Cirrus Logic Inc (CRUS) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second quarter fiscal year 2006 financial results conference call. [OPERATOR INSTRUCTIONS.] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. John Kurtzweil, Senior Vice President and Chief Financial Officer. Mr. Kurtzweil, you may begin.

Thank you, Operator, and good afternoon. Joining me on today's call is David French, Cirrus 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 the third quarter fiscal year 2006 revenues, gross margin levels, combined R&D and SG&A expenses, and operating cash, 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 risk and uncertainty that may cause actual results to differ materially. By providing this information, we undertake no obligation to update or revise any projections for 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 other filings made with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from our current expectations.

I want to mention before we proceed that all financial numbers are, unless noted, in accordance with GAAP. In addition, during our call, we will be providing certain non-GAAP financial numbers, including our core product revenue and gross margin numbers and certain R&D and SG&A expenses. A reconciliation of GAAP to non-GAAP is included in the financial statements issued with our press release and provided on our website in the Investor section at www.cirrus.com. Non-GAAP results are not meant as a substitute for GAAP, but are included solely for informational and comparative purposes. We believe the non-GAAP financial information is useful to investors because it enhances the understanding of the results and trends in our business. We also use non-GAAP reporting internally to evaluate and manage our operations.

As a note, our criteria for determining non-GAAP results may differ from other companies' methods. These non-GAAP measures should be considered in addition to, and not as a substitute for, the results prepared in accordance with GAAP.

Now I will turn the call over to Dave.

Thank you, John, and thanks to all of you who are joining us here today. Before I get started, I want to summarize for you the key highlights from the second fiscal quarter of 2006. First and foremost, I'm pleased to report that we've completed the restructuring of the Company around our high-precision analog and mixed-signal and embedded products, with our core products showing sequential revenue growth of 11%. These results include a substantial non-GAAP operating income of $0.08 per diluted share from these core products, as compared to $0.05 per share from the prior quarter on an equivalent basis. For this quarter, we continued to reduce our inventory levels, resulting in inventory turns of more than five. And we further increased our cash and marketable securities by over $10 million, to $225.1 million.

Let me quickly recap the results for the quarter, which ended September 24th. Total revenue was $50.5 million, while revenue for our core analog and mixed-signal product lines was $48.3 million. Gross margin was 53.2% overall, and gross margins for our core analog and mixed-signal product line were 55.4%. Combined R&D and SG&A expenses totaled $26.4 million, and the combined R&D and SG&A and on a non-GAAP basis in our core product areas was $21.4 million. Net loss was $99,000.

I'd also like to provide those investors who track our ongoing business activities with non-GAAP second quarter results. This is generally done by the analysts covering Cirrus Logic and contributing to First Call. When calculated on a non-GAAP basis, for our core product lines, the Company would have produced a net income per share of $0.08, based on 87.8 million diluted shares. This non-GAAP result compares favorably with the current First Call mean estimate for the quarter of $0.07 net income per share, and is up from $0.05 on an equivalent basis for the prior quarter. This non-GAAP number does not include the revenue and associated costs with the digital video product line, as well as certain non-recurring items, which John Kurtzweil will discuss in a few moments.

Later during this call, I'll provide more detail regarding our business operations, but John will now review our financial results in some detail for the September quarter.

Thank you, Dave. Our net sales in the September quarter were 50.5 million, compared with 52.8 million in the June quarter. Our core revenue for analog, mixed-signal and embedded products in Q2 was 48.3 million, an increase of 11% over the prior quarter and 3% year-over-year.

Using our product line structure, our quarter-over-quarter sales were as follows -- mixed-signal audio products contributed 26.3 million in the September quarter, up 13% sequentially and up 10% year-over-year. Embedded processor products were 13.9 million in the September quarter, up 11% sequentially and up 18% year-over-year. Industrial products provided 8.1 million in the September quarter, up 4% sequentially, but down 28% year-over-year. The digital video product business that we sold during the quarter contributed 2.2 million in the September quarter, compared with 9.1 million in the June quarter. We anticipate that we will not receive any further revenue associated with this business going forward. Historical revenue breakdowns for this product line -- for these product lines may be found on our website in the Investor section on our web page.

We had no OEM customers more than 10% of sales, and one distributor, Avnet, was at 25% of sales. Gross margin for the September quarter was 53.2%, compared with 51.7% in the June quarter. The September quarter gross margin for the core products of the Company was 55.4%, which was in line with the previous guidance. The digital video product line gross margin for the quarter was approximately 5%, as we liquidated the remainder of the inventory in this product category. Combined R&D and SG&A expense was 26.4 million in the September quarter, which included video-related spending of approximately 335,000 for R&D and 1.3 million for SG&A. There was also a 3.3 million contingency related to excess leased office space. Without these one-time items, combined R&D and SG&A was $21.4 million.

Second quarter operating expenses also included a 2.3 million net restructuring charge, primarily related to the sale of the digital video product line. Interest income for the second fiscal quarter was $1.7 million. Net income also included a $207,000 foreign tax benefit. Net loss in the second fiscal quarter was $99,000, and there was -- there were 85.8 million shares outstanding. In the prior quarter, the Company reported a net income of 26 million, or $0.30 per diluted share based on 86.2 million shares. As you may recall, this included a 24.8 million net gain related to a legal settlement.

Now I will review the reconciliation of our GAAP loss of $99,000 to our non-GAAP earnings of $6.8 million, or $0.08 per diluted share, based on 87.8 million shares. As 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 arrived at our non-GAAP EPS of $0.08 per diluted share by making the following adjustments to our GAAP statements of operation. First, we exclude the digital video product line sales of 2.2 million from revenue. We exclude the estimated associated expenses with the digital video product line of 5.9 million. This includes an estimated 2 million in costs of goods sold; 335,000 in R&D; 1.3 million in SG&A; and 2.3 million in restructuring charges. We exclude the 3.3 million loss contingency on excess leased office space. And, finally, we had a 207,000 foreign tax benefit that we exclude as well.

All these items combined will result in non-GAAP revenue of 48.3 million, non-GAAP net income of 6.8 million, and non-GAAP diluted EPS of $0.08 per share. We have provided a detailed GAAP to non-GAAP reconciliation on the Investor section of our website.

Our employee headcount at the end of September was 410, compared with 560 at the close of the June quarter, which ended on June 25th. Our headcount on June 30th, after the sale of the digital video assets, was approximately 425.

Now on to the balance sheet, total cash and marketable securities at the end of September increased to 225.1 million, from 214.5 million at the end of June. Our cash per share increased by $0.07 during the quarter, and ended at $2.56 per diluted share. We ended the September quarter with 21.6 million in net receivables, compared with 23.5 million in the June quarter. DSOs, or day sales outstanding, were 39 days, compared with 40 days in the June quarter.

Inventory at the close of September was $17 million. In comparison, inventory for the Company at the end of the June quarter was 19.5 million, which included approximately 1.6 million of digital video product line inventory. Net inventory turns were 5.5 in September for the entire business, including sales of the digital video product line. Net inventory turns for the core business were 5.1. The 7.9 million investment in Magnum Semiconductor, resulting from the sale of the digital video product line assets, was recorded in other long-term assets and is being accounted for under the cost method of accounting.

Trade accounts payable at the end of September was 15.2 million, compared with 14.5 million at the end of June. Our capital expenditures were $190,000 in the September quarter, compared with 668,000 in the June quarter. Depreciation and amortization expense totaled 2.1 million, compared with 2.8 million in the June quarter.

And, now, back to you, Dave.

Thank you, John. I'd like, first, to mention the growing enthusiasm level we have here at Cirrus Logic, as we have focused our business around the core analog, mixed-signal, industrial, and embedded products. Our products, our technologies, and our unique engineering skills provide a strong foundation of the underlying value of Cirrus Logic, and we believe that they provide a good basis to drive annual growth in revenue and operating earnings going forward.

During the quarter, we met or exceeded our revenue, gross margin, and expense guidance for these core operations, and I'm encouraged by our non-GAAP net income of $6.8 million, a further improvement from last quarter's non-GAAP net income of $4.3 million. These results further substantiate the underlying strength of our core business and are a positive indicator that our engineering teams are beginning to achieve results in line with other analog semiconductor companies.

I'd now like to provide more detail on each of our core product areas. I'll begin with the mixed-signal audio products, which contributed $26.3 million of our September quarter revenue, up 13% sequentially and 10% year-over-year. Semiconductor components in this product line are used in a wide array of consumer, professional, and automotive audio applications. I'm pleased with the strong seasonal growth of our mixed-signal audio products this quarter, within exciting applications, including digital televisions and home theater systems. Key growth drivers this quarter also included greater-than-anticipated demand for consumer products and an overall strengthening of our product portfolio over the course of the past several years.

We're entering a seasonally softer demand cycle, and in spite of that, our backlog is solid. We are focused on introducing a wide variety of new products targeted at exciting new market opportunities, such as portable audio equipment and digital TV's. We also have made great strides in demonstrating the competitiveness of our digital amplifier, or Class D technology.

I'd like to point out that when addressing these new opportunities, there's a considerable amount of time between new product introductions and significant revenue contribution. As an example, this past quarter's better-than-expected financial results were aided in large part by two audio converter product families which were introduced almost two years ago. In some cases, time to revenue is shorter. We launched our first low-powered stereo codec family earlier this year, and it is already generating demand from customers. This is an encouraging prospect, as we expand our position within portable applications, such as wireless headsets, portable digital radios, digital camcorders, MP3 players, and possibly PDAs, and even cell phones.

This quarter we introduced three additional leadership audio products. These include a new eight-channel A/D converter for multichannel surround-sound applications, such as audio video receivers. Also a complete single-chip six-channel digital to analog converter for entry-level surround-sound audio systems. And, finally, a new stereo codec, or two-channel integrated circuit, offering superior audio performance for entry-level consumer applications, such as digital television, DVD recorders, and audio-video receivers.

We have considerable analog and mixed-signal engineering expertise that's driving new product development and innovation across the Company that will become the fuel for our future growth in these markets. Focused demand-creation activity is also showing results, with key design wins in a vast array of consumer and professional audio applications.

I'd like to turn now to our analog industrial products . This product line includes integrated circuits designed into a variety of data acquisition, power metering, and energy application -- energy exploration applications. These products generate our highest gross margins, and represented $8.1 million of our September quarter sales, up 4% sequentially. On a year-over-year basis, revenue from this product category was down 28%, as North American industrial business was slower and energy exploration customers consumed existing component inventory.

I'm particularly encouraged, however, by revenue growth from our line -- growing line of power measurement integrated circuits, where we're engaged with several leading customers worldwide. Further expansion of power measurement integrated circuit revenue can augment the long-term stability and periodic growth opportunities of our industrial product line, which is highlighted by consistently high margins and significantly longer product lifecycles than the chip industry's average.

This past quarter we added another high precision power meter offering to our portfolio, which brings superior analog performance and additional on-chip features designed to appeal to a new generation of residential power metering applications. In addition, I believe the seismic market, or energy exploration market, is rich with potential. Our revenue opportunity is not directly tied to the current rise in energy costs, but I believe there's a significant opportunity for continued growth in fiscal year '07, as marine and land-based exploration is becoming more attractive in a broader range of locations than people previously thought.

The senior leadership we hired last year in the industrial product group has reinvigorated the engineering team, and is significantly improving our rate of new product development. This bodes very well for revenue expansion in this high margin area in the years to come. Overall, industrial products met our expectations for revenue growth this quarter, and our mid- to long-term outlook is favorable, led by new application opportunities for amplifiers and high voltage products, as well as the expansion of power meter opportunities within mainland China. With our industry-leading industrial technology expertise and focus on new product development, our longer-term prospects for growth within industrial markets are promising.

Finally, I'd like to comment on our embedded product line, which represented $13.9 million of our September quarter sales. This is up from $12.5 million in the June quarter, and represents growth of 11% sequentially and 18% year-over-year. Products within this category include our audio DSPs, or digital signal processors, general-purpose ARM-based microcontrollers, and networked audio components.

Revenue growth in our embedded products was fueled by strong seasonal consumer demand by customers such as Onkyo, Harmon Kardon, and Pioneer for our audio processor ICs, particularly within home theater and other consumer applications that leverage our surround-sound audio expertise. Newer applications, such as digital televisions and surround-sound personal computer peripherals also contributed to revenue growth. One particularly noteworthy design win, which began volume production during this past quarter, is a new generation of Hitachi digital televisions, which employs Cirrus Logic audio DSP.

This quarter we introduced a new software programming tool for our CobraNet-based audio system processors, making it easy for our customers to quickly program our DSPs for their networked audio application. The commercial audio market has a long-term revenue upside opportunity, as we focus on driving our CobraNet IC products into expanding applications within both professional and commercial networked audio systems. Overall, our embedded processor products are receiving broad market acceptance and have a positive long-term outlook.

Before I discuss guidance, I'd like to remind you of the progress we've made in recent quarters to reach sustainable profitability on an operational basis. As you know, in Q1 we generated approximately 7% operating profit on a non-GAAP basis. This past quarter we improved to 11% operating profit on a non-GAAP basis. We remain strongly committed to our 20% operating profit model, and have action plans in place to drive towards this level of performance.

This quarter we continue to demonstrate strong growth, reflecting the Company's focus as a leading provider of high-precision analog, mixed-signal, and embedded processor solutions. We have a solid base of more than 3,000 active end customers where our products deliver high performance and command high margin.

Our guidance for the third fiscal quarter of 2006, which ends on December 24th, is as follows -- sales are expected to range between 45 and $49 million, which represents year-over-year growth in core revenue of 10 to 20%; gross margin is anticipated to be between 55 and 57%; combined R&D and SG&A expenses are expected to range between 20 and $22 million; and we expect cash generated from operations to be between 5 and $8 million.

To recap, I'm pleased with our financial results in the second quarter of fiscal year 2006. We achieved 11% sequential revenue growth within our core product lines and generated a non-GAAP net income of $6.8 million, non-GAAP earnings per share of $0.08, which is roughly 60% higher than the prior quarter. With the restructuring of the Company around high-precision analog, mixed-signal, and embedded products now substantially complete, we're a fundamentally stronger and more focused organization. We continue to invest heavily in new products to strengthen our position further and capitalize on new market opportunities. Our balance sheet and our cash position is strong, and I'm optimistic regarding our improved prospects for year-over-year revenue and operating profit growth.

We're now ready for your questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS.] Our first question comes from Tore Svanberg with Piper Jaffray. Please go ahead.

Hi, this is Heidi Poon calling for Tore Svanberg. My first question's regarding the gross margin. I know that is within the guidance, but can you give those a little bit more color regarding why this is down sequentially?

Yes, the consumer-related business, Heidi, during the past quarter, was a little bit stronger than we anticipated. As you, I think, know, our consumer segment margins are a little bit lower than the industrial product segments, so a lot of the revenue upside was on slightly lower gross margin products. So that held back some of the expansion in gross margins that we've been working towards. I'd like to point out here that most, if not all, of our gross margin programs -- or gross margin improvement programs continue intact, but, again, they were offset by the considerable strength we saw in consumer products this past quarter.

Do you see those mix shift continuing in the December quarter?

We gave a very wide range of revenue guidance for the Q3 period, partly because we don't really know how consumer spending's going to go, and we don't know how the retailers are going to anticipate consumer spending, in terms of what they put on their shelves. We believe that if consumer remains as strong as we've seen through the second fiscal quarter, the September quarter, that that will slow down revenue -- or gross margin expansion in December a little bit. On the other hand, the rest of the business continues to see good gross margin performance.

Okay. Regarding your operating expenses, I understand that you just completed the restructuring. Can you also let us know if you have IDed any potential efficiencies with R&D going forward? I mean at 10 million a quarter, when do you think that we might see a little bit more returns from the R&D spending?

Well, right now, we think that the projects that are coming out of R&D have very good prospects for return. The time line is difficult to predict, and as I mentioned earlier, particularly in the analog area, it's usually a year to two years before we get significant revenue ramp on new products as they come out. We've seen pretty good performance on the products that began to come out of engineering about two years ago. In fact this last quarter, I mentioned that one of the big areas of revenue growth was in products that came out in the fiscal year '04 vintage. But in any case, I think we're already starting to see the beginnings of that return. And in the coming year, if we can get the kind of revenue growth that we think possible next year at the gross margins, or even higher gross -- at today's gross margins or even higher, we think that will justify the continuing high level of investment in R&D that we are making.

Okay. One last question, what do you anticipate the tax rate to be for the rest of '05 and maybe into '06?

I'll let John answer that question.

We, we don't expect that we're going to have a tax rate for the next two years, for the rest of this fiscal year and for next fiscal year due to the NOL position that we're in.

Okay. Oh, so not even into '07, fiscal '07?

No.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from Daniel Gelbtuch with CIBC World Markets. Please go ahead.

This is Hugh Cunningham for Daniel Gelbtuch. Congratulations, gentlemen, on a good quarter and on delivering solid progress on your turnaround. A couple of questions. What's your experience in going up against Wolfson in portable and also in -- against Micronus on DTV?

In the portable area, I think Wolfson has a strong position with multiple products in that area, so, clearly, they've got a good position with many accounts. On the other hand, we have great customer relationships with most of the customers that matter in consumer portable applications. So we're seeing pretty good acceptance for the product that we have in the areas where it's applicable. We're not getting immediate revenue generation, which we certainly wouldn't expect. But we do think that will generate noticeable revenues in the first part of calendar '06, which is quicker than average. And we're also seeing in Asia-based accounts, we're getting very rapid acceptance due to the cost advantages that our product brings, not only in the component cost itself, but also system-level cost advantages in the area of reduced discreet component count around the converter itself.

Okay.

So that's on that. With respect to Micronus and digital television, we actually are not competing head-to-head typically with Micronus, who has some other technology that sells into those applications. However, we are seeing a broader acceptance of our DSPs, as well as our converter components, than many people anticipated, just by virtue of the fact that television manufacturers, when they moved from analog architectures of yesteryear to today's digital architectures, started from scratch and are making component selections with a clean sheet of paper. And if you look at our breadth of technical offerings and component offerings and trade-offs between performance and cost, for a catalog of products in the audio array -- in the arena, nobody has a better set of solutions than we do in most cases.

Okay. Given your 60% gross margin target, 20% operating margin, where do you think you need to be at revenue-wise to achieve that?

Well, the gross margin is not so much related to revenue. In fact, cyclical spikes, which are driven by consumer cycles, such as we saw in the September quarter, will tend to slow down margin expansion, as I mentioned earlier when Heidi was asking her question.

Right, right.

On the other hand, when you get to the other side of the cycle, when you get into the March and June period, which are oftentimes a little bit slower, that should help our margin percentage. But, overall, margin percent is not directly tied to revenue level. Operating expenses, we've said, and I continue to believe, that we can manage our operating expenses flat to down in dollar terms, even if we were to experience substantial revenue growth. On the other hand, I don't think we should have plans in place to dramatically reduce engineering expenses, as was discussed earlier, because I think most of the programs we have can generate pretty substantial return over the coming years. So if we manage that flat to down, we continue to push gross margins slightly up, something in the low 50s in quarterly revenue should be able to drive something like our 20% operating profit model.

Excellent. Thanks very much.

Thank you.

Thank you. Our next question comes from Shawn Slayton with SG Cowen. Please go ahead.

Dave, John, good afternoon. This is Deepak Sitaraman for Shawn.

Hi, Deepak.

Dave, could you give us a little bit more color on the top-line guidance, specifically it sounds like some of the current quarter revs were pulled into fiscal Q2? And, also, how did your backlog coming into the current quarter compare with what you had entering the September quarter?

Yes, that's a big question that a lot of people have been asking. We came into -- to kind of give a little bit of background -- we came into the previous quarter, Q2, with better than -- better backlog coverage than we had seen in the immediately prior quarters, over 50% of the quarter having been booked, and turns requirements between a third and a half of the total revenue expectation. We actually beat our expectations in our guidance in Q2, as we saw strong demand all through the quarter. If you recall 90 days ago, when we had the conference call, I indicated if things kept up, we'd probably beat our revenue number, but we didn't know if things would keep up.

Well, they did. I mean, bookings levels were strong throughout the quarter. We actually entered the current quarter with approximately equivalent backlog coverage for the December period as to what we had last quarter coming in, which means we had more than half the December quarter already booked, or at least more than half the center of guidance booked, noticeably more, just like last quarter.

We have the same sort of ambiguity, in terms of market signals. A lot of people at the macro level are talking gloom and doom on the consumer side, particularly for North America. We can't ignore those signs. If business dramatically drops off pretty immediately here, that will push us down towards the lower end. If things keep going, we'll have a -- we'll have a situation similar to what we saw last quarter, where demand continues strong in spite of some of the macro gloom and doom that we hear out in the marketplace.

Okay. Fair enough. And, also, Dave, could you help us understand seasonality, if there is such a thing, in the industrial products business? And are all -- most of the revenues related to this business North American, domestic?

On industrial, you mean?

Right.

Yes, industrial doesn't have any clearly noticeable seasonality from a calendar perspective. There are cycles, but -- but they're not tied to the calendar, it seems to me. If anything, the summer tends to be a little bit slow, going back to a lot of years and working standard linear -- around standard linear businesses with bigger cap chip companies, the summer tends to be slow in Europe, which slows you down. North American business was a little bit slow this summer as well, so the business was overall slow.

Seismic is a good chunk -- we don't break it out at the product-specific level. Seismic exploration is a good chunk of the revenue in that space, and that's not seasonal that we know of, though the hardware costs are pretty small overall percentage of the cost of a deployment in the exploration arena. Consequently, the end customer doesn't manage hardware costs all that tightly, so they tend to buy product and then eat up -- chew off inventory for a good period of time, as much as six to twelve months, it seems in some cases. This past quarter we saw, at least we speculate, that a little bit slower revenue there than we saw in a year-ago period, for instance, was that particular scenario.

As far as the North American versus non-domestic percentage of that business, it's more than half North American, but it's not 90%. Europe is a pretty big chunk. We don't have that much Asian business to speak of in industrial.

Okay, great. And also, OpEx on an adjusted basis has been flat for the last couple of quarters, and it sounds like it's expected to be flat in fiscal Q3. Does your OpEx guidance reflect the lower headcount ex-video products, or how should we be thinking about that on a go-forward basis?

The guidance we gave was 20 to 22. We did 21.4 on an adjusted basis, non-GAAP, this past quarter. We've been giving non-GAAP indications for our core products in that same area for the last, I think, two, maybe even three quarters. I'd expect us to continue that direction. One of the big changes is the numbers will start to become GAAP results as opposed to just non-GAAP results because the video transaction was actually completed at the beginning of fiscal Q2. We actually added some operating expense when Memec was acquired by Avnet in order to strengthen our demand-creation channels through that acquisition. We actually added some more internal-demand creation costs. Over the long run, I think that will be good for us. In the short-term, that kept us from showing meaningful further reduction in adjusted operating expenses.

Now, the specific question about -- Does our spending guidance take into account the headcount reduction associated with video? The answer is, yes. But I'd like to point out that the adjusted spending for previous quarters, for core products, would have excluded the video-specific headcount. Now one level of refinement on that, is that there were some corporate resources that we were able to scale back on to some extent with the simplification of our business as we sold the video product line assets. We believe that those reductions are reflected in the guidance.

Okay. And, I guess, just going forward, without giving guidance, directionally, should we expect that to trend downward?

Yes. Flat to down.

Great. I'll pass it on. Thank you, very much, guys.

Thank you.

Thank you. Our next question comes from Jason Pflaum with Thomas Weisel. Please go ahead.

Yes, good afternoon.

Good afternoon.

Maybe to start, if we could sort of go back to the gross margin. How big of an impact did your DVD codec business have, I guess, on the negative side, as far as margins this quarter? And, kind of, what's your expectation for that business in Q4?

DVD DAC, I think you mean.

Yes.

For DVD players?

Yes.

Yes, we didn't break that out. I don't actually have those numbers at my fingertips. But we priced that product very aggressively. We priced to maintain market share versus Integrated Solutions. We were successful at maintaining market share.

Gross margins, on the old product, which has, or will be replaced over the course of the next few months, were substantial -- I don't have the numbers at my fingertips -- substantially lower, even, than the consumer product average, which is a little bit lower than the corporate average. Now, the total revenue, we've indicated in the past, for DVD player DACs, again, we don't break it out specifically, but it's between 5 and 10% of the total revenue during the peak season, which this last quarter was. So you can do the math. I mean, tens of percent of gross margin lower on 5 to 10% of the revenue. And we expect in December there's a little bit less revenue associated with that product line.

Okay. But you also get the benefits of the lower cost solution that rolls out?

For a little bit higher percentage of it, we got the lower cost product in play, yes.

But it contributes more next year, it sounds?

Definitely next year. By this time -- by next year's hot season, certainly all the DVD player business will be converted to the new D/A converter core.

And, then, the new core, how much better margin profile does that have?

It's dramatically lower costs. Die size is half to two-thirds of the die size of the existing or previous-generation product.

Okay. And if you had to guess, what market share do you think you have in that business right now?

Over 50% still. You could argue as much as 70%. I don't know until after I get a summary statement of what -- how many DVD players actually got built this year.

Okay. And, then, I guess another component of your gross margin, some of the lower wafer costs, how much of did that contribute this quarter? Did you get a full quarter worth of lower-cost wafers? Or is that something that we get some incremental benefit in in the December quarter?

We didn't get much of that this quarter. I think we'll get a little bit more in the December quarter. And I think we'll get the preponderance of that by the March quarter.

Okay. Maybe, could you give an outlook by each of your three major divisions, what you're expecting for the December quarter?

We don't break out guidance on revenue, and, obviously, there's some visibility issues that only half to two-thirds of our backlog -- or of our quarter come -- is backlog at the beginning. So there's -- we just don't give guidance on that. I would expect that the likelihood of industrial being up is pretty good. The likelihood of consumer being -- or mixed-signal audio being up, there's a chance it's up. There's a chance it's slightly down. Embedded products is more likely down a little bit, and that's at the center of our expectations. On the other hand, if the consumer business keeps going the way it went through this second fiscal quarter, everything's -- each of those -- well, other than industrial, each of those a little bit better.

Okay. And, I guess, maybe, just last question, just focusing more on the consumer, what type of feedback are you getting from your OEM customers right now? Are they -- do they appear more conservative heading into the holiday season than in past years? What type of inventory do you see out there as far as, kind of, pre-holiday build occurring?

There's different kinds of inventory. Our internal inventory is very healthy now. We got that down to model levels at five turns. So that's good. Our customers' inventory and the non-stocking fulfillment-oriented distributors in Asia, which the big chunk of our business for consumer, their inventory is down meaningfully from the year-ago period, which we think is good. And we think demand is actually higher this year than last year. Certainly, the consumption rate through our customer base in the September quarter was higher than it was last year and inventory is lower. So that's positive.

The feedback we get qualitatively, so I cannot confirm this at all, is that retail inventories for products in the home audio entertainment area is relatively low relative to last year, and even relative to anticipated sell-through. So all those are very positive signs against a general macroeconomic backdrop that tells me all kinds of negative things. And that's why we give a pretty wide range of guidance on revenue.

All right, great. Thanks a lot, guys.

Thanks.

Thank you. Our next question comes from Quinn Bolton with Needham & Company. Please go ahead.

Hi, Dave. Hi, John. First question, just I wanted to talk about the low-power audio products. I don't know if you can talk specifically, but sounded like you guys were getting some good traction with folks like Samsung and Sony, but I was just wondering if you could provide a little bit more color there in terms of what types of applications are these stereo headset applications, MP3 players? And then I've got a few follow-ups.

Wide array. The faster-moving accounts are the accounts that you might not know of so much, they're not the famous global brands like the Samsungs or Sonys necessarily, but we've got a long-standing relationship with a bunch of the accounts in Asia that build low-cost audio equipment from low-end home-theater-in-a-box to low-end and mid-range MP3 players and/or boom boxes, even, so we don't tend to participate in the lower price point. iRiver's an account that we've got a long-standing relationship with who seems fully committed to using our product for some of their designs. Overall, I think fiscal 2007, or calendar '06, will be a good year of revenue growth for our low-power product line, even though we only introduced that product this year, meaning millions of dollars of revenue, not tens of millions, but millions of dollars of revenue next year.

But millions of dollars over the course of the year?

Right.

Okay. Second question was just, it sounds like you come into the quarter about equally booked as you entered the last quarter, yet I would assume at this -- the bookings this quarter tend to be very front-end loaded, given the holiday slowdown that probably begins second half of November, early December. Is that a fair statement?

All those are fair statements. And one other key factor is that, with our inventories running as lean as they are, bookings, generally speaking, that we get don't tend to get serviced in less than six to eight weeks. So most -- not all, but the vast majority of orders, for instance, more specifically, in fiscal Q2 that occurred in the second half of the quarter did not get shipped during fiscal Q2. And we went out with approximately the same amount of, what I would call, delinquent backlog or backlog where our customer requested dates are faster than our ability to service those lead times. It was about the same as it was the prior quarter. I expect in the December quarter that number is likely to be down a little bit.

Okay. But it would sound like your bookings for this quarter should be very front-end loaded. So I would imagine within about three weeks, you're going to have a very good look at the quarter. So if bookings activity continues at the fiscal second quarter levels for another three weeks, you're going to feel pretty comfortable with the guidance you've given?

I think that's a rational set of conclusions.

Okay. Can you comment just how bookings have continued to date in the month of October?

Well, the first week of October is typically a holiday weekend in a bunch of the regions in Asia, and that's a little bit slower. But then, again, the first week of July is slower, too, because it's July 4th week. So, I don't have any meaningful data point to share with you on that so far.

Okay. But National Week in Asia keeps the first week of October low, and then, typically, you'd see a pickup?

Yes, typically it's a little bit better the second week, which, we're in and it was a little bit better second week, as we would have guessed.

Okay. And, then, finally, last question for John. It sounds like R&D stays fairly flat on an absolute dollar basis, given investment in new products, but SG&A could continue to come down. Is there, sort of, a target level you might be able to provide us as to where you think you might be able to get that if you execute all the programs? Or is that something that you're going to continue to cut depending on the revenue level?

We're going to continue to look at that as we move along on revenue. But as Dave mentioned earlier, we continue to take down our operating expenses, and R&D is probably going to stay flat. So it's going to be coming out of SG&A over time.

Can you give us any sense on Sarbox costs, say fiscal, sort of, over the next few quarters and how that might have compared to the last couple quarters? I mean is that one area where you've got some good savings opportunities?

Last year it cost us over, close to 1.2, $1.3 million. And this year it will cost us, probably, closer to 7, 800,000. So I think we made a good stride in that area to cut those costs.

Great. Okay. Thank you, very much.

Thanks.

Thank you. Our next question comes from Adam Benjamin with Jefferies & Company. Please go ahead.

Thanks, guys. Just to continue on the order rate and backlog, Dave. So with respect to going into this seasonal period, can you give us, based on history, where you would think the -- what time period? Is it the first week in December that the order rates drop off significantly, or is it really -- is it earlier than that?

We've seen lots of different behaviors in the past four or five years. And so I'd be reluctant to try to clarify a norm based on that. Last year we had a relatively large inventory overhang throughout the channel -- our customers, our distributors, ourselves -- I don't know about retail, maybe retail wasn't so bad, but in the areas leading up to retail. And so we saw very little ordering and very little backlog coverage going into and in the first part of the third fiscal quarter.

The prior year, people were talking about lead times extending, and, actually, business booked strong all the way through lunar new year. This year, it's not real clear to me how to predict. Again, that's why we gave a relatively wide range of guidance on revenue. The only thing I would say is that inventory levels appear to be low, and sell-through, all the way through our customers, appears to be very good.

Okay. All right. I'll move off that topic. On the industrial, it seems as if the business was essentially flat, or up a little bit over last quarter, and you mentioned some inventory being worked off in North America. Is that something you expect now, that inventory's been worked down, that that business can grow a little bit over the next couple quarters, or is that going to take a little bit longer for us to see more growth, more toward, like, the back half of fiscal '07?

It's difficult to predict. As I mentioned, customers in that space tend to buy a bunch and then not buy for a little while. And we're trying to get better visibility on that, but it's difficult. So I'm reluctant to pick which quarter. Generally speaking, on that product area, the health that our market share and the strength of our relationships don't tend to be reflected in predictable or smooth quarterly progressions of revenues. So it's really hard. On the other hand, we have some good opportunities for meaningful upticks in December and March. And overall for fiscal '07, we feel very good -- or calendar '06, let's say -- very good about the prospects of a number -- a revenue number meaningfully higher than calendar year '06.

Okay. And, then, one last question just on the new products. We talked about a lot of different end markets and applications. Can you maybe give us your top two or three that we should be keeping an eye on that you see as the most near-term revenue opportunity, as well as the largest, in terms of addressable markets?

Yes, the areas that are -- that we are most, I'd say, enthusiastic about in terms of year -- next year revenue growth, let's say, looking out two or three years maybe less interested -- we got digital television for audio converter products, as well as our DSPs. We've got low-power products, which we've talked about in a couple of questions already, which will likely generate millions of dollars of revenue off of 0 this year. We've got --

And is that -- is the best application for that MP3 or portable media players or is it headsets? Which one on the low-power side, Dave?

I would say MP3 players is the biggest. We're only going to go after the higher-performance segments, so stuff that SigmaTek and service have integrated low performance, or slightly lower performance audio quality product, we're not going to really compete for. On the other hand, probably 10% of that 30-million unit market is an area that's -- where we should pursue, and that can generate a meaningful amount of revenue. Headsets -- wireless headset's a possibility, probably not a big number for us next year. Digital satellite radio, portable versions, could be a pretty meaningful revenue generator for us in the coming year. Those are probably the biggest ones.

Okay.

Digital television, I mentioned. PS3 coming out next year, we've got the audio component in there, which is probably a pretty meaningful revenue generator next year. Seismic, I mentioned earlier, is likely to generate a meaningful revenue uptick. A lot of new products we introduced in calendar '04, calendar '05 can generate meaningful revenue, I mentioned some of the products earlier, in the coming year. Another wild card is automotive. I think Bose's business, for us, is relatively soft this year, not because we aren't doing well in market share, but because some of the new products haven't kicked off yet. That could drive, actually, a pretty large Company-specific uptick next year, as they look to proliferate products containing our components into a wider distribution of price points in their end markets.

Great. And one last question, Dave, on the gross margin side, can you give us a little more granularity with respect to audio, industrial and embedded? Industrial, you've talked in the past about that having the highest gross margin, say, in the mid-60 range. The audio and the embedded, is there much difference between those gross margins? Are they roughly, kind of, in line with the corporate average?

Embedded's a little higher than the mixed-signal audio, but not dramatically.

Okay. All right. Great. Thanks a lot.

Okay. Thank you.

Thank you. Our next question comes from Don Rhode with S-Squared Technology. Please go ahead.

Yes, hi, David, kind of a concessional question. With the cash this quarter up to $2.00 and almost $2.50 a share, and with no revenue growth, and you continue to maybe slight margin improvement, if you get to your target some point in time next year, there's potentially another $0.40, $0.50 a share cash generation on the balance sheet, which would leave you, kind of, a pretty over-capitalized Company. Just what are you thinking about out loud in terms of what you might think about doing with that would be helpful? Thanks.

Yes, thanks, Don. We have no immediate plans. I think that we're focused on putting up good numbers. We got up to the double-digit operating profit, which is not overwhelming, but it's certainly a move -- meaningful move in the right direction. We continue to generate positive cash, and I think your calculations are about the same as my calculations on our ability to have positive cash flow. We'll keep looking at all the various options. Right now we don't have any immediate plans to do anything with that cash other than work to continue to improve our returns on that cash. Last time, if you look at the interest income line, it's up a little bit, not only because the net -- the average cash was up, but also because the interest rate was higher.

So -- so right now, I think we got a reasonable quarter this past quarter. I think December's shaping up to be a pretty good quarter for us. I think next year's going to be a pretty good year overall. There are probably some seasonal cycles that we got to deal with, but, overall, looks like a pretty good year. As we gain confidence and gain your confidence in the strength of our underlying business here, then maybe we'll look at other alternatives, but right now we have no immediate plans.

Okay, good. Thanks.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS.] Our next question is a follow-up question from Tore Svanberg. Please go ahead.

Yes, good afternoon. Just coming back to the gross margin situation, if, let's say, your consumer audio business is down in the March quarter, what type of an impact should we expect? Are we talking about 100 basis points or 300 basis points? I'm just trying understand how you can improve that mix as consumer audio becomes a smaller portion.

Well, we didn't guide the March quarter, as you know. The arithmetic I would steer you towards, without giving guidance, because I'm not giving guidance, is that consumer's a pretty good percentage of our mixed-signal audio, which was over 50%. What was the actual percent for mixed-signal audio? But a pretty good percentage of that. And the margins were -- well, thousands of basis points lower than the industrial business, and several hundred basis points lower than the corporate average. As that -- if that mix goes down meaningful, I would say the opportunity for gross margins to float up with the substantial shift in mix that, basically, it results from that, are more towards the high side of your reference range estimates.

Okay. Very well. And I'm not trying to be cute here, but since the quarter -- this quarter is so front-end loaded, do you think you've had pretty good sense by the time the RDAA conference to know exactly what's happening?

What date is that?

November 6.

Oh, the AeA, yes. Well, you never know what you don't know, so I can't anticipate what I'm going to learn between now and then. Oftentimes it's seasonally front-end loaded, but our inventories are low. Our customers' inventories are low. A bigger percentage of our business, it appears to me, not provable scientifically, is going to end consumers in Asia relative to the past, which has been more so to Europe, Japan, and North America, which tends to peak in February, early February, as opposed to mid-December. It's unclear that it will be front-half loaded as much as everybody's saying on the call today, to tell you the truth. So I mean I'm likely to know more by November 6th, but things may still be going up by then. I don't really know.

Fair enough. Now, and, also, maybe to follow up on the previous cash question, I think this quarter you generated -- well, I think next quarter you're expecting to generate 5 to 8 million from operations. You already have a pretty high cash balance, not a whole lot of debt. So haven't you, or at least considered maybe doing some buybacks at this point?

Yes. The Board is constantly evaluating alternatives, one of which is buying shares, and we're thinking about it. We've not decided to do anything specific as of yet. And we'll keep looking at that. The likelihood of the cash continuing -- as Don mentioned earlier -- the likelihood of the cash continuing to go up based on operations is very, very, very high and probably at a very good clip. And so that question will become more meaningful even further in time.

Okay. And, now, last question for John. Just as a reminder, according to FASB 123, do you have to report those numbers by the end of the March quarter, or is it later?

By June quarter.

June quarter. Great. Thank you, very much.

Thank you.

Thank you. And our next question comes from Quinn Bolton. Please go ahead.

Hi, guys. Just wanted to follow up. Dave, you mentioned the audio component for the PlayStation 3. I was just wondering if you could kind of give us a rough sense of the dollar content you have there? And could you also remind us if you're getting any substantial or meaningful revenue today from any of the existing platforms, game console platforms? Thanks.

Yes, we're in PlayStation 2 at a pretty low price. We've been in all the PlayStation 2s, I believe, thus far throughout history. And they started out in the $0.50-range, and we're dramatically lower than that now on a unit cost -- unit-price basis. Most of the game consoles, as they come out, follow a similar curve. So when we come out with the audio component in PlayStation 3, it starts in the same range and works its way down over time. Big question is what's the volume next year? Lot of people are estimating 10 to 14 million units. And if that's the case, it's millions of dollars in revenue for us next year.

And -- but that should be incremental revenue since your ASP, or dollar content, in PS2 is much lower and I'm sure that those units are starting to tail off?

I'm not sure they're starting to tail off, but the price is so low, it's not real visible and not really a big factor, correct.

Okay. Great. Thanks.

Yes, thank you.

Thank you. And, gentlemen, at this time, I show no further questions.

All right. Thank you, Operator, and thank you, all, for your attention and interest here today. By the way, I just want to mention in parting that we hope to see many of you at the upcoming conferences which we will attend, including the Prudential Technology Conference October 27 in New York; Silicon Hills Summit, for those of you that are visiting Austin on November 1st; the AeA Classic Financial Conference November 7th and 8th in San Diego; the Lehman Brothers Global Tech Conference December 7th through 9th in San Francisco; and the Needham & Company Growth Stock Conference January 10th through 13th up in New York City. Again, thanks for your time and interest and attention here today, and have a good day.

Thank you. Ladies and gentlemen, this concludes the Cirrus Logic second quarter fiscal year 2006 financial results conference call. Thank you for participating in today's conference. And at this time, you may now disconnect.