Cirrus Logic Inc (CRUS) 2006 Q3 法說會逐字稿

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

Thank you 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 fourth quarter fiscal year 2006 revenues; gross margin levels; combined R&D and SG&A expenses; inventory levels 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 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 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 generally accepted accounting principals. In addition, during our call we will providing certain non-GAAP financial numbers, including our core analog, mixed-signal, and embedded products 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 and issued with the financial release published today, as well as on our website in the Investors 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 information is useful to investors because it enhances the understanding of the results and trends of our business. We also use non-GAAP reporting internally to evaluate and manage our operations. As a result, our criteria for determining non-GAAP results may differ from other company's 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 French.

Thank you, John and thanks to all of you who are joining us today. First, I'd like to recap the results for the quarter, as noted in our press release, which ended December 24th: total revenue was $48.3 million; gross margin was 55.1%; operating expenses were $21.2 million; and net income was $12.8 million. I'd like to summarize the key highlights from the third fiscal quarter of 2006, and first and foremost, I'm pleased to report that our high-precision analog, mixed-signal and embedded products demonstrated healthy year-over-year revenue growth of 18%. This resulted in a GAAP income of $0.15 per diluted share. We continued to hold our inventory levels flat, resulting in inventory turns still greater than five, and we further increased our cash and marketable securities by $8 million, now up to $233 million.

Also, I would like to provide investors who track our ongoing business activities with non-GAAP third quarter results; this is generally done by the analysts covering Cirrus Logic and contributing to the first call. And when calculated on a non-GAAP basis, the Company would have produced net income per share of $0.09 based on 88.1 million diluted shares. This non-GAAP results compares favorably with the current first call mean estimate of $0.08 net income per share. The non-GAAP number, which John will go through in more detail, excludes a one-time foreign tax benefit of $5.3 million, and that's the only difference between our GAAP and our non-GAAP numbers. Later during this call, I will provide more detail regarding our business operations, and John will now review our financial results for the December quarter in more detail.

Thank you, Dave. Our net sales in the December quarter were 48.3 million, compared with 44 million in the December quarter one year ago. Of that 44 million, the revenue associated with our analog, mixed-signal and embedded products was 40.9 million. Therefore, the revenue associated with our current product lines has increased 18% year-over-year. Our sales by product lines were as follows: mixed-signal audio products contributed 25.5 million in the December quarter, representing 16% year-over-year growth; embedded products were at 13.9 million in the December quarter, representing 26% year-over-year growth; industrial products provided 8.8 million in the December quarter, representing 12% year-over-year growth. Historical revenue breakdowns for these product lines may be found on our website in the Investors section. We had no OEM customers representing more than 10% of sales, and one distributor, [Avnet] contributing 26% of sales.

Gross margin for the December quarter was 55.1%, compared with a GAAP 53.2% and non-GAAP 55.4% gross margin in the September quarter. As shown in the GAAP to non-GAAP reconciliation on our website, the difference between the GAAP and non-GAAP gross margin was due to the low gross margin sales of the digital video product line, which had a gross margin of approximately 5% as we liquidated the remainder of the inventory in that product line. Combined R&D and SG&A expenses were 21.2 million in the December quarter, compared with 26.4 million in the prior quarter. The prior quarter included video product line related spending of approximately 1.7 million, as well as a 3.3 million contingency charge related to excess leased office space.

Without these one-time items, combined R&D and SG&A would have been 21.4 million in the September quarter. Interest income for the third fiscal quarter was 2.1 million. Net income also included a 5.3 million foreign tax benefit. Net income in the third fiscal quarter was 12.8 million. In the prior quarter, the Company reported a net loss of $99,000. As you may recall, the September quarter included the final expenses associated with the sale of the digital video product assets.

Now, I will review the reconciliation of our GAAP income of 12.8 million to our non-GAAP earnings of 7.6 million, or $0.09 per diluted share based on 88.1 million diluted shares. As mentioned earlier, we used non-GAAP financial numbers because we believe that this information assists us in the management of our business and provides more transparency, consistency, and completeness to help understand our underlying results and business trends. As provided on our website, we arrived at our non-GAAP EPS of $0.09 per diluted share by excluding a 5.3 million foreign tax benefit from our GAAP statement of operations. Our employee head count at the end of December was 425 compared with 410 at the close of the September quarter, reflecting increases within our engineering, product development, and sales force during the quarter.

Now, on to the balance sheet. Total cash and marketable securities at the end of December increased to 233 million from 225.1 million at the end of September. Our cash per diluted share increased by $0.09 and ended at $2.64 per diluted share. We ended the December quarter with 21.4 million in net receivables compared with 21.6 million at the end of the September quarter. DSOs, or day sales outstanding, were 40 days compared with 39 days in the September quarter. Inventory at the close of December was 17 million, which was flat with the September quarter.

Net inventory turns were 5.1 in December. Our capital expenditures were $800,000 in the December quarter compared with $188,000 in the September quarter. Depreciation amortization expense totaled $1.8 million compared with $2.1 million in the September quarter. And, now, back to Dave, who will discuss our ongoing business operations and our guidance for the upcoming quarter.

Thank you, John. First, I'd like to mention that just a few weeks ago, the Company returned from our annual international consumer electronics show in Las Vegas. We held numerous meetings with key customers that we anticipate will continue to lead to strong and ongoing relationships and also new design wins. Our customers' interests in Cirrus Logic's new product offerings is reflective of our position as a leading supplier of integrated circuits into audio and industrial markets, based on our core analog and mixed-signal technology strengths.

Now, I'll focus on our ongoing operations beginning with mixed-signal audio product group. This product group contributed $25.5 million of our December quarter revenue, representing 16% year-over-year growth. Semiconductor components in this product area, including data converters and interface devices, are used in a wide array of consumer, professional, and automotive audio applications. I'm pleased with the revenue growth of these products this quarter, driven by exciting application areas such as digital televisions, home theater systems, and more and more so, portable media players. Additionally, this quarter we saw wide array of new design wins in the DTV, or digital television market, with encouraging sales of products such as audio converters and speed of digital audio interface devices.

The recent revitalization of our low-power, portable product offering has generated considerable customer activity, including multiple design wins for several models of MP3 players with companies such as [I-River and Calhoun]. Our time to revenue generation from this product line seems to be faster than other mixed-signal audio products, and we expect to further expand our product offerings within the low power portable IC market during this year. Based on these factors, we believe this area is a strong growth opportunity in calendar year 2006 and beyond.

We will continue to drive long-term revenue opportunities as we continue to introduce new, mixed-signal audio products throughout the calendar year. We have considerable analog and mixed-signal engineering expertise applied across a broad mix of developments, and our commitment to innovation will fuel our future growth in these markets. Focussed demand creation or design win activity is also showing good results, with well over 100 design wins in a vast array of consumer and professional audio applications reported last quarter for this product group alone.

Let me turn now to our analog industrial products. This product line includes integrated circuits designed into a variety of data acquisitions, power metering, and energy exploration applications. These products generate our highest gross margins and contributed $8.8 million of our December quarter revenues, which is a 12% year-over-year growth from the December quarter last year. I'm particularly encouraged by the revenue generated by our growing line of power measurement, or power metering integrated circuits, where we are engaged with several leading customers worldwide.

We achieved multiple new design wins with our customers, particularly in India and China, such as [Alimer] and [Xen Zen] Technology. We anticipate that further global expansion of power measurement integrated circuits will likely augment the long-term stability and overall revenue growth opportunities of our overall industrial product lines. In addition, the market for our seismic products is steady and continues to show good opportunity for revenue gains over the medium to long term.

As I've said before, our revenue is not directly tied in this area to the current rise in energy prices, but nonetheless, we believe there is a significant opportunity for growth in revenue in this area during fiscal year 2007. Overall, industrial products met our earlier expectations for revenue growth this quarter, and in an upcoming quarters we'll focus on launching several, new power measurement and data acquisition products, which leverage our high-precision analog and mixed-signal expertise to drive future growth opportunities. With our industry leading industrial technology, expertise and focus on new product development, we remain optimistic about our longer-term growth aspects within industrial markets.

Finally, I'd like to comment on our embedded product line, which represented $13.9 million of our December quarter sales. This is up from $11.1 million in the December quarter a year earlier, representing growth of 26% year-over-year. Products within this category include our audio digital signal processors, our general purpose, arm-based microcontrollers for industrial and other applications, and networked audio components. Overall, embedded product revenue was somewhat better than expected with continued strong results with our digital audio products and digital signal processors, in particular, in applications such as digital televisions and home theater systems.

Within the area of digital televisions, we secured several new design wins with Sharp and Sanyo, and customers such as Hitachi are currently in production with several digital television models already using Cirrus Logic audio digital-signal processors. Within our networked audio products, we introduced DSP Conductor, which is a new graphical software tool designed to accelerate and simplify our customers' programming of CobraNet networked audio processors. CobraNet technology continues to be the de facto standard for networked audio applications, and over the course of this year, we believe we will see several leading OEMs adopt CobraNet integrated circuits within a wide variety of networked audio or media applications. For instance, this quarter we announced an agreement with Gibson Guitar to apply our engineering skills and CobraNet technology to jointly develop products for next generation, gigabit ethernet-based networked music applications.

Before I discuss our guidance, I'd like to reemphasize how pleased I am that the Company has begun to deliver good cash flow and profitable, year-over-year growth. We remain committed to our 20% operating profit model. We achieved 18% year-over-year growth within our analog and mixed-signal and embedded products during the December quarter. The underlying fundamentals of our business are strong, and we expect them to continue to strengthen during fiscal year 2007. As we look to the fourth fiscal quarter, the current quarter, we're forecasting continuing strong year-over-year growth. However, it's important to remember that like many other companies, the March quarter is traditionally our seasonally weakest quarter, particularly for products that are oriented toward consumer applications. On this basis, our forecast for the fourth quarter is somewhat cautious.

Our guidance for 4Q fiscal year 2006, which ends on March 25, 2006, is as follows: our revenue is expected to range between $41- and $45 million, which represents a year-over-year growth in the analog mixed-signal and embedded products between 12- and 22%. 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 to further increase by $3- to $5 million. We also anticipate that inventory will go up $2- to $3 million during the quarter in preparation for seasonally expected growth in the first fiscal quarter of 2007, or the June quarter.

To recap, I'm pleased with our financial results in the third quarter of fiscal '06. We achieved 18% year-over-year revenue growth within our analog mixed-signal and embedded products, and generated a non-GAAP net income of $7.6 million, and a non-GAAP earnings per share of $0.09. With the Company focussed around high precision analog, mixed-signal and embedded products, for a fundamentally stronger organization. We continue to invest heavily in new products, which we think will strengthen our position and capitalize on many new market opportunities. Our balance sheet and our cash position are very strong and growing stronger, and I'm optimistic regarding our improved prospects for year-over-year revenue and operating profit growth.

And now, we are ready for your questions. Operator?

[OPERATOR INSTRUCTIONS]. Our first question comes from Jay Srivatsa with Roth Capital Partners. Please go ahead.

Hi, good afternoon. Nice job on beating the Street numbers for both top line and bottom line.

Thank you.

Couple of questions. Let me start, if I may, with the gross margin. I know it is within the guidance. Can you speak a little bit as to why it was down sequentially?

Well, the consumer--well, it is pretty much flat because you would have been down 20-basis points, sequentially, which I don't look at it as a big move. But as I mentioned previously, the consumer product portfolio last quarter -- well, the September quarter and also the December quarter -- is the higher percentage of totals sales than it is in other quarters. And in particular, in the second half of calendar '05, we worked very aggressively to maintain market share in audio D to A converters in some high volume, relatively low priced applications, particularly DVD players. We were successful in maintaining market share; in fact, in some cases we might have grown market share. The impact there was it subdued our opportunity to grow our gross margins at the anticipated rate. So we do not expand gross margins during the quarter.

That is -- so the consumer exceeded revenue expectations, and our success in holding market share in [DAX], which I think is overall is a good thing, delayed some of the increases in gross margins that I expected, really started to show up during the March quarter, all things being equal. In addition, the seismic business has not grown yet, so pretty substantial gross margin impact of a mix shift towards seismic, which is quite likely to occur during calendar year 2006, has not at all occurred through the December quarter. So that's still out there as a gain for us.

Okay. Well, maybe we can speak to that a little bit. As you look ahead into the March quarter, the industrial business and specifically the seismic business, is there any seasonality impact there or is the seasonality restricted to the consumer part of the business?

It typically we don't -- we're not able to identify a calendar seasonality norm for the industrial business. I think that particularly for Seismic, that doesn't seem to link up with calendar at all. It has more to do with big deployments, both land-based and more particularly marine-based, which tends to be even chunkier, so to speak. We had some deployments that were scheduled to go out in September and December which got delayed into the calendar year 2006; one in particular looks like it could happen in the March quarter, more likely in our anticipation right now, it is going to be in the June quarter.

So we've had a little bit of push-outs in that area. We do see that there is a tremendous amount of interest, and we have such a high market share I don't think it's a question of us losing business to anybody; it's a question of when are they going to take the products. So we actually got our relatively good, or relatively strong, revenue performance in the second half of the calendar year with, really, no help at all from the seismic area area.

Okay. Last question. On the inventory, you mentioned you expect increases in preparation for the fiscal '07. Could you try to crystallize it for us as to where we could expect the inventory buildup? Is it in the mobile space as you get into it, or the DTV space or is it more on the AV/receiver space that you are anticipating, incrementally?

It's a pretty detailed inventory analysis. We've got about 600 products and several thousand customers, so it is sketchy at best, in terms of trying to provide visibility here. However, the areas you point out, DTV, mobile, and home theater, it's likely that none of those areas will show any inventory increase because, if anything, we will probably be having a hard time keeping up with customer demand, at least based on current outlook. In the industrial area, where lead times tend to be long and gross margins tend to be high, we've actually decided to increase inventory a little bit based on broad strength we're seeing in that area.

We're seeing U.S. industrial markets, which are distribution oriented, European markets, both showing good signs of broad strength, which is pretty important to us. We also see a broad increase in demand across our mixed-signal audio product line. And without being able to pinpoint which customers are going to be successful, since there are many different versions of our customer product that we build, our plan is to build inventory a little bit at the dye level across a wide array of products.

Okay. Thank you. Nice quarter.

Our next question comes from Shawn Slayton from S.G. Cowen. Please go ahead with your question.

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

Hi, Deepak.

Just following up on gross margin again and looking forward toward your 60% gross margin target, Dave, where do you see most of the opportunities? Is it wafer pricing, or plain vanilla cost reduction? Can you give us some color there?

Yes. There is a little bit of everything. We've talked about a lot of it. There is mix, as Seismic comes into play it will have lifting effect on gross margins. We've got a little bit of wafer price reduction that will improve our performance on the gross margin line. We've got a significant cost reduction at the dye level on our audio deck line, the two biggest running audio [D-day] converters; there's a two-channel version and a six-channel version, which gets sold in DVD players and a wide array of other applications which we upgraded, or updated, during the third calendar quarter. We converted the majority of the customers over on the two-channel device during the December quarter.

The cost reduction on that product type is dramatic. The cost on the new product offering is probably a third lower than it was on the previous version. We did not convert a substantial amount of the six-channel customer base over during the December quarter as it was the heat of their building season and they were not real interested in making the move. That will happen this year. That in its own right will have a pretty substantial effect on gross margins for the whole company.

Plus the new products that we're bringing out show, many of them show the opportunity of coming out with higher gross margins than some of the older product offerings.

Okay. Great. And also, Dave, just looking at the industrial segment, can you help us understand the competitive landscape there and f who else you're seeing out there?

Yes, industrial market is highly fragmented. There'ss some big cap companies that sell very successfully way out in front of us, in most cases, the analog devices of the world probably, they're probably one of the stronger ones. Interestingly, our product line is, like most company's offerings in that space, is pretty nichey. Areas where we have technological advantage we oftentimes have no competitors. There's really not any competitive offering to a first approximation for the kinds of products we offer, from any company. So while we're not only sole-source, we're in a no-compete kind of environment in many cases. And a lot of that has to do with driving the level of precision we do at the price points we hit, based on low-cost CMOS technology.

To put things into perspective, much of that product line is built using one micro CMOS technology and older technology nodes, just to put it in perspective. Those wafers are inexpensive; those designs highly unique. The products sell to customers who are relatively small volume, so we don't really see a lot of competition directly. As we get into the seismic applications, there is really not any direct competitor. If you look at -- there is one custom solution that sells through [inaudible] which has some share, but on the merchant market there is not a lot of people who have even tried to tackle the technology demands of that class of applications.

And in power meters there is a bunch of competition. There is quite a few companies that have been selling out their analog devices; I think TI's got an offering, couple of others. We think we've got pretty good share in India, we've got pretty good share in China. We've got better share in three-phase meters than we do in single-phase meters, so our new offering in single-phase meters looks like it is going to be a real winner, and we expect to get pretty good share there during '07 and '08 -- sorry -- '06 and '07 on a calendar basis.

Okay. That's helpful. Thank you. Just one last question and then I'll go away. Dave, can you remind us of typical seasonality for the first fiscal quarter?

First fiscal quarter, meaning the June quarter?

June, right.

Yes. The March quarter we guided down a bit, seasonally, and one can argue it is kind of conservative, and it is a wide range but we don't really know what the interpretation of retailers are going to be once everybody gets back from new year's -- Lunar New Year, I mean -- and studies the retail inventory posture.

However, we've seen good Christmases and bad Christmases tend to generate significant impact on the March quarter, but the June quarter is almost always a very significant sequential up quarter, regardless of what March does. I've seen 10- to 20%, sequentially, in June, be pretty much the norm.

Okay. Great. Thanks, guys. Good luck.

Thank you.

Thank you. Our next question comes from [Niemal Vellipurim] with Benchmark Company. Please go ahead with your question.

First of all, let me congratulate you on a good quarter as well. Just a couple of questions here. First one is when you look at your first calendar quarter, the guidance of meet point down about 10% or so from the fourth quarter, can you put that into perspective? I do understand that Cirrus has gone through a number of divestitures here so it would be somewhat difficult, but still, taking that into consideration, can you let us know what that 10% means? Is it better than or less than, or is it the normal seasonality that you would expect with your product portfolio?

Off of September, we came out a little bit ahead of what we had thought going into the quarter. December, we came out a little bit ahead of what we thought going into the quarter. I'm starting to get convinced that it was a reasonable Christmas season for our caliber of products; though, I think all the accounting is not done with that in retail and what not, so I'm still a little bit concerned. All the data points that we've historically seen and that we currently see suggest that at 10% down, sequentially, for March, for overall mix, is on the conservative side, generally, by a couple of points.

In particular, this year with bookings coming out of December pretty strong, particularly in the second half of the quarter, and bookings at the beginning of this quarter through January bookings looking particularly strong, you could argue it is pretty conservative view to take relative to all those data points. And that notwithstanding, Lunar New Year's a little bit early this year, so we expect starting next week the bookings should slow down from the pretty good pace we've seen since Christmas.

And the time between there and the Father's Day, graduation-type season from mid- to upper-level audio products selling through in retail is a little longer than usual, so it could be that we go into a couple-week period where bookings are a little bit slower. That notwithstanding, and I would expect that if things are as good as many people say, that there is some opportunity for us to do a little bit better.

Just two follow-up questions. Number one on that, I know that you are somewhat reluctant to give some sort of a time frame on the success and revenue generation of the two new product families, the products in the DTV as well as low-power product family. If you can just give us some idea, subjectively, how that's going to play out, maybe on a longer-term basis, this year or next year for Cirrus Logic?

Well, in low power -- we don't guide by applications, so you're right about that -- but in low power there is really only one other supplier with meaningful skill in analog components for audio applications and low power portable devices, that's Wilson, who are a very fine company. But seeing as how there is only one other competitor we've got a pretty good chance at taking some significant market share. I think the overall market is already somewhere between $50- and $100 million annually; probably significantly closer to $100 million annually.

I think our offering, the level of response we've got to our offering just based on the simplification: removal of discreets, lower system costs, lower unit costs based on our price quotes, and the simplicity of design with the ground centered outputs is very, very strong. I expect we've got a pretty good shot of winning 20- to 30% of that market within a one or two-year period, which is up from basically zero dollars in calendar year 2005, so do the arithmetic on that. Most research analysts suggest that portable audio semi-conductors are the fastest growing segment in audio semiconductors. Most reports I see suggest that it's growing at 30- to 40% per year. I think it is a little bit slower, but well in excess of 20% per year.

On the digital television, the market for audio semiconductors in TVs is a couple hundred million dollars a year. Up until this calendar this year, and in analog architectures, overall, we experienced zero success, historically, in that class of application. In digital televisions we're going to get, in calendar '05, we've got a couple million dollars worth of revenue. We're not going to be a dominant supplier because there is so many people going after that space, including the historical kingpin of analog TV audio solutions, which is Micronus, but also companies like AKM, Wilson, ADI, probably the biggest ones, will have some competition.

I think we have an opportunity to get 20- or 30% of that market, and over the next three to five years it's going to convert from predominantly analog architectures to predominantly digital architectures, as will most of the $200 million opportunity in that space, convert, from an area where we had zero market share to an area where we've got an opportunity to get 20- or 30% market share. I expect very exciting opportunities to emerge in DTVs for Cirrus Logic.

Thanks, David. Just a final question. On distribution side, with Avnet being such a large direct customer of yours, from your point of view, are you comfortable with the kind of inventory they're carrying, your distribution partners?

I'd like to point out, Avnet is a point of sale accounting customers; in other words, we only take revenue after they ship it out. So everything they do have is not yet recognized as revenue, so I want to make sure that's clear. That being said, actually, in some areas I wish their inventory were a little bit higher.

Overall, they're at about the right level, in my opinion, and we work very closely with their product management people to try to make sure that that's the case. They have a pretty diverse product portfolio so it is always a bit complicated to anticipate which customers are going to buy what at what point in time. Generally speaking they are at about the right mix. I'd probably like to see it go up a little bit during the March quarter.

Thanks, Dave. Again. congratulations on a great quarter.

Thanks a lot.

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

Good afternoon, guys. This is Alex Kim calling for Jason.

Hi, Alex.

Hi. Just a question on your cautious guidance. I know that you had iterated that your guidance was cautious, and just trying to understand the hinge factors that can sway the quarter one way or the other.

Yes. There is a lot of thing that could sway it to the positive direction. There's predominantly good news; bookings levels are pretty good; December bookings were better than we expected; all the trends look pretty positive. That being said, Lunar New Year's this weekend, and we usually expect the week after that to get pretty close to zero new orders for Asia. And we're wondering if that happened, that is not a big issue.

If we had two weeks of close to zero orders after Lunar New Year as people sort out what retailers really want to do in North America and elsewhere, then that would start causing me to be -- to lean more towards the lower end of what we were thinking.

Okay. Got you. And just a question on margins, again. I know that your target, long term, is 60%. Do you think we could see 60% gross margins? I'm just trying to work out my model here. Can we see 60% in calendar year '06, is that possible?

Yes, it is possible. A lot of opportunities have cropped up for us over the course of the past three to four months as we've got them more and more focussed on the analog side of things. I still think 60% gross margin is the right target for the Company. I prioritized higher than that; the 20% operating model. And I see a lot more opportunities around the globe for revenue pops in the 50- to 55% range that, all things considered, might slow our migration towards 60%, but could dramatically enhance our move to 20% operating profit and beyond. And I've directed the people to go after those and I don't know the impact of that yet, but I like the way it feels right now.

The level of success, the demand creation processes and systems that we have in place appear to be stimulating a tremendous amount of activity. Net-net, if that generates a more substantial growth rate and a slower expansion in our gross margin rates, our ability to get to and beyond the 20% operating profit model might be even stronger. And so I don't know if 60% will happen this year, but I do still think you ought to be thinking that that is possible, anyway.

Okay. Perfect. Thanks, guys.

Thank you.

Thank u our next question comes from Tore Svanberg with Piper Jaffray. Please go ahead with your question.

Yes, good afternoon. Just to try a little bit, again, on the guidance. I know qualitatively you talked about what could go right, what could go wrong. Could you put any numbers around that? Bookings, quarter to date versus quarter to date last quarter. I'm just trying to get some granularity on how conservative you are being.

Yes, I can give qualitative input; I don't know that I got anything that is quantitative. But our bookings quarter to date are certainly better than we would have guessed. Our bookings in the month of December were certainly better than I would have naturally guessed. So if you look at that -- and we came into the quarter with inventories having been held pretty lean in the December quarter, we actually came into the quarter, this quarter, with a couple million dollars of leftover backlog; product that our customers were requesting for shipment in December that we just couldn't turn in time, and that's unusual for the December quarter.

So we got a little bit better coverage there to the level of a couple of million dollars. So that being said, we might have a couple million dollars worth of advantage of what you might otherwise expect in terms of our preparedness to meet or exceed our guidance. And other than that, it kind of depends how things look the week or two after Lunar New Year.

Okay. So I guess what you are saying maybe two weeks after Lunar New Year you would have a pretty good idea how things will play out and shake out?

There's a pretty fair bet of that. Of course, with that being said, I'd have to point out you never know what you don't know.

Sure.

I do expect that the next couple of weeks would be kind of telling for us.

Very good. I know you talked about the industrial business and how it did near term and things like that, but just looking longer term, are there any other areas of the Company is focussed on now? I'm just thinking new projects in R&D that you're committing now that may generate some returns 24 months from now?

Yes. When you look at high voltage industrial products, you look at some of the amplifier products we're working on in industrial and in the audio arena, we're going into some new aes. We've got some new measurement devices, catalog products coming out of the industrial product design group, which are pretty interesting. They're first innovations that we came out with in that area for a number of years, and I think that those are going to open up some meaningful opportunities for us as well.

And in addition to that, we've got, in networked media processing systems, whether they be in a home or in professional applications, deploy a lot of audio components, both analog and digital signal processing devices. Our CobraNet industrial networked audio technology is the industry standard. We're seeing some interest in taking that down to consumer price points. There's a lot of issues when you start thinking about hooking up home media processing systems; you've got [echo] prongs, you've got latency prongs, you've got a whole bunch of things.

We are the world's experts in solving those problems. We've historically sold into million dollar price points and we brought it down to quarter million dollar price points; we now sell into installations that are under $100,000. We start getting down to $10- to $20,000 installation costs, with $10 to $15 worth of content from Cirrus Logic, we start hitting into some real interesting consumer price points that could offer pretty dramatic up-side for us over the two- to four-year horizon for us as well.

Okay. I know in the past we've talked about automotive big a longer-term opportunity as well, and I assume now with the entertainment part of the car really taking off, are you starting to see an acceleration in the signs or do you think we're still quite far away from seeing some meaningful revenues there?

Well, we have meaningful revenue there. I've pointed out that, as a norm, if you average any few quarters together it runs probably 10% of our overall revenue, the automotive space; Bose being the biggest customers and some of these satellite applications, as a group, probably the next biggest chunk and probably another half dozen customers we sell into there. Calendar '05 was kind of a slow year for us in automotive. I think it was little bit down year-on-year, and that was maybe an issue of some of the timing of the deployments our customers have and what not.

'06 looks like it could be a little bit of an up year, and there is some chances that our big customers there could have a much more successful '06, calendar '06, with our products, which could drive meaningful growth. But it is hard to predict whether '06 will be a big growth year or not. It doesn't look like it's going to go down meaningfully. In '07, some of the new products we brought out now three years ago in that space look like they're going to start generating meaningful revenue in calendar '07.

Great. And just finally, could you just comment a little bit on pricing overall? Obviously, the end markets look healthy, your bookings have been looking good, you have had some expedites. How is the whole pricing environment looking for you at this point?

Well, we always have discussions about pricing. Generally speaking, everything we do is proprietary. There might be one or two exceptions with very, very low revenues in the legacy product line, but basically everything we do is proprietary. That being said, we like to make sure our customers are highly successful so we work cost reductions, we work pricing evolutions when we introduce new products for the five-year horizon, which represents maybe a third or quarter of the product's life. We don't try to plan five years out, but we try to offer orderly price declines in high-volume applications for big customers. We don't have the same kind of price pressures.

When we decide to be aggressive on pricing it is because we're thinking about it, and we're thinking out, strategically, why that makes sense. So for instance in the second half of calendar '05, we were extremely agressive in audio D-day converters in DVD players, particularly in China. I wouldn't use the word "bombed prices," but we were very, very aggressive, and the reason we were very aggressive is because we wanted to make sure that people understood we were serious about that market. We held market share, took a little bit of a downside in margin, it was still good business.

It kept us expanding gross margins, but all things considered, that business -- people are going to think twice before they get aggressive about going after that business because we have lowest cost and there is a lot of things we can do there. But other than that, we try to think out two, three years and work with, like, Sony on PlayStation 2; we anticipated price plans over the number of years we offered them, maintain 100% share on PlayStation 2, that sort of thing we'll continue to do for the high-volume applications. Today, we're thinking the same way about digital television. And we'll plan out our price reductions there, and I think we've got a good opportunity to pursue pretty exciting applications at model margins.

Great. Thank you very much.

Thanks.

Thank you. Our next question comes from Vanessa Jacobs with Needham & Company. Please go ahead with your question.

Hi, guys. Can you talk a little bit about -- I'm not sure how you can -- if you can quantify this or not -- but revenue contributions from low-power audio [codecs] and also DVD-related revenue and what's that's doing quarter-over-quarter into the March quarter?

Yes, we don't break out specifics by applications, for one reason is that it's really hard to tell because our customers use the same products in a lot of different applications. But low power, in particular, just started generating a little bit of revenue in the fourth calendar quarter. It wasn't really noticeable; it was well under million dollars in the fourth calendar quarter. So that's really starts shipping in earnest in March and June of this year.

DVD-related revenues, quarter on quarter, again, we don't forecast by segment, we don't even report by application. It's our guess, or estimate, that DVD-related revenues in the December quarter were somewhere between 5- and 10% of sales total for the Company. I would expect it would be down sequentially in March, particularly after Lunar New Year. We've seen continuing revenue there in December and January a little bit, but it could be half of that in the March quarter, I don't really know. We don't really track it all that closely.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from Niemal Vellipurim. Please go ahead with your question.

Thanks. I think this question is for John. John, I know that your tax rate is very low for the time being. Can you give us some sort of a guidance as to what we should be modelling for the next 12 months or so on the tax rate?

The tax rate for the next year and for the balance of this year and FY '07, I would use less than $100,000 a quarter to zero. We have some NOLs that are out there that we plan on using.

All right. Thanks, John.

Yes.

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

Hi, Dave. Just a quick question on the cash cycles in the business. I know you're going to grow the inventory slightly in the March quarter, still going to be generate a couple million dollars in cash. As you move forward this year, are there any incremental things that you might be able to do to improve the cash cycle -- not criticizing where they are -- just for planning purposes. Should it match the operating income and then just add back depreciation or how -- if we were thinking about modelling that, what factors would go into that difference in operating income? Thanks.

Generally speaking, if you think about it at rational growth rates -- so, say anything less than 25% growth -- it is reasonable to expect the cash cycle to resemble the operating profits -- I'm sorry, the earnings number. And the depreciation benefit is not -- we don't really have a lot of capital, capital will tend to run less than depreciation, but there tend to be cash effects that are off the P&L in old leases that we already have accrued and things like that, that are still a cash drain, that don't show up on the P&L. So those are probably offsetting the difference between depreciation and CapEx.

Okay. And so that is -- if you look for that number, let's say it is 3 million or so, is your best -- well, it's your guidance for whatever that -- I won't ask about that anymore. But then you go to the June time frame and you're talking about a typical seasonality is plus 10- or 20%, so, of course, that's significant change in that cash generation ability as well. So that gets back up more towards the level we generated this past quarter, so you go 233, you're getting close to 250 million or so by end of fiscal year. Is that somewhere even close to correct?

Probably conservative. And then you look at September, it's even better. It is likely we'll want to expand inventories a little bit during June, too.

Okay.

And June is a little bit back-end loaded almost always, and it's usually a really a strong quarter so receivables are likely to go up meaningfully in June.

But then generate more in September?

Even more in September. And then December's usually very good, and we did 15% year-over-year last quarter; we're guiding middle of the range, between 15- and 20% year-over-year this quarter. You start extrapolating that and you start looking at some pretty big cash numbers, yes.

Thanks.

Thank you. Mr. French, there are no further questions at this time. You may continue.

Thank you, Operator. And, again, thank you all for your time today. Any questions, I know there is a lot of earnings' calls going on out there today. We hope we can see many of you at a number of upcoming conferences, just to name a few: Thomas Weisel PartnersTechnology Conference, February 8th in San Francisco, we'll be there; Deutsche Bank Small Cap Growth Conference, February 16th in Miami, I think it is; Roth Capital Growth Conference, February 21, down near San Diego; Piper Jaffray Internet and Technology China Conference -- we're spending a lot of time in China these days -- February 28th in Beijing; the Prudential Tech Conference, March 2 in Chicago; and another one, CIBC World Markets Third Annual Semiconductor Summit, March 16th in Vail, Colorado. Look forward to seeing you there and elsewhere. Thank you very much for your time and attention today, and have a good [inaudible]. Bye.

Thank you. Ladies and gentlemen, this concludes the Cirrus Logic third quarter fiscal year 2006 financial results conference call. You may disconnect, and have a good night.