we believe that our embedded products will continue to provide opportunities to further fuel revenue growth. In terms of guidance, I should remind you that since the divestiture of our video assets we are now operating as a pure play analog and mixed signal company. We have a solid base of more than 3,000 active end customers where our products command high margins. And we continue to invest in new products that will strengthen our position and capitalize on new market opportunities, such as the low-power stereo audio CODEC, which I mentioned earlier.

In addition, I believe that we are somewhat ahead of our previous expectations in driving towards our business model objective, of 20% operating profit. Looking specifically to this quarter, we anticipate further revenue and earnings growth and continuing operating cash flow improvements. I'm also very encouraged by the ongoing demand for our leadership proprietary analog products as reflected in a significant increase in backlog and a low level of inventory for our components internally and at our customers and distributors.

Taking into account all of these positive indicators, I remain somewhat cautious in terms of our outlook. Our guidance for Q2 of our fiscal year 2006, which ends on September 24th, is as follows. Sales for our core products are expected to range between 45 and $47 million. Gross margin anticipated to be between 55 and 57% for our core products. And sales from video products are estimated at $2 million at a 15% gross margin, as we liquidate the remainder of our inventory in this product category. Combined R&D and SG&A expenses are expected to range between $20 million and $22 million. The Company expects to incur a charge, as noted previously, of of between 4 and $5 million as we exit the digital video product line facility in Fremont, California, partially offset by a gain of $1.5 million related to the digital video asset sale. Cash generated from core operations is estimated to be 6 to $8 million this quarter, with an additional 6 to $7 million expected to be generated from the sale of remaining video product inventory and the collection of outstanding receivables associated with the previous video product line.

To re-cap, I'm pleased with our financial results in the first fiscal quarter of 2006. We achieved 19% sequential growth within our core product lines, with strong gross margins. And based on the end demand of our products, we appear to be tracking ahead of our business model objective plans, and we are predicting continued revenue and operating income growth in Q2. With the completion of the sale of video product line assets, we're now a fundamentally stronger and more focused organization than we have been in the past several years. I'm enthusiastic regarding our improved prospects for top line growth and profitably within our high margin analog and mixed signal IC products for audio and industrial applications. And now, we're ready for your questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] We will pause for a brief moment while we poll for questions. Our first question comes from the line of Shawn Slayton of SG Cowen. Please present your question.

Hey, Dave, hey John.

Hello, Shawn.

Good progress getting things in order here. You put up some good numbers on the core side of the business for June, Dave. The guidance for the current quarter, you mentioned that you're cautious. I guess the guidance we're looking maybe for only a 4 or 5% improvement on the core side of things. Did sales get pulled into June? Can you help us understand that a little bit?

Yes. Well yes, June actually came out ahead of previous expectation. We guided June at 40 to 41 on the core revenues and it came in at 43.7 million. Strong bookings throughout the quarter, strong bookings both for returns as well as for the September period. We came into September with further improvement in our backlog. It's the best on the core products that we've seen in any of the periods since we've been tracking it. So, right now the backlog coverage for September is quite strong, and we feel pretty good about the quarter. And the question always remains, will that bookings level keep up. You know, the turns requirement for September is relatively low. And so our level of confidence in the ability to hit this kind of guidance is quite good. And there might even be some upside potential beyond that.

So you don't see kind of any conspicuous phenomenon in maybe audio electronics, audio or other where we had a nice build in Asia in June and maybe some of September got pulled into June.

No. In fact, quite the opposite. We had a lot-- our lead times requested by our customers continue to be quite short. Our lead times that we're quoting continue to lengthen.

Okay.

And we left a bunch of backlog on the books at the end of June that our customers wanted us to ship that we just couldn't get turned in time, as the order rates continue to exceeded our earlier expectations by a significant margin.

Okay.

So we came in pretty strong.

Okay. Kind of on this new employee count, you guys made a lot of great progress, I guess, on the OpEx side of things, 430 employees on the core side of business. I guess, back of the envelope, that's about $100,000 in revs. per employee right now. Do you feel like that's about right?

No. I think we should do better.

Okay, okay.

And we, for instance, with any kind of growth, we don't think we need substantial expansions in headcount, so we can get some improvements on that front. And 2e continue to look for ways to run our operations more efficiently.

Okay. How about kind of long-term gross margin for this core business? You have a goal of 20% Op. margin. What gross margin does that imply? Are we about there now at the gross margin line?

Oh no. We have-- our model is to get to 60% gross margin.

Okay.

And we don't expect to be able to get there right away, but we've got a lot of good cost reduction programs already implemented, which will show up as our inventory works through the system.

Okay. Last question from me. Can you remind us -- I'm sure it's going to be a multitude of products, but remind us the business end-products you're doing with LG.

We sell a wide variety of products to LG. Of course, we used to sell the video products there. We also sell an incredibly broad array of mixed signal audio components there and embedded DSDs.

Okay, so I guess with video going away, would you expect LG to drops off as a 10% customer?

Absolutely. In fact, last quarter they would have been our second-biggest customer behind Bose at somewhere between 5 and 8%.

Okay, tha's helpful.. I'll pass it on. Thank you.

Thanks very much.

Our next question comes from the line of Jason Pflaum of Thomas Weisel Partners. Please present your question.

Yes, good afternoon.

Good afternoon.

Maybe just to circle back on the guidance question as far as expectations for how the quarter progresses, if you look at the midpoint of guidance, would it imply business tailing off fairly, I guess, markedly at the end of the quarter?

Well, we don't guide with any sort of trend on linearity or anything like that. But right now the coverage coming into the quarter is-- on backlog, was above 50% of the revenue guided, which is a significant improvement from where we have been previously. And right now it looks like we can achieve that level of revenue even if bookings do tail off pretty dramatically towards the end of quarter, which some people may think is a little bit conservative, particularly in the season as the September quarter usually is quite strong all the way through the quarter and in fact all the way through October.

Right. And particularly since some of your customers, it appears their inventories are in much better shape certainly from last quarter and probably relative to last year as well. Would you say that--

-- lower than a year ago.

Okay. And maybe just as far as looking ahead to Q4, what in a normal year, if there is such a thing as a normal year, would you expect normal seasonality to look like in your business as it stands today?

Really hard to predict. Really hard also to describe a normal year. I think that if the normal seasonal trend from June to September, which is I think quite a bit above what we guided, if that were to happen, we'd estimate December to be kind of flat from September. If our conservative guidance for September turns out to be true, you know, flat just slightly to up is possible in December.

Okay. That's helpful. And then circling back on the gross margin guidance, it looks like it was flattish, plus or minus a point or so.. What are the major factors in the range at this point? Is it mix or are there other factors more at play here?

Well, mix is always something to wonder about. I think that probably the biggest single question there is CapEx for energy exploration because margins on that product tend to be pretty strong. Barring any shifts in mix, which I think is a fair assessment going into the quarter, there's three major gross margins improvement categories that we've got going on. One is lower wafer prices, which will start to have an effect as we get through the existing inventories.

We've already negotiated lower wafer prices over the course of the past 12 months, and only in the past 90 days have we started buying any wafters at all, as our inventories have gotten a little bit too high. So over the course of the next six or nine months we think wafer prices will improve gross margins. We've also got some replacement products, particularly in high volume D to A converters for DVD players and other applications. We have some new products coming out which have substantially lower product costs, manufacturing costs, than their predecessors. And they can substantially increase our gross margins for the Company as a whole, particularly in the DAC product area. And then finally, the new products we're introducing, which are now coming out at a better and better rate, are tending to garner higher gross margins than our Company as a whole, as they emerge in the marketplace.

Okay, which I think leads me to my last question, as far as some of the activity you're seeing today in this new low-power stereo CODEC. Can you describe some of the design activity you're seeing today? Is it pretty broadbased and when do you expect meaningful revenue, second half?

Yes. We started sampling the products several months ago. Typical design cycles are 6 to12 months in this area. We've already gotten some of the early production first orders to ramp up during the second half of this calendar year, which is pretty exciting and a little bit quicker than we had anticipated. Previously, as I think we mentioned earlier, there's really only been one company out there, and that's Wolfson, selling aggressively in the low-power audio component area. And we think we've got some substantial technical advantages over their offering with this product. We've got a wide array, not hundreds of companies but dozens of companies, looking at the product and pushing to drive toward production as early as 3 to 6 months from now. The first -- it's best so assume the first meaningful revenue contribution is not until the March quarter, although it might happen a little bit sooner.

Do you have wins with that yet?

Oh yes, absolutely.

And across the three categories that you mentioned: MP3, smart card--?

Yes. Probably the one that moves the quickest is the MP3 player space.

Okay. That's great. Thanks a lot,, guys.

Thanks, Jason.

Our next question comes from the line of Tore Svanberg, from Piper Jaffray. Please present your question.

Yes, good afternoon. I had a couple of questions. If I do the math, it looks like now you're in your core analog business or core analog mixed signal, analog mixed signal is about 71% of revenue with embedded DSP being the rest. Within that 71%, how much is amplifier and how much is data converter?

We don't break it out, but the vast majority of the mixed signal audio is data converter, either A to D's, D to A's or CODECs. Often times there is other analog stuff like amplifiers and PLL's and other components. integrated on. But the vast majority is data converters. And in the industrial products, I would say the same thing holds true. Stand-alone amplifiers is a very low percentage of the business.

Okay. And moving onto the guidance on the backlog, if you look at the current backlog, what's filling that up between the three segments?

All three product groups have substantially higher backlog coverage than they had 90 days ago for the just-completed quarter.

Okay. Very good. And coming back to the 30% that's embedded processor, is that a business that longer term you're going to continue to invest in? Help us a little bit on how you are allocating R&D to that product line and could we even assume longer term that that becomes lower than 30%?

Right now we see great opportunity to integrate some of that capability and product portfolio with our analog technology and sell mixed signal components which are slightly larger in die size and bigger in function and higher in ASP. So, we see the integration capability for audio CODECs with imbedded audio DSPs as being a big opportunity. Likewise, in the industrial product area, the embedded arm micro-controllers, we already have integrated some of the communications analog technology in that area. And we see other opportunity to integrate measurement capability with our embedded micro-controllers. What you see from most of the substantial analog companies , like Analog Devices and Maxim [ph] and other companies have shown-- even Silicon Labs with their acquisition of Signal Integrated Products are moving towards the integration of some amount of digital capability to increase the footprint and the staying power of some of the analog technology in certain application arenas. I expect we'll do some-- mostly the same thing.

Okay. Then finally a question for either you, Dave, or John, the operating margin target is 20%, looks like next quarter you'll already be at 10%. Do you think you could potentially get to 20% by the end of fiscal '07?

I think by the end of fiscal, '07, you know our plan, as Dave said, is to work through the inventory, get the lower cost wafers, grow the revenue and we should be able to, you know, get closer to it by the end of fiscal '07.

It all depends, Dave-- it all depends, Tore, on the growth rates. I mean we have shown some pretty good growth. I think we've got some pretty good prospects. The indicators, at least on paper, look very, very strong, although we're hedging against that a little bit, based on some unknowns in the marketplace. Right now 20% looks achievable, between 50 and 55 million of quarterly revenues, which to me seems feasible in fiscal 2007.

Great. Thank you so much. And good job improving the profits there.

Thanks very much, Tore.

Our next question comes from Daniel Gelbtuch of CIBC World Markets. Please present your question.

Thank you. First of all, congratulations on doing an admirable job of turning the Company around. The first question I have is regarding your new areas of audio products. I see you're going after the MP3 market against Wolfson. Do you have any plans at this point of going after the TV market and maybe ending the dominance or maybe taking any of the monopoly of Micronus?

Absolutely. Thanks for the nice comments, Dan. We already have demonstrated substantial traction in digital television. And I think you pointed out a very good point. TV is a big application and Micronus has absolutely owned the audio components, which are traditional analog designs, in the analog TV market for quite a period of time. And our attempts to crack into the market have been unsuccessful on the analog side.

But with DTV's the architectural approach, the design approach started more from a clean sheet of paper for most of the major consumer design shops over in China and throughout Asia. And with that, most of the companies over there looked at a fresh set of suppliers. And we're winning our fair share. We're already shipping a noticeable amount of revenue into DTV's today in form of D to A converters, A to D converters, CODECs in a couple of cases. In a few cases, we've got the embedded DSD's sitting along side our CODECs to do effects processing, improve the tonal quality of the relatively low-cost acoustic systems or speakers they're putting in those boxes. And I think we got opportunity to further expand that footprint. So I look for TVs to be a pretty substantial contributor to our revenue line in calendar '06 and even more so in calendar '07, as DTVs take over the majority of the business.

Okay, thanks. One other-- I mean two other questions. Second question would be with regard to you mentioned that you're in the MP3 space, you're winning your fair share of designs against the likes of Wolfson. What specs in particular give you the edge? You know, you mentioned you have some advantages. Can you give us any color on that, on the advantages?

Yes. Sound quality is better, though in the MP3 world, most of the people don't really care that much. Our product costs is lower, which is helpful. So at our model margins, which tend to be higher than the model margins it appears than Wolfson, we can still price the thing pretty aggressive, relative to their position. And we've also got the ability to eliminate discrete components because we've got basically a ground centered output capability. In other words, the output, analog audio output, swings between a minus and plus level around zero volts, which allow us to eliminate capaciters in the end system, which decouple the output signal from ground. Now that's a cost advantage at a system level. It's also a serious physical constraint elimination so that we can allow our customers to make smaller boxes than can our competitors. And we think that's going to be a pretty significant difference as well.

So, would you be able to, you know, quantify what kind of cost savings? You're giving a 10%, a 15% cost savings theoretically?

Well, you have to look at it from a complete system perspective. Again, we're saying only in the analog components. We're not going to go into the system chips and compete with those guys. The analog components are a relative small percentage. Just apples-to-apples, it's a substantial cost savings for our customers, even at our model margins, measured in double digits.

All right. I guess final question would be, you mentioned about getting to a 20% operating margin and you said it's predicated theoretically on getting revenues to a 50 -- what was it a $55 million level?

Yes, between 50 and 55.

50 and 55. Just looking at, you know, I would just like to get some information or some color where you would see some of the operating margin percentage -- I mean operating expense percentage decrease? Would it be coming more out of R&D or S&M?

More out of G&A I think than in any other place. We think gross margin-- we think has got an upside lift, which I don't know if you mentioned that, but that's a pretty meaningful improvement that we think we can achieve there.. And we think that we can run more efficiently on the internal audit and control side in the finance area. We've gone out and achieved Sarbanes 404 compliance, and we think that we can operate within those processes more efficiently than we could in getting to that point. So we think there is some improvement there.

Over a longer period of time, some of the amortization of some of our IT tools will go down. We think that we can further drive efficiencies through our selling channels as we drive revenue growth. We don't think we have to increase expenses really at all in most of those areas. We think that some of our adjustments that we've made in our distribution network with the sale of Mimic to Avnet, we've made some adjustments that we think will be more efficient and drive higher gross margins and ultimately lower operating expenses as well as generating better design win coverage. So those are some of the areas.

So, just as far as targeting, if you were to get a 60% gross margin, what kind of R&D target, G&A targets would you have? Would you be at 20 and 20 or would you have your G&A less than 20? I think G&A -- we'd target G&A being meaningfully lower, you know 22 and 18 is not a bad way of looking at things for that kind of model. Okay. Excellent. That's exactly what I needed. Thanks.

Thank you.

Our next question from Quinn Bolton of Needham & Company. Please present your question.

Thanks. I'm add my congratulations. First question for you, Dave. You know, If you look at your business, you're now an analog pure play, what kind of long-term growth are you going to target as CEO? And what's going to make you happy? Is this a double-digit percentage, if you look at over five years? What kind of numbers should we be thinking about long-term?

Well, that's a good question. Thanks for the kind words. I think that the markets that we're in can drive 10 or 15% annualized growth. You know, if you look at some of the stuff we're doing in the industrial area, we're in the faster growing area. If you look at some of the home entertainment spaces, the digital television installation is driving pretty substantial growth rates, I think probably in excess of 20% from mid to high end audio for homes. Automotive audio is not a big growth area, though we think we've got good opportunity to pick up share as we drive toward lower and lower cost systems through our biggest customer, Bose and others. But I think a 15 or 20% growth area or growth rate in the markets we're in is a reasonable estimate.

We're spending quite a bit in R&D. Many people might argue we're spending too much in R&D. But I think the projects that we've got going now can allow us to grow in excess of the market rate. And as long as I believe that's true, I'm going to allow the organization to spend at levels approaching where we're at today to see if that will play out at the gross margin we're targeting. So, we'll either drive in excess of market growth rates, and I think over a two or three year period, if we can start showing 20 or 25% annualized growth, I might not be happy but I think that the world would be pretty pleased with that. And I think that that's something to be pretty proud of. And if we don't demonstrate those kind of results over the course of the next 12 months, then we've got some improvement in our business model because we can spend less.

Okay, great. And then just wanted to clarify, John, given sort of the three areas where you're going to get some gross margin improvement from the lower wafer price as the replacement products with lower cost and new products. Are those three components themselves what drives you to 60 or are there other factors that play in it? I want to make sure that I had that straight.

That is the bulk of it. I mean there are always product-specific areas where a certain product, you know, might have an issue that we identify. We can save a few points here and there. But the thing about the analog business is typically no one product makes a significant difference in the total. So any improvements have to be more systemically oriented.

Okay.

And that's why it's probably-- you're better off looking at it from the macro point of view.

Okay. Now I was just looking at it more because it looks like the lower wafer prices probably flow through over the next two, three quarters. The replacement products probably would flow through I would think in the same timeframe. So it looks like two of the three factors, you know, we could see this fiscal year, by the end of the fiscal year. Obviously, your new products and the mix shift to newer products, that's going to be a longer term. But it looks like you could get a good way just towards 60% by the end of this fiscal year.

I think that's a pretty fair assessment.

Okay. Next question I had was just on the inventory levels. You had sort of given a comment that they were down 25% year-over-year. I was kind of wondering if you saw a real good growth in revenues quarter-over-quarter, could you make any comments as to what you think just the inventory did quarter-over-quarter? I mean do you think that sales in matched sales out, so this is real sort of market demand pull? Was there any restocking of the channel? Any comments you can make there would be helpful.

Yes, those are good questions. Our -- well as you know in Asia and Europe, the distributors we sell to are -- we recognize revenue on point of shipment because they have no return rights, et cetera. For those class of distributer's customers, revenues in the March quarter-- sorry, inventories in the March quarter at the close of the March quarter were way too low. It was very clear to us that it was way too low. And we weren't surprised to see a very modest uptick going from the March to June period for inventory of that class of customer, but not a lot. And in fact, the inventory levels in that category of customer is several million dollars lower than what it was a year ago still, even after a little bit of increase in June.

So a little bit of a bump up, but still you, as a company, are still very comfortable where the disti. levels are, especially over in Asia.

I think they're too low still.

Okay, and then last question. You'd mentioned sort of the new efforts in low power DACs and that Wolfson was really the only sort of incumbent there. I'm just kind of curious as to whether you're seeing any other companies starting to sample new product in this area. It seems to me that things like digital cameras, MP3 players are all pretty good growth -- unit growth opportunities. And I'm just wondering if you've seen any other competitors attracted to that market?

Really, no. And the way we discriminate is discriminating between low-level voice interfaces with high-performance audio interfaces. So, unless people can offer components for a given application that can process music-level qualities, we don't really consider it a head-to-head competition. Now as it turns out in camera applications, the audio quality that people are willing to pay for is less than that. So it's not really opened up as a good opportunity, nor have cel phones yet, nor really have PDA's as of this stage of the game. They may open up over a period of time. Video cameras, on the other hand, particularly Japanese manufacturers and brands, do care about audio quality, and that's a real application. AKM, in addition to Wolfson, has always been a meaningful competitor. We think that they're a little bit pricey. We think they've got some other issues that allow us some competitive advantages. But they certainly are out there already. But other than AKM and to a large extent Wolfson, every now and then-- the old Brown Group at TI, we really haven't seen anybody else come in the market yet.

Great. And thanks again on the good results.

Thanks very much.

Our next question from Adam Benjamin of Jefferies & Company. Please state your question.

Thanks, guys. Good afternoon.

Good afternoon.

Just a couple of questions. First, just in terms of the mix for the quarter, it appears that the industrial business returned to pretty decent growth, as well as the embedded products. Can you talk a little bit about, a) whether what was driving that; and then b) if we should expect growth from these levels, or is this kind of just one quarter of a return?

Yes, in industrial seismic was the biggest contributor. U.S. distributions-based instruments and industrial business was still pretty slow, although it picked up towards the end of the quarter and started to look pretty good actually in July. But seismic probably pushed the growth more than anything else. In the embedded side of things, pretty broad-based. Home theater and digital television were the two biggest components, I'd say were driving that. And as to whether or not it's a one quarter phenomenon, I mentioned earlier all three of our product lines had meaningful increases in the backlog coming out of the quarter compared to going into last quarter, indicating that we're prepared to see some pretty good performance in each of the product groups in the September period. If I extrapolate from what we see now, we'd probably anticipate that we can see growth in all three areas. But we don't really guide product line by product line.

Okay. That's helpful. With respect to audio, I don't know if you want to get into this kind of granularity but you talk about the digital television growing within that segment. Can you break that out and just give rough spec on the $23 million or so that you did for the quarter, what the end market was for each-- for that 23 million?

We don't. There's a couple of reasons for that. One is that it's a lot of detail. Second thing we actually sell through customers that buy the same product and put in DTV's and put it in DVD players and put it in home theater equipment and everything else. It's really difficult to do that with any level of accuracy in a way that we can believe in. That being said, digital televisions are still pretty small, as a percent. You know, million or two per quarter is, you know, probably an overstatement today. But with the kind of design wins and the kind of bookings rates we've begun to see, suggest that that will be meaningful coming out of this year and going into next year.

Okay. With respect to the backlog, you talked about, Dave, the coverage being above 50%, finishing the quarter here. With respect to looking at where we were a quarter ago, can you -- it's obviously higher it sounds like. But roughly how much more?

Backlog you mean?

Yes. You said the coverage is above 50% today.

Yes.

--for the September quarter. If we look back a quarter ago, were you at 40%?

We've been talking about being covered between one-third and a half, or needing turns between a half and two-thirds. And right now we're, noticeably coming into the quarter, noticeably above half. Don't get too specific because we think it can be a little bit misleading. But right now I guess we could say that the backlog increase in the June period was upwards-- almost 20% of revenue or something like that.

Okay.

So it's pretty meaningful backlog increase.

One last question, I'll let let you go. With respect to the end markets and a question just to clarify that was asked prior regarding the the end-market growth of about 10 to 15%, you had talked about 10 to 15% in a bunch of those end-markets and then your expectation to have higher due to market share gains. Just to clarify, so you would expect that your annual growth rate could exceed 20% over the next couple of years?

We aren't guiding longer-term revenue growth rate at this stage. And I think the best thing to do is put up some numbers that are believable. I think yes, we grew 19% sequentially, one quarter in a row. It doesn't really mean anything. And I think it's better to look at the numbers as we start performing as an analog company and then extrapolate from that. That being said, do I believe it's possible? Absolutely, yes or I wouldn't spend this much money.

All right. Congrats, thanks again.

Thanks a lot.

Our next question from Brian Alger of Pacific Growth Equities.

Hi, guys, good afternoon. Nice job.

Thanks, Brian.

Just trying to crunch through some of the numbers. I want to come back to you, the gross margins that you saw in the June quarter on the video products. Obviously, this is going away, but just trying to make sure I got the comparables set. That was in the low 30s, is that correct?

Did we put a number in there? Was that gross margin on video?

Yes, it was 29%.

29%. I thought so, yes.

Okay and that was below expectations? I'm just wondering what drove that drop in gross profit?

Selling everything we can.

Fair enough. And in the guidance for the next quarter, you gave some operating expense, you know, guidance clearly. Does that include anything for selling the $2 million of additional video product?

The core guidance excludes that. So we guided the revenue on core, 45 to 47 million in revenue and 55 to 57 in gross margin, excluding all video. Then we put a comment in there on video that said we can -- we think we can liquidate the remainder of the 2 million of inventory at a 15% gross margin. And we're actually selling it to that other spun off company, Magnum, so they're marketing it up and selling it.

So we aren't going to have any operating expenses associated with that ?

The trivial amount to support that is included in the 20 to 22 million.

And just kind of reading between the lines here and listening to the commentary with the backlog that you have, the strength in the end-markets and normal seasonal patterns, I guess I'm having a hard time understanding the drive for conservatism on the guidance for the September quarter, up only a couple million dollars, given what you're seeing in the backlog. Can you maybe, I don't know, help me understand why we shouldn't expect more than what you're talking about?

Well, you know, we came into June and we guided 40 to 41 and we did 43.7 And we indicated that we thought the bookings rate at the time was really strong and we thought we could get more, but you don't know what you don't know. And it's going to stay the same thing for September. We came in even stronger and this and that, and June was a substantially better quarter than previously forecast. And the bookings rate all the way into July has been very strong. So if things extrapolate from what we've seen so far, we'll beat the numbers. But the issue is we've been wrong a long a lot in the past at anticipating consumer spending and how it reflects back to the manufacturers. So we just think being more focused on analog, it's better to be conservative anyway.

All right. Well thanks for clearing it up. Thanks. Good job.

Thanks, Brian.

Our next question comes from Jeff Bernstein of Menhast Capital. Please state your question.

Hi, thanks, my questions were answered. Nice quarter.

Thanks. Thanks very much.

Our next question comes from Quong King [ph] from Eden Vance. Please state your question.

Hey, guys. Congratulations on a good quarter.

Thanks a lot.

Just wanted to get some clarification. I think on the call, you said-- someone asked the question about gross margins exiting fiscal year '06. And so I just wanted to get that number again from you guys.

We declined to give a number. And we're only really guiding one quarter. But we did indicate that we think we can make progress, meaningful progress, towards our 60% model during the year.

Right. Okay. So it's during the fiscal year?

Right.

All right. So then wouldn't it be safe to assume that you could improve upon that in fiscal year '07?

Yes.

Okay. Okay. Great. And then in terms of -- in terms of expenses, the 20 to 22 million that you guided for next quarter, how much -- how much more fat is there to cut, given the fact that you guys already incurred a lot of this R&D whatnot for the current generation of products that you'll be shipping?

Well, whether or not one might call it fat, there's always ways to driving further efficiency improvements. There is leasing out more space in our building. There's reduction in costs associated with managing 404 compliance versus installing 404 compliance I mentioned earlier. There's further reductions, amortization over a period of time. There's some improvements I mentioned in our sales channel. We didn't say specifically how much further we can reduce it. But I do think that we can manage, even with meaningful or substantial revenue increases, we can probably hold it flat or drive it down at least a bit.

Okay. Great. Now just in terms of your balance sheet, pretty healthy. Just wondering what your strategy is for cash utilization going forward here?

Pretty healthy?

I'm sorry.

We indicated that we'd see further substantial improvements in our cash position during the June period. Right now we've got no particular plan. We don't feel particularly urgent in terms of utilization of that cash. We're continuing to find ways to get a little bit better return on that, while following a low-risk strategy while we look at our alternatives on that front. And really right now we're focused more on driving towards our organic operating profit model at 20%. And as opportunities to use -- to get better return on the cash show up, we'll look at them.

Great. Okay. Thanks a lot, guys.

Thanks for joining us.

Our next question comes from Shawn Slayton of SG Cowen.

Hi, guys. I know you mentioned to Adam Benjamin that you want to get too granular by end-product but we talked about it in the past. The DVD players, can you mention or remind us now what you're exposure is to DV players? Is it greater than 5% of total sales? And also, can you update us on kind of the impact to your business on silicon integration within the DVD player and just help us understand the general disposition of the industry at present? Thank you.

Yes, yes. Thanks for the question. One of the things, just for history, you know DVD players a year ago in March and June quarters of calendar '04 had become a very meaningful percentage of our revenue, maybe as much as 15% of the core revenue, notably above 10%, I think it was anyway. We're nowhere near that level now. We've seen that business pick up from the over-inventory position of September and December last year. So it's a couple-- few million dollars a quarter. Again, it's tough to get real exact about that because people use the same products for multiple systems. But I think your idea of somewhere around the 5% of sales level is probably a pretty fair estimate.

Okay. And just kind of -- how does that trail off here with this silicon integration within the DVD player?

Yes. Okay. It's kind of hard to tell. I think there's probably some further silicon integration, although we got some pretty aggressively priced DACs right now that it's hard to get much cheaper integrating it, number one. Number two, when these system chip companies got to go to .18, .13 and 90 nanometers to drive costs down, getting reasonable performing audio output signals off of 1 volt rails is going to get tougher and tougher. And you might start seeing a disc integration and they might come back and buy our $0.15 to $0.25 two-channel DACs. But that being said, we'll probably see a little bit more integration but not a heck of a lot. I mean probably half the market will stay separate you know, because they can get a meaningfully better audio quality for $0.20 or $0.25 than they can get by integrating it. But -- so the maximum exposure is, you know, a couple of million bucks a quarter if everything goes away. And we really haven't seen that trend because now people want to put six channels on there and do surround sound DVD players. And you know, putting six channels on there is even less cost-effective because it takes more pins and whatnot. And we got a pretty aggressive six-channel offering as well.

Okay, that's helpful. And then just kind of the state of the DVD player industry, you said mostly we had this inventory train wreck a few quarters ago. That's all cleaned up and you feel like things are healthy or is that an accurate statement?

It's pretty hot but I don't-- you know I was saying last April and May that was way too hot. and I think I was right about that more so than I wish. But I think it's healthy and it's probably okay. We see the consumption running at about the right rate. And again, I think our market share in DVD players, if you look at our analog component presence, is still probably higher than anybody else in the industry. And our view of it is pretty hot, pretty healthy. And I think the consumption rate is probably pretty reasonably comparable to what people are buying right now.

Okay, I appreciate it, guys. Thanks.

Yes, thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from Quinn Bolton of Needham & Company.

Actually, Shawn just asked the question about DVDs, so I'm all set, thanks.

Okay, thanks.

Gentlemen, it appears that we have no further questions at this time.

All right. Thank you, operator. And again, I'd like to thank everybody once again for your involvement and your questions and your interest in Cirrus Logic. We hope to see you and interact with you in he near future, and particularly at the Silicon Valley Bank Tech Investor's Forum September 7th and 8th in San Francisco. And again, thank you for your time and attention here today.