Cirrus Logic Inc (CRUS) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic fourth quarter fiscal year 2007 financial results conference call. At this time, all participant are in a listen-only mode. Later, we will open up the call for your questions. Instructions for queueing up will be provided at that time.

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thank you, operator, and good afternoon. Joining me on today's call is Mike Hackworth, Cirrus Logic's Chairman and Acting Chief Executive Officer.

Before we begin, I would like to remind you that during the course of this conference call we will make projections and other forward-looking statements regarding, among other things, our estimates for first quarter fiscal year 2008 revenues, gross margin levels, combined R&D and SG&A expenses, stock compensation expense, as well as our estimates and assumptions regarding our future revenue growth and profitability.

These statements are predictions that are subject to risks and uncertainties that may cause actual results to differ materially from our projections. 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 today, which is available on our website, at www.cirrus.com. Our latest Form 10-K-A for fiscal year ended March 25, 2006, 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 also want to mention before we proceed that all financial numbers are prepared, unless noted, in accordance with generally accepted accounting principles. For any financial numbers not prepared in accordance with GAAP, a reconciliation of non-GAAP to the most directly comparable GAAP information is included in the financial statements and issued with the financial release published today, as well as provided on our website in the investor section at www.cirrus.com.

Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for informational and comparative purposes. We believe that certain non-GAAP financial information is useful to investors because it may enhance their understanding of the results and trends in our business.

We also use certain non-GAAP financial information internally to evaluate and manage our operations. As a note, the non-GAAP financial information we use may differ from that used by other companies and these non-GAAP measures should be considered in addition to, and not a substitute for, the results prepared in accordance with GAAP.

Now, I will turn the call over to Mike to discuss key financial highlights from the fourth quarter. Mike?

Thank you, Thurman, and thanks to all of you for joining us today. Let me briefly recap the results for the quarter, which ended March 31. Total revenue was $43.6 million. Gross margin came in nicely at 60.2%. The combined GAAP R&D and SG&A expenses were $25.8 million, and the net income was $7.3 million, or $0.08 per diluted share.

I would also like to provide those investors who track our ongoing business activities with our non-GAAP fourth quarter results. This is generally done by analysts covering Cirrus Logic and contributing the first call. When calculated on a non-GAAP basis, the Company would have produced a net income per share of $0.09, based on 89.3 million diluted shares. This non-GAAP result compares favorably with the current first call mean estimate of $0.08 net income per share.

This non-GAAP number does not include certain one-time items and other expenses and benefits that management does not consider as part of its ongoing operational functions of the Company, and Thurman will discuss those with you in a few minutes. Later during the call, I'll provide more detail regarding our business operations. But Thurman will now review our financial results in detail for the March quarter. Thurman?

Thanks, Mike. Our net revenue in March, in the March quarter was $43.6 million, compared with $45.3 million in the December quarter, and $42.2 million in the March quarter one year ago. Our revenue by product line was as follows: Mixed signal audio products contributed $20.2 million in the March quarter, equaling revenue from the same quarter one year ago. Industrial products provided $13.5 million in the March quarter, representing 34% year-over-year growth, and embedded products were $9.9 million in the March quarter representing a 17% year-over-year decrease.

Historical revenue break-downs for these product lines may be found on our website in the investor section. We had no OEM customers representing more than 10% of revenue, and one distributor, Avnet, contributing 31% of revenue. Gross margin for the March quarter was 60.2%, compared with 60.5% gross margin in December quarter, and 58.1% one year ago.

Combined R&D and SG&A expense was $25.8 million in the March quarter. This includes stock-based compensation expense of $450,000 in R&D, and $510,000 in SG&A. This also includes $1.6 million in expenses related to our recently concluded stock option review, $1 million in facility related charges, as well as a $400,000 charge related to an executive termination agreement we negotiated with our former chief executive officer.

Interest income for the fourth fiscal quarter was $3.4 million, down slightly from $3.6 million in the previous quarter. Fourth fiscal quarter results also included a $4.3 million impairment charge to our investment in Magnum Semiconductor, the Company that acquired the assets of our video product line in June 2005. Additionally, we incurred a $500,000 facility restructuring charge and also recorded a tax benefit of $1.8 million, $8.2 million. Net income in the fourth fiscal quarter was $7.3 million and earnings per share was $.08 based on 89.3 million diluted shares.

I would like to review the reconciliation between the GAAP net income of $7.3 million to our non-GAAP net income of $7.9 million. We arrived at our non-GAAP net income by making the following adjustments to our GAAP statement of operations: First, we excluded the $4.3 million impairment charge related to our investment in Magnum Semiconductor. We excluded $1 million in stock-based compensation expense. We excluded $1.6 million in expenses associated with the Company's recently concluded stock option review. Additionally, we excluded $1 million in facility related charges and $500,000 in restructuring charges.

We excluded a $400,000 charge related to an executive termination agreement that we negotiated with our former chief executive officer. Finally, we excluded the tax benefit of $8.2 million. When these items are excluded, the net income on a non-GAAP basis is $7.9 million with diluted earnings per share of $.09. Our employee head count at the end of March was 456, a slight increase compared to the 441 at the close of the December quarter.

Let's move on to the balance sheet. Total cash and marketable securities at the end of March increased to $272 million from $264 million at the end of December quarter. Our total cash per diluted share increased to $3.04 at the end of the March quarter. We ended the March quarter with $19.1 million in net receivables compared with $16.6 million at the end of the December quarter. DSOs, or days sales outstanding, were 40 days, compared with 33 days in the December quarter. Inventory at the close of the March quarter was $16.5 million, down 19%, or $3.8 million, from $20.3 million at the end of the December quarter.

Net inventory in turns improved to 4.2 in the March quarter, up from 3.5 turns in the December quarter. Net inventory at our distributors, increased 16% during the quarter.

Our capital expenditures were $400,000 in the March quarter compared with $3.1 million in the December quarter. Depreciation and amortization expense in the March quarter totaled $1.8 million, compared with $1.7 million in December quarter. Now Mike will discuss the business operations and guidance for the upcoming quarter. Mike?

Again, thank you, Thurman, and I guess I would start by saying it's been about eight years since my last earnings call at Cirrus Logic, so please bear with me for this first one here. Before I discuss this past quarter's performance and future guidance, I would like to mention that Cirrus Logic's revenue for fiscal 2007 came in at $182 million, which was flat compared to the revenue associated with our analog mixed signal and embedded processor businesses in the prior fiscal year, our ongoing businesses.

While we were disappointed by the lack of top line revenue growth, we are pleased that the gross margin percent related to these products increased from 56% in 2006 to 60% in fiscal 2007, contributing an additional $6.6 million in gross margin. Non-GAAP R&D and SG&A expenses were relatively flat, increasing $1.7 million over the same period. So this is a strong indication that we are, in fact, making progress towards our long-term goal of 20% operating profit.

In the fourth quarter of fiscal 2007, I'm pleased that our March quarter revenue came in at the high end of our expectations and continued profitably highlighted, again, by strong gross margins. The Company remains fundamentally solid, built on a strong foundation from our analog and mixed signal product lines, and continues to deliver profitable earnings.

Even as the Company addresses slowing demand for some of our older product lines, I'm pleased to say that new product development initiatives that began 18 to 24 months ago are now beginning to pay off. I am particularly encouraged by the design win momentum for our new products within consumer electronic and industrial segments with key customers. I believe this is really a good indicator for future revenue growth.

I'd like now to provide a brief update on our products beginning with our industrial products group. This is the product line that includes integrated circuits designed for a variety of data acquisition, power metering, precision measurement and energy exploration applications. Revenue from industrial products this quarter came in at $13.5 million, which is relatively flat to the December quarter. However, industrial products revenue grew 34% year-over-year and continued to provide strong gross margins.

Demand for our industrial products remains strong, although we are experiencing some reduced demand this quarter for seismic products due to customer inventories. In addition, we continue to obtain solid results from our power measurement products which provide an opportunity for revenue growth longer term due to a good position in an overall attractive market with strong new products in the pipeline, an opportunity we are pretty excited about.

We remain encouraged with our long-term growth products for the industrial product line, as we plan to introduce several new industry benchmark products this year for both power measurement and industrial process control markets.

Now I'd like to discuss our embedded product line which represented $9.9 million of our March quarter sales, down from $12.3 million in the December quarter and down 17% year-over-year. I think the thing you need to understand about this product line is it consists of a fairly large component of legacy products, complemented with audio DSPs and general purpose ARM-based microprocessors, those processors being the focus of our investment for this product group.

The legacy and new products that we just mentioned are used in a wide range of consumer and industrial applications -- broad market. Revenue for the embedded products line is being impacted by slowing demand for the legacy products. It's likely that the revenue during the June quarter will be flat, however, an opportunity to grow will emerge later this calendar year and into calendar 2008 based on anticipated upgrade cycle into new generations of home theater equipment that support the emerging new high definition audio standards with associated DVD products.

Recognizing the need to move into this market opportunity quickly, we launched the new audio processor for both early generation high definition DVD players, as well as new generations of home theater receivers. The processor is the industry's first single chip solution capable of offering audio decode of all of the audio standards associated with high definition DVD including Blu-ray disc and HD-DVD.

We believe we are at the forefront of this market transition, and with these new products, combined with our historical strong market position for audio products, we are poised to capture market share as high definition DVD consumer products begin to drive an upgrade cycle in the consumer electronics home theater market.

Let me now turn to our mixed signal audio products. Semiconductors in this product line include data converters, Class D amplification production, and several interface circuits that are used in a wide variety of professional and automotive audio applications. This the product line contributed $20.2 million of our March quarter revenue, up slightly from the December quarter and flat from year-over-year.

Though historically March quarter sales are generally weaker compared to December quarter, it is encouraging that this past quarter, we saw a slight revenue growth compared to the December quarter driven by strong demand for our audio converter products. For the June quarter, we are anticipating flat sales impacted by soft demand from older products.

Longer term, we are encouraged with our growth prospects driven by strong consumer customer acceptance of our recently introduced products from the consumer related product line. This includes design win moments up with multiple tier 1 accounts in both the portable audio and the automotive audio and telematics markets. In the past several years, audio has reemerged as a priority for consumer features, something they are willing to pay for, and with our broad line of mixed signal audio solutions Cirrus Logic is able to help drive innovative products for our customers as they work to meet this demand.

As consumer electronics OEMs begin to build, begin product builds for their 2007 holiday season, we are expecting good revenue growth for our mixed signal products, audio products, during the second half of this calendar year. Overall, expectations for the first fiscal quarter for 2008 are as follows: Revenue's expected to be in the range between $40 million and $44 million. Gross margin is expected to continue to be in the 58% to 60% range. R&D and SG&A GAAP expenses are expected to range from $23 million and $25 million, and these include share-based compensation expense of approximately $1.1 million.

To recap, I'm pleased we've achieved the high end of our guidance for the March quarter. Our diversified product portfolio has enabled us to deliver solid and predictable results. The June quarter revenue guidance reflects our expectations of softer demand for legacy products as we transition to anticipated revenue growth for the newer consumer products.

Backlog coverage is consistent with the shorter lead times we're seeing from our customers, and, therefore, our visibility is lighter than in previous quarters. In closing, I note that strong analog businesses often enjoy very long product life cycles, but at the same time new product designs can take more than a year from product introduction to revenue ramp. And we're encouraged by the strong customer acceptance of many newly introduced products that will drive revenue growth in the future.

A 20% operating profit margin remains our long-term goal as we continue to tightly manage operating expenses and drive toward revenue growth at strong gross margins. We're now ready to take your questions. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from Jay Srivatsa with Roth Capital Partners. Please go ahead.

Yes, thanks for taking my question. In terms of the outlook, typically the June quarter tends to be pretty strong for you. I'm a little surprised that you're guiding to roughly a flat quarter. Maybe you can share with us, specifically, what aspect remains weak, especially when you refer to the older products?

Thurman, you want to take a shot at answering that?

Well, there's two ways to answer that. One, our Q4 results were better than normal, so part of that was getting actually performing better in the Q4 so we are not seeing the difference between the Q4 numbers and the Q1 numbers. We believe that we're continuing to stay pretty strong in the industrial business and we think that our mixed signal business, although we are ramping up and preparing for the Christmas season is also, we're putting up a pretty good quarter there.

We've got, the weakness is partially due to some of the older products which are really losing some of the demand that we've had for that, and as we're moving into new products and a new growth area for us later in the year, we're seeing some of that transition which is translating to a little bit less visibility for us this quarter, and is resulting in us being somewhat cautious on how we are looking at our revenue profile.

Okay. Maybe I'll ask it a little differently, in the mixed signal side, I think your revenue was down by almost $10 million sequentially. Was this specific to any geography, or is it across the board drop for demand in those products or maybe you can elaborate on that?

I'm not sure how we track to that particular number, but maybe this is a follow-up question that we should pursue later? Do we have that data available to us at this moment?

Okay. Let me ask maybe another question related to the CEO search, can you give us an update on where things are?

Yes, we have a, the board has been actively doing the search activity, agreeing on the criteria and such. We've engaged a number of people, senior people in the Austin area, we've engaged a number of candidates outside the Austin area, and we're also engaged with internal candidates within the Company. I would expect that we would be coming to a decision as to how we want to proceed fairly soon. That's about all we can say at this point.

Okay. Last question, and I'll step off of the queue. In terms of R&D, there seems to have been a little bit of an increase in the March quarter, and yet on the forward guidance, you are taking it back down, can you share with us where the increase came from?

Thurman, you want to take a shot at that one also?

In R&D, normally we have some movement with the number of tape-outs we do, and when you see a difference in that, we've added some R&D staff in terms of some expenses on the R&D side, as we're on a normal course of business, and then driven by our product revenue expenses and our tape-out expenses that will drive that up and down on any given quarter.

Is that the same thing with SG&A which also ramped up quite a bit?

SG&A we have stock option expense included in there, and there are some additional administrative and overhead expenses we've had with some of the things that we've had going on over the last six months, which has contributed to driving that up.

Okay. Thank you.

Our next questions comes from Tore Svanberg with Piper Jaffray.

Yes. Maybe I can ask a little bit of a follow-up on the legacy products. Looks like that's where the demand is weak. Can you maybe put a number, maybe a percentage of how much of your products are now legacy that are at a little bit of this risk?

Well, that's a hard one to quantify. We have some products that are 15 years old, we have products that are 10 years old. So it's, that's a difficult one to quantify. We don't really break it out, just that there's a set of products that are basically cash cows, and demand for them can be erratic in some cases, get large surprise bursts and then go for periods where nothing happens and another burst of, so it's just characteristic of things that are near end of life and you have up and down demand.

Okay. And you mentioned the industrial business is going to come down in the June quarter driven by a little bit of an inventory reduction, can you give us a little bit more color on that? And how long you expect that correction to last?

Actually, the industrial business come down is primarily pretty flat in the June quarter.

I think we -- Go ahead.

Yes, and we're expecting that the industrial business still has some growth in it. What we are not expecting in terms of very slight growth or staying relatively flat, you are not going to see the growth we saw year-over-year from last year in the industrial business, but you are also not going to see a significant drop-off in that business either. We expect it to stay relatively consistent throughout the year.

Okay, and on your $40 million to $44 million, what type, you mentioned you did have less visibility. Can you maybe qualitatively talk about what has changed, other than the older products?

I think the thing that's changed is the lead times have come down and the visibility is consistent with the lead times. It's just a mathematical calculation.

Okay, so you are just being conservative because you are going to have to require more turns this quarter?

That's correct.

Okay, and what gives you the confidence that some of your business segments are going to return to more substantial growth in the second half of the calendar year?

It's basically new products that have been introduced, as I said, over the last 18 months, two years, but it's not just introducing them, it's the fact they are proceeding through a design win cycle. We're seeing the customer acceptance of those products, and they are going through their cycle of product deployment and roll-out. In some markets, this can happen very quickly, in other markets it can take as much as a year, but we are tracking those and we're seeing very good acceptance and the [dollarization] of it is quite interesting. So it gives us confidence to say the things we've said.

Very well, can you give us an update on your low-power audio business? Obviously, I know you can't mention customers or anything like that, but qualitatively, just give us some comfort that that business model is actually working out?

Yes, we have with us in our call today, Jason Rhode, who is the general manager of the MSA division, which includes that family of products, and so, Jason, you want to make a comment or two there?

Yes. It's an area where certainly we've invested a fair amount over the past couple of years. We've seen a handful of new product introductions. Those products, as Mike said, have had great acceptance in the market, with lots of new samples and quotes (inaudible), our sales team works with the customers real closely, and we've got a variety of new customers we are shipping to in that area already.

A variety of new design wins that are on the way over the course of the next couple of quarters, so it's definitely an area where we are feeling real good about our progress.

Is there an inflection point at any given time there this year or next year? I'm just trying to understand when you expect some more substantial revenue in that business?

As I think we said, we would start to see that in the second half of this, actually beginning in this calendar year, but really in the second half of this fiscal year.

Okay. Great. Thank you very much.

Our next question comes from Craig Hettenbach with Wachovia. Please go ahead.

Yes, thank you. Question for Thurman and Mike, just given some of the change at the senior management level, can you just talk about some of the senior level design engineers or sales, people that are still with you in the organization, just give us some color below the CEO level? That would be helpful.

Could you restate the question? I'm not sure what you're asking?

Sure, just, there's been some change in the senior management team at Cirrus Logic, what I'm looking for is just underneath that--

Are there any changes? No. There have not been any changes since, over the last several months, if that's what you're asking.

That was. Thank you. And then to follow up in the industrial space and the seismic market, do you have much visibility? You said there's some inventory correction going on. Do you have visibility from your customer as to when that correction would ease?

We have one particular customer, and I have John Paulos here who heads up the Industrial Products Division, and he can maybe give you a little bit of color on that.

Yes, the inventory situation that Mike referred to is a relatively modest one with one customer, and there is also some lumpiness to the business in terms of where a significant orders and deliveries fall within the quarter, so what we are seeing from Q4 into Q1 is really more a matter of timing of business, and not a significant inventory overhang.

Thank you. And then last question, if I could, you talked about some low-power audio, can you just give us a refresh on the digital TV side in terms of design win and product ramps through the year?

Yes. This is Jason Rhode again. That's an area where, again, we've had a variety of new products introduced there, it's an area, of course, where we ship quite a lot of our existing portfolio of DACs and ADs. Sometimes that's hard to break out a little bit, because those customers tend to be fairly broad and tend to have a lot of other activities as well. In a lot of cases, it's the same part that goes into multiple products that they make. So it's a little bit hard to get visibility on some of that.

But that said, we introduced a new Class D product a few months back, I believe it was when we did the public announcement. We've seen great acceptance on that, we've seen some good momentum, people definitely in the design win phase, and we expect some significant revenue from that, as Mike said, in the second half of this year. So it's, that's been an area we've been working on for quite a while so we are starting to feel pretty good about, actually seeing some return on that.

Okay. Thank you.

Our next question come from Rick Schafer with CIBC World Markets. Please go ahead.

Hi, thanks for taking the question. This is actually Dan Morris calling in for Rick. For the last, actually many quarters, you've been generating quite a bit of cash, just wondering what your perspective is on cash on the cash balance, if you want to keep continuing to growing that, or if you are thinking of returning more back to shareholders?

First of all, we enjoy having a large amount of cash, so the fact that we're generating cash and we have a good amount of cash on our balance sheet, we don't necessarily see as a terrible thing. We will always say on a quarter-by-quarter basis, and ongoing basis, we always review numerous possibilities for the use of cash, and that certainly includes considering acquisitions, although we don't have an immediate plan to acquire anybody at this moment.

We do look at that. In terms of stock buy-backs, we have an ongoing dialogue both internally and with our board of directors concerning the merits of doing stock buy-back, and we will continue to have those dialogues, and continue to consider all of our options with cash, but we are not going to do anything outside of the normal or anything that we are not comfortable with doing. So when we do begin to utilize that cash on different fronts, we are going to do it in a manner that we feel is best for the future of the Company.

Okay. And talking about the lead times coming in a little bit, could you quantify, maybe on a week's basis or something like that?

I think the number of, I'm going from recollection now, so I'm not saying this for the hard record, but I think that number is down about four to five weeks from where it historically has been.

So lead times are around four to five weeks right now or they came in four to five weeks?

It came in four to five weeks over the last quarter.

Okay.

As capacity is freeing up in the foundries, the utilization of foundries is down, utilization of back end manufacturing is down, and customers are providing shorter lead time and still getting service. It just means we have to run faster and harder to, when the orders come in to turn the business and get it out the door.

Okay. And kind of related, but how have the bookings been trending?

Been monitoring that on a daily basis, and some days are good, and some are not, but overall, it's supporting our plans.

All right. And lastly, to get to your 20% operating margin target, what kind of a top line run rate does that require?

You know, it's relatively easy math, our top line is going to have to run, depending on our product mix and what our gross margins are running, and what our expense profile is for any given quarter, it's going to have to be above 50 for a single quarter for us to hit a 20% margin at least on our spending profile now.

And our goal there is when we state that it's a long-term goal, it is a long-term goal, and we're also still driving internally to achieving that in a quarter, in this fiscal year, and achieving it on an annual basis going forward, so that continues to be our, our, one of our primarily considers.

I would offer this observation, that the Company in my mind needed to get to predictable revenue. It needed to get to respectable gross margins, (inaudible) start with a six and hopefully over time grow from there, and then get to that 20%. I think Dave in the last several years did a really good job of getting us to the point of predictable revenue, and now more recently, demonstrating the 60% margin, and what we got to do now is get that growth rate going.

And coming in here as the board chair now with this Acting CEO role, I would make an observation that now that I can see things that at a lower lift of detail than you do as a board member on a day-to-day basis, the new product activities is quite impressive, and we made our comments that we did in the release, and what we need to do is get the growth curve going and we'll get that 20%.

We have to keep our OpEx tight so we can't let the dish run away with the spoon on that, so we have to keep a tight rein on OpEx, but drive the revenue with the new products, and we'll be moving there.

Thank you.

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

Hi, good afternoon, guys. A first question, just as a follow-up to the last, so thinking about OpEx going forward, it seems like we should not expect any further cuts, that perhaps, just kind of holding of OpEx from these levels going forward?

I think there's an inflation factor there, and there's obviously non-recurring OpEx associated with various activities, stock option expense, legal matters from time to time, so with that said, I would say, you're right, the main thing that we need to do is look at how we're spending the money, and perhaps reallocate from time to time, but we're going to have some modest increases, and then as we get the revenue curve going, we'll need some more additional resource to support that revenue, but we certainly want to get a lot of leverage off that revenue growth.

Okay. Just looking by division, I think you offered some guidance, I was hoping you could repeat that. I think I missed it. Did you say flat on the embedded and mixed signal, and industrial would be down?

We really didn't talk about specifics, we think, we did not say the industrial would be down, industrial is running somewhere on a run rate where it has been. We did, as John mentioned a moment ago, we have some inventory issues that can cause that to fluctuate a bit. We actually are looking for our mixed signal business from a quarter-over-quarter basis to be flat to up a little bit, and our embedded processors staying in the flat area. We don't really break that out to detail or forecast associated with that.

So it sounds like mixed state relatively the same, and I guess if that's the case, what is driving the sequential decline in gross margin, especially in light of the fact it seems that some of your older products, I guess I'm making the assumption some of these older products have lower gross margins are fading away. I think you'd have --

We're basically giving you the same guidance on gross margin we gave you last quarter. (inaudible).

Okay.

If you're discussing in Q3, we are 60.5%, and I think in Q4, we are at 60.2%, that's a very modest decline, and there are lots of things that can move it around, that small an amount, but we are not looking for significant erosion of our gross margin.

Okay. This last question, if you could provide some more color as far as some of the legacy programs that are winding down. Are these associated with DVD -- I was under the impression that was out of the mix already?

That's out of the mix, I'll give you one example. And -- megabit Ethernet, I don't know how old that product is, guys, but what it is, 15 years old, 17 years old, something? What we get on that is we had some nice pops on that last year, and we are not forecasting to have nice pops on it this year. If we do, it won't decline as much, if we don't, we will see what we are projecting. It's that kind of thing.

So there's several items in that camp that are --

Yes.

Got it.

Another example would be some T-1 chips that were actually in production before Cirrus Logic acquired Crystal. We're still making them.

Okay. And think of the margins on these products as being below corporate?

I'm not familiar with that. Thurman?

Maybe slightly below, but they are in the range.

Okay.

Depending on the product itself. They all range, there are different margins associated with each one, but they are either at or slightly below.

They aren't going to move the needle on the net gross margin.

No.

Got it. Great, thanks, guys, good luck.

Thank you.

Our next question comes from Adam Benjamin with Jefferies. Please go ahead.

Thanks. I know this has been asked a couple different ways now, but if you look at your OpEx on a non-GAAP basis over the last several quarters, you've basically been running at $21 million to $22 million in total OpEx.

Your guidance implies $23 million, so a million increase, and I think, Thurman, you talked about R&D increases, tape-outs, and head count increases, and I just got confused whether you were referring to that as the March quarter. I'm assuming you are referring to the June quarter because in the March quarter, the R&D was essentially flat with December, so I'm just trying to figure out if it is a million dollar increase sequentially into the June quarter how should we think of that going forward?

Are those kind of one timers that cause the OpEx to come down again in the back half of the year, back to the $21million, $22 million level, because if you do the math and your $54 million of revenue at break even, it gets you to 20%. You obviously need a lower OpEx base than that $23 million?

The $21.5 million to $22 million that you're referring to is without our FAS 123 option expense. The $23 million that we're talking about is, we went through this earlier, had $1.1 million, the range that we gave has $1.1 million of those option expenses--

But you guided $23 million to $25 million, and if you back out that million basically you're at $22 million to $24 million, midpoint is roughly $23 million.

Roughly, but you add in that we go through this cycle of inflation that Mike is talking about, talks about salary increases during a certain time of year, and we also have additional expenses associated with certain taxes and so forth .

We are expecting that we will see a little bit of uptick, that's why we're giving you that number, but those numbers will move around. Also associated with product expenses which includes things like the number of tape-outs that we do and not do, and so if you're talking about the June quarter, that's our guidance, we would, we're trying to tightly control our expenses and we expect to come in hopefully at the lower end of that, but, again, we have other things that can affect that over any quarter and we are comfortable with the spread that we've given

Okay. I guess -- I guess what I'm trying to get to is it does bump up in the June quarter and does it come back down? Obviously, there's certain things in given quarters that cause OpEx to go back up, but it would seem to have to come back down in the back half of the year.

We would continue to drive to see that come down, but again, what can drive some differences in those expenses is how many tape-outs we do, how much product expense we have, any other things that can move that, move the needle on that a few hundred thousand dollars, which is what you are talking about on a quarter-to-quarter basis. But what we don't expect to have is to see a growth in expenses over the year to the high end.

Okay, just two more questions. On the gross margin, with respect to the product lines, they seem to be relatively stable, is that something you would expect to continue given the diversity, especially in the analog segment?

Yes, we have products that can drive higher growth that might be below that number and on the other hand, we have a large number of products that will be growing, but not necessarily as at high a rate as some other products that are much higher gross margins, and when you integrate all of this and manage it, we believe we can achieve the numbers and maintain the gross margin with the growth we are talking about.

Right, with the vagaries just being a mix on a quarter-to-quarter basis?

Right.

Okay. And then lastly, on the TV audio side, there's been kind of some dialogue about increasing competition there and pricing degradation affecting margins, how are you seeing that overall marketplace in terms of your competitive advantages and where you expect to see that market go for you guys?

Jason, you want a shot at answering that?

It's definitely a competitive space for the existing converter products we have, that's somewhat tempered by the fact we have a new product offering that's a little bit higher ASP, and a little bit bigger footprint on the [inaudible] materials, that's something that we are working real hard on this year to try to make that transition from some of our more generic products, it is an extremely competitive pace to some areas where we have a more differentiated product that is targeted at that application.

Okay. Can you talk about any particular customers in that segment that you've penetrated something in the magnitude of 20%, 30% of share within their total units?

We can't really give any customer detail on that segment at all.

No, without naming a specific customer, have you penetrated any specific customer to that magnitude?

That's a tough question to answer actually.

I don't think we have the data to answer that on this call. That could be something we could answer (inaudible). Don't have the data here, don't want to make it up.

Okay. That's all I have, guys. Thanks.

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

Hi, I just wanted to come back to this legacy product issue. One of the concerns that you guys just reported a year where your revenues were flat year-over-year. Your talking about kind of a soft June quarter, but you have a lot of new product design wins that you are excited about driving growth in the second half of the year. Can you just, any more sense you can give us as to what percent of your revenues are in this legacy bucket, and what is the chance this legacy product continues to decline into the second half, and sort of offset some of the growth for the new products?

I think the only thing I could answer in that question to try to be helpful here is the reason we have enumerated legacy products, these are things that are older product that will be declining, it's just the nature of the beast. Very, very long product life cycles and some of them are finally hitting their end. On the other hand, that's being offset by new products that are in the design win stage and ramping up.

If it were a perfect world, we would have have this new product cycle maybe a couple years earlier, but we are where we are and we are going through transition of those two elements of the business, and we are just trying to make you aware of that.

We don't have a lot of detail quantification, X/Y analysis on that, it's just, there's sort of a meta trend within the Company, and what we are really focused on is driving the new products and getting those design wins, and getting those ramped into production.

But these legacy products, do you think, is this 20% of the revenue that could go away over the next year, or is it a much smaller percent of revenues? I understand this is always part of the business dynamic, but this has happened before in the DVD space. That was kind of legacy product, that went away, and again, it's resulted in your top line being flat now for a couple of years?

Yes, well, DVD is a product that had relatively speaking a short product life cycle, I'm going to make up a number here and say it's three years, four years, whereas the T1 circuits, the product life cycle there is approaching 25 years and so eventually some of that stuff goes away, and some of these things are dropping off, and that's really what we're talking about.

Okay. Thank you.

Our next question come from Tayyib Shah with Longbow Research. Please go ahead.

Hi. Good afternoon, guys. My first question was also on the DVD side, can you give us an idea of if you in the last three or six months have won any top-tiered designs for your audio amplifier product?

Jason, you want a shot on that? It's a little early to be asking that question.

Yes, it's a little bit early to declare a win on that one, but we are definitely engaged with some top-tier guys, and we feel good about turning some of those into revenue in the back half of the year.

Okay, and then I think, Thurman, you alluded to the low-power audio space, getting some design wins there. I understand you had one product last year, and you came out with two or three new products this year, have you been able to get any design wins for the new products that you came out with recently?

Yes, again, that's a, I tend to be cautious on calling things design wins until we get those first P.O.s, but, yes, the prospects for the new products are looking good.

Okay, fair enough, and then you talked about legacy products going down. Just looking at some of the end applications that make up your revenue pie, how is the home audio AV receiver and home theater market doing recently? Have you seen the sort of sluggish [inaudible] DAC market improve recently or is it just the same?

Yes. The AVR market is an area where historically had quite a bit of share. That's a space we in the last couple of year have invested in building that back up for ourselves, we are again seeing good progress on that. In terms of market size -- that's not an incredibly quick-moving market. I would have to say if that's what you are getting at with the kind of sluggishness there. But there are new innovations, and some new things that are causing a wave of redesign in that space, and we are hoping to participate in that with some of the new products we've come out with in the embedded processors group.

So that's not included in the legacy products that you talked about?

No.

Okay. And then, question for Thurman, should we expect the stock option investigation expense to fall off in the June quarter, or is there some expense in the June quarter, as well?

We would expect the expenses that were related directly with the special committee's investigation to pretty much wrap up and dry up in this quarter, yes.

Thank you guys.

We have other things going on that are associated with the option investigation which will continue to drive some expenses, though, going forward.

Okay. So should we then think of those expenses to fall off in the September quarter?

Well, they are associated with some derivative lawsuits that we have going on and we just don't know how long that will take and what, to what extent those expenses will be, and how long they will last, but, yes, you could assume that those will continue at some levels throughout, through the September quarter, yes.

Okay. Thank you.

Our next question is a follow up from Jay Srivatsa. Please go ahead.

Yes, a quick follow-up, in terms of the June quarter, are you seeing any specific weakness in some of your geographical markets, like Asia, or is it just across the board weakness in some of the legacy products?

I don't think, none of the reviews said, this is Mike Hackworth, I don't think any of the reviews that I've been, I've noted a particular geographic localization. It seemed to be, seemed to be not geographic oriented.

It just strikes me that it seems the legacy transition is happening pretty rapidly, you would expect it would happen over a period of time, and not all of it falling in one quarter, so the question then is is there anything driving that kind of drop-off from a specific sector in the market?

No, I think it's been attriting all along, but the older the products get, the more significant the attrition is. But that's for trend analysis that you folks are looking at. There were some very favorable pops in some of the legacy products that were totally unanticipated by us in one or two of the prior quarters, so that kind of over states the run rate, and then when you get back to the normal run rate and normal decline of it, it may appear there is a bit of a drop, but it's really just an evolution of those product lines, not some specific event, per se.

Okay. Thanks.

Our next question is a follow-up from Adam Benjamin. Please go ahead.

Hey, guys. Just to clarify. You are talking about the stock option expensing, that's on a pro forma basis that's already excluded out, so it coming down, obviously, it comes out in the September quarter, but if you're running a pro forma model it's not going to change that OpEx guidance.

Not tremendously, no.

Not tremendously. I mean, it's 100% excluded already, so it's not at all.

That's right.

Thanks.

Next question comes from Bob Sales with LMK Capital Management. Please go ahead.

Yes, just a couple of questions. The, what is seismic now as a percentage of total revenue? Roughly.

This is John Paulos. We don't break the numbers out at that product line level. It's part of the industrial division, but we don't give guidance as to how that industrial business breaks out into a separate product line.

Got you. What are your customers saying when you talk about their forecasts, kind of plan out your fiscal year with respect to, I think you said there was one customer that had a timing issue, when you look beyond that what are their plans for their businesses?

The timing issue is just related to the fact that particular customer tends to take products in four-weel order chunks, and depending on how the calendar falls around that 12-week cycle, you get some quarters that have an extra delivery that the previous quarter didn't.

Generally speaking, the customers, the significant seismic customers are forecasting a stable to positive year. We are really past the highest growth part of this cycle, and what we are getting is a very steady, positive outlook, but not with the growth we saw in the past 12 months.

Got it. Okay. And with respect to, I guess I just want to back up a couple steps to, like I think you made the comment that internally you had hoped within the current, the fiscal year '08 to hit a quarter with, where you reach your long-term operating margins. Is that accurate?

Yes, that would be an internal goal for the company, yes.

How do I reconcile that with, I think, a very subdued or conservative detail point as we go through your outlook on design wins for digital TVs and some of the low-power audio stuff? I think, when I listen to the analysts on this call, they are grasping at some some of the positives that we perceive are going on with the Company, and what I hear from you guys at a low level is you really don't want to count on design wins until you see the P.O.s, but then, Mike, it's hard to reconcile that with your internal outside shot of hitting the long-term operating goals at some point this year. So help me out on that one?

Sure. What we are really trying to do is keep our guidance to within the upcoming quarter and that when we get beyond that time frame, we are really trying to give you some indication of our strategy and direction, and kind of migrating to more of a model that the longer term stuff is more driven by the strategy and execution to the strategy and short-term guidance is really one quarter out. I don't know if that helps you, but that's, maybe, explains the difference. We are not willing to comment on specific guidance numbers beyond current quarter.

Right. And then with respect to the timing of some of the wins you hope to achieve in low-power audio and digital TV, is it your expectation that you'll see these within the, in the second half of the fiscal year or second half of this calendar year?

I think we'll start to see some of them in the second half of this fiscal year.

Yes. Okay. And then Thurman, lastly, I just wanted to understand, you've been around this Company for a long time, and I think it generates very attractive margins, has an excellent balance sheet.

How much, has there been discussion at the board of what the alternatives might be in terms of bringing shareholder value to the table? Or has the main focus been to drive the profitability and growth of the Company?

I believe over, if you go back four years, we didn't have a lot of, we didn't have such a clean balance sheet, and didn't have a lot of cash, and, yes, we were driving towards profitability. And as we emerged out and divested the video business, and we began to generate an operating, consistent operating profit and started generating cash to the level that we had been in terms of growing our cash balance on a quarter-to-quarter basis, now there's far more discussion about capital structure and the use of cash and how to improve shareholder value.

And that happens on a regular basis, yes, with the board and internally with the Company, and so forth, and, again, those discussions center around what is best for our long-term vision for the Company and where we're going to go, and we will make the right vision when that decision is made.

Okay. Thank you.

Our next question is a follow-up from Tayyib Shah. Please go ahead.

Hi. On the industrial side, are you also seeing some impact from weaker industrial demand overall, meaning if you look beyond the decline in seismic and legacy products, are you also seeing some weakness in industrial terminals and some of the other industrial applications your products go into?

Not in any way that really shows up in a meaningful trend. We still see a very constructive environment for our industrial products.

Okay. Thank you.

At this time, there are no further questions in the queue. I would like to turn the call back over to management for their concluding remarks.

That concludes our call for today, thank you all very much for joining in.

Ladies and gentlemen, this does conclude Cirrus Logic's fourth quarter fiscal year 2007 financial results conference call. You may now disconnect, and we thank you for using ACT teleconferencing.