Cirrus Logic Inc (CRUS) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic third quarter fiscal year 2008 financial results conference call. At this time, all participants are in a listen only mode. Later we will open up the call for your questions and instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I'd now like to turn the conference call over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thank you, and good afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer. Before we begin, I'd 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 our fourth quarter fiscal year 2008 revenues, gross margin levels, operating expenses, amortization of acquired intangibles and share based 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 the new developments or otherwise.

Please refer to our press release issued today which is available on our website at Cirrus.Com. Our latest Form 10-K for the fiscal year ending March 31, 2007, 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. A reconciliation of the non-GAAP financial information provided in today's call to the most directly comparable GAAP information is included in our financial statements and on our website in the investor section. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included because we believe such information is useful to our investors for information and comparative purposes.

In addition, we 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. These non-GAAP measures should be considered in addition to and not a substitute for the results prepared in accordance with GAAP. Now, as the housekeeping details are done, I'd like to discuss our third quarter financial results.

Net revenue in the December quarter was $48.9 million, up 8% from $45.3 million in the quarter a year ago, and up 4% from $47 million in the September quarter. Audio Products contributed $27.3 million in revenue, up 9% from $25 million a year ago, and down 3% from $28.1 million in September quarter. We continue to see strong sales growth of our new audio products which allowed us to grow revenue year-over-year.

Industrial products generated $21.6 million up 7% from $20.3 million in the December quarter a year ago, up 14% from $18.9 million in the September quarter. Historical revenue breakdowns are also available on our website for these product categories. We continue to have a diversified customer base with no OEM customers representing more than 10% of revenue while one distributor, Avnet, represented 24% of our revenue during the quarter. Gross margin for the December quarter decreased to 56% from 57% in the June quarter, and 61% in the December quarter a year ago. Total GAAP operating expenses were $26.1 million, down from $30.3 million in the September quarter, and our GAAP net income in the third fiscal quarter was approximately $4.2 million, up from a net loss in the second fiscal quarter of approximately $300,000.

On a non-GAAP basis, our net income was $6 million and our earnings per share was $0.07. Based on 89.5 million diluted shares. We arrived at our non-GAAP net income by making the following adjustments to our GAAP statement of operations. We excluded a net 1.3 million credit associated with the release of various facilities related accruals. We excluded 2.1 million in share based compensation expense. We excluded approximately $500,000 of amortization of acquired intangibles. And finally, we excluded $500,000 in legal fees related to current activities associated with the concluded stock option review.

Interest income for the third fiscal quarter was $2.9 million down from $3.2 million in the previous quarter. Headcount remained roughly flat as we closed the current quarter with 548 employees. Now, turning to our balance sheet, total cash and marketable securities at the end of December was $252 million, up from $245 million at the end of the September quarter. Our total cash per diluted share was $2.81 at the end of the December quarter. We ended the December quarter with 23 million in net receivables compared with 23.8 million at the end of the September quarter, ending net inventory for December quarter was up 3% to 20 million from 19.5 million at the end of the September quarter.

Our capital expenditures were $400,000 in the December quarter compared with $1.1 million in the September quarter, depreciation, amortization expense in the December quarter was $2.3 million with no increase over the September quarter. I would like to also mention the $150 million share repurchase program authorized by our Board that we announced earlier today. The stock purchases will be funded utilizing our cash resources and will be executed either through transactions in the open market or in private transactions. And now I'd like to turn the call over to Jason to discuss our business operations and guidance for the upcoming March quarter.

Thank you, Thurman. Q3 represents continuing progress towards meeting our long term growth and profitability objectives. We saw revenue grow by $1.9 million compared to Q2, which is up $3.6 million year-over-year. Revenue from new products grew compared to Q2 and to the same quarter a year ago, an indication that our innovative new products are valued by key customers. Back in June, we met internally to develop a new vision, mission, and values for the Company. We then rolled out a strategic planning process aimed at determining how to align our resources with our best growth opportunities with our goal of becoming the first choice supplier of analog and digital signal processing components for the audio and industrial markets.

This process was completed in Q3 which resulted in our decision to deemphasize certain product lines that did not support this vision or warrant further investment. We will continue to support these existing customers for these products and going forward we expect all product line investments to be consistent with our vision. This has allowed us to more fully invest in exciting product lines better positioned to drive growth for Cirrus Logic.

I'd like now to provide a brief update on our products beginning with the industrial category. These products include integrated circuits designed for a variety of utility metering, high power, precision measurement, energy exploration, and communications applications as well as our line of arm processors. In the future we will primarily be focused on energy related products within this category such as energy measurement and energy exploration. Revenue from industrial products in the December quarter came in at $21.6 million, up 7% compared to $20.3 million in the previous December quarter.

This past quarter the integration of Apex Microtechnology was largely completed and revenue from our energy exploration or seismic products stabilized as we anticipated. Our new energy measurement products for the digital utility meter applications continued to gain acceptance with key global utility meter accounts and we expect that our strong new product road map will drive longer term revenue opportunities as digital meters continue to replace their mechanical predecessors. Looking ahead we anticipate that a strong line-up of new products will expand our opportunities into a wide range of energy related applications in which our innovative, analog and digital signal processing solutions will provide value to the market.

Let me turn now to our Audio Products. Components in this category include data converters, class deamplification products, audio processors, and interface circuits, products that are used in a wide variety of consumer, portable, professional, and automotive audio applications. This product category contributed $27.3 million of our December quarter revenue, up 9% compared to $25 million in the December quarter a year ago. One of the highlights this year has been the progress -- has been our progress in a portable product line which serves applications such as portable media players and portable navigation devices. We began investing heavily in this product line several years ago, which led to initial success with Tier 1 customers and today we're engaged with multiple leading customers that are generating strong growing revenue. We are on track to achieve our goal of $11 million in sales from this product, from portable products this fiscal year, and momentum generated by this initial success has strengthened our expectation for significant growth from this product line in FY '09.

Our plan looking forward is to continue to take market share and continue introducing new innovative products in this product line this calendar year. Our success in growing revenue from portable products underscores our ability to enter new markets and gain share and serves as a model for other product lines in which we commit resources to drive growth. In automotive where we provide IC solutions for car audio amplifiers, head units, and telematic applications we also continue to track to our current and ongoing revenue goals for FY '08. We have entered volume production with new products in several automotive entertainment applications and we're well positioned to grow market share through continued success with multiple key automotive accounts.

Also, in December, Cirrus announced that we are the first supplier to grow at a cost effective, production ready audio DSP featuring Dolby volume and SRS labs volume IQ technologies for DTV and other applications. We met with numerous customers recently at the consumer electronics show in Las Vegas And we believe we have a significant competitive edge as leading OEM's look to incorporate volume leveling technologies like Dolby volume into their products this year. It was an exciting technology that we expect to be valued by consumers and we plan to introduce additional products that offer these technologies for applications such as home theatre receivers and automotive entertainment.

Now let me review our guidance for the fourth quarter of fiscal year 2008. Our overall expectations are as follows. Revenue is expected to range between 44 million an d$47 million. Gross margin is expected to be in the 55to 58% range, combined R&D and SG&A expenses are expected to range between 25 million and $27 million, including approximately $2.3 million in share based compensation and amortization of acquisition related intangibles. Our expense guidance reflects certain spending reductions that are being phased in during the fourth quarter And are associated with our previously mentioned decision to deemphasize investment in certain product lines.

In closing, we have refined our plan to capitalize on our strength as a leading provider of analog and digital signal processing components for audio and industrial markets. We are in the process of aligning the full weight of the Company's resources towards key programs that are consistent with our vision and designed to drive growth. Revenue from new products such as portable is up significantly serving as the springboard for future revenue growth opportunities, and the $150 million share repurchase program we announced today underscores our confidence in our plan. We are now ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jay Srivatsa, Roth Capital Partners. Please go ahead.

Thanks for taking my questions. A couple of questions if I may. First of all, on a non-GAAP basis, Thurman, what was the EPS number?

On a non-GAAP basis, earnings per share for the quarter was $0.07.

Okay, and then in terms of margins it appears that your industrial business was slightly stronger relative to last quarter but yet your margins were down. Could you clarify why that was?

That's primarily mix.

Well, I would have thought industrial business was a higher margin business so that should have positively impacted your gross margins. Wouldn't that be the case?

Well, audio is up as well, right?

Okay.

I mean, but the margins within the industrial product line vary quite a bit as well.

Okay, and then would the-- in terms of the share buyback, assuming that you're going to jump on it, what kind of share count should we be modeling for next quarter?

We're basically doing the buyback depending on market conditions, we've executed the program because we, with the intent to move forward on it. We don't really have a real good way to estimate what that share count would exactly be. It's in the open market and we will be basing that on the market conditions as we go forward.

Okay.

We don't really have a lot of guidance for exactly what that will be.

Okay, and then in terms of the March quarter, I suspect there's some seasonality. Could you share with us, is it only in the audio products? Are you seeing anything in the industrial products? How should we be looking a at that?

Well, as we indicated the industrial stuff stabilized, actually a couple of the industrial areas are up a bit. Of course, in particular, with portable, the consumer stuff is seasonally soft, soft quarter, so I would expect the audio side to be a little bit weaker and the industrial side is actually up a little bit in some of the product lines.

Okay, and then last question and I'll step off. In terms of the DTV products, specifically the ones you mentioned and showcased in -- what type of contribution would you expect in calendar '08 from DTV's?

Yes, I don't know that we're ready to speculate on exactly the number that will come from that, come from those products within DTV, but overall we are looking for some significant contribution from the volume leveling and some of the new DSP products that we've got out. It's definitely nice to see the new products that we developed in the last couple of years really be ready to bring to the market and actually be a contributor to the growth of the Company.

Okay, thank you.

You bet.

Our next question comes from the line of Heidi Poon, Thomas Weisel Partners.

Hi, guys, first a general question, some of your peer supplying to the digital media player have seen the March guidance or outlook pretty weak because of potential inventory in the channel but it seems like your number is actually quite within seasonal pattern. Could you explain why you're seeing this difference?

Well, overall, again our overall dependence currently is probably less on portable than some of the other guys. We'll do what we can to increase that of course, but we've done a very careful job of managing our inventory, in particular relative to that we're certainly aware of the trend in that -- the seasonal trend in that product line in particular and it's something we kept a real close eye on.

So, in your March guidance, you're basically building in pretty seasonal outlook for audio products so you're not really seeing trends in the channel regarding inventory?

No, we don't believe we have any significant inventory problems anywhere, really.

Great. What about you mentioned the portable area is a big growth driver but with the volume IQ and the Dolby products what is the expectation there for calendar '08 or is it more an '09 driver?

No, we expect it to be significant this year. We haven't established an exact number that we're willing to put forward at this time, but as I said on Jay's question, it's been a long time, but we finally got real new products that are production ready, and been designed in by our customers, and the DSP products will be a contributor to our growth this year. So we expect really good things from that product line.

Great. Lastly, an operating leverage question. Do you anticipate more sort of benefits from some of the spending cuts in the June quarter or is this the level that we should model? Is there a new operating margin target? Well, we're certainly going to continue to work on improving that. I think that we've still got some relative to kind of the range that we put out for Q4, I think we've still got some room for improvement going forward, and kind of as the text outlined those really have been phased in through the course of the quarter so we'll get a little more benefit from those going forward. Thank you.

Our next question is from the line of Rick Schafer, Oppenheimer & Company.

Thanks, guys. I've got a couple questions. Just first on audio, I sort of expected and I thought you guys had talked about audio being up a little bit in the December quarter, it looked like it was down about $1 million or so, I guess, actually sorry, yes, about $1 million or so. Can you kind of explain what happened there, maybe what the source of the weakness was and is that kind of what we're seeing going into the current quarter or are we just seeing normal seasonality?

Yes, it was down just slightly relative to the Q2. Every year, the seasonality there is -- some years it's up a little bit, some years it's down. We did expect a little bit more revenue than that in Q3. We had a very slight amount of delinquencies, the -- but it was not anything that we're overly concerned about.

Okay. So I'll leave that, I guess. Number two here, just if you could discuss the pricing environment, it just seems like, I guess I haven't seen the non-GAAP gross margin number yet but just if you discuss the pricing environment on your end markets and sort of I guess should we be thinking of margins being stable going forward this year or do you expect sort of given the pricing environment out there, should we be kind of modeling gross margins to kind of trend down this year?

I don't expect them to trend down this year. We believe we're in businesses that we should be able to maintain in the upper half, certainly above 55%. It is, it's a lot of work, it's a challenge when you ramp new products and as a larger and larger percentage of your revenue comes from new products, it's of course a fair amount of work to do a good job of supply chain management and make sure that the new wafer pricing and as you're bringing new packages et cetera online that you've got that fully rung out with respect to cost but we've got a fair amount of momentum on that. We've got some good initiatives behind it, and we believe we will be able to keep it in that range.

So correct me if I'm wrong, Thurman, but I think you had said in the past that automobile and the portable stuff was a little bit below core average gross margin?

Right. We were running at one point a year ago at 60% margins, now we're coming in at a lower number which we gave you earlier, and so part of that is that our portable is a growth driver. It's a little bit lower than the old average of 60%, and with a higher mix towards the audio that Jason mentioned before, you're just going to have a natural progression down, but we don't see this continuing a slippery slope down under the mid 50's. It should stay up above that range, and even with the the portable and the automotive in the new product.

Let me give a little bit of color I'll add to that, that might explain kind of the perception. One of our bigger design wins, historically on the automotive stuff was with a pretty old product that had some margin challenges to it. Generally speaking, we expect automotive business to be very supportive of the corporate margin targets. So generally, automotive is a pretty good market for us in terms of margins but historically we had one particular piece of business that was pretty significant that was at the lower end of the range.

Great. So that's really good color.

Yes.

So the newer automotive stuff, can we kind of guess that it's above 60% then or in that range anyway?

No, but it's certainly supportive of the 55 and above range.

Got it. And then just a follow-up on the seismic stuff you guys were talking about. Should we be kind of thinking of seismic as having troughed and is now starting to improve or how do we look at that business? I know it's kind of cyclical.

Yes, well, it is cyclical and it's an interesting business for sure. There's a lot of dynamics in it that involve -- discrete orders. We have customers that are pretty significant in that space that you can expect kind of two orders from a year or something on those lines as they get an order to fill out another boat worth of electronics, so it can be pretty discrete chunks of business so it's a little bit hard to forecast, but yes, as we said last time on the call we expect that that had stabilized and it did. We're actually expecting a slight uptick in it this coming -- or this quarter that we're in so that appears to be, we don't have any further holes to fill there, so it's a nice change.

Okay, and then just one last quick housekeeping one. I think I heard Thurman mention that the new formal SEC option investigation was complete now; is that correct?

No. The formal investigation is continuing on. The only thing I mentioned was the costs associated with that but that investigation is still under way.

Any kind of timing or update you can give us there?

Not really. I mean, the SEC does the the work.

Just the main concern that I hear from folks on that is just making sure that it's not a continuing distraction to the Company, which it's not. Our legal department does a very good job of taking care of that so the rest of the Company can just keep focused on driving growth going forward.

Is there anything we should be worried about there like worst case scenario, anything like that?

We don't really guess at that.

Don't really speculate on that sort of thing.

Okay, well thanks, guys.

Our next question is from Tayyib Shah, Longbow Research. Please go ahead.

Hi, guys. Can you -- you talked about, when you said that you would be focusing your R&D resources away from certain products in the industrial portfolio, what kind of revenue impact is that going to have as the sales legacy products are phased out over the next few quarters?

Well, I don't expect to have any impact in revenue over the next couple of quarters. It's not a big revenue piece for us now, but it was a fairly expensive type of product lines to keep supporting, so really, I don't think there's anything negative there. It was just something that was difficult decision to make because people are always very excited about supportive of things they've been working on for awhile. We need to manage the resources on to the most, the best growth opportunities, so, but we don't expect any revenue impact in the short-term.

So then most of the revenue was already coming from power meter and seismic applications on the industrial side; is that correct?

Well, power meters, seismic, and as well as some of the more precision measurement products is the bulk of the revenue there, along with of course, the Apex product line. We didn't talk overly much in the Apex piece, but that as we say has gone pretty well according to the plan that was in place as we bought them. So that's still a significant contributor there.

Okay and if you can just talk about what happened to margins within the industrial business last quarter, what were some of the positive drivers and negative drivers in there? That will be helpful.

Well, really, what we're talking about on margins is more of a -- when Jason talks about mix issues, there's a lot of product lines within industrial but if you look at a year-over-year number, audio was a much bigger piece of our total revenue number, and the mix within industrial was not as rich as it was a year ago. If you look at a quarter ago, in the September end quarter, although we're about flat on audio again, the percentage difference between that is, of the total audio is a little greater plus we had some reserve actions and we had some numbers that were a little bit higher, about 300 K higher than the previous quarter which moves that a little bit also, so there are moving parts in the margin numbers but it's not a concern that it's a continuing downward slide.

And are you -- in portable audio specifically, are you still at a stage where you are working towards winning major design wins with major OEM's in that space or is that something that you now have more visibility than you did about a quarter ago?

I'm not sure I understand the question. We've had some significant media player revenue this year. We expect to continue to take share on the portable market.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Our next question is from the line of Jay Srivatsa. It's a follow-up question. Please go ahead.

Yes, thanks for taking my follow-up. Jason, on a macro level, would the economic conditions the way they are as you look ahead to the year, is there anything that causes you concern in the environment? And if not, what do you believe is going to be the revenue profile for your Company going forward?

It's a good question. Yes, sure, I mean, I think you'd have to be pretty naive to read the Journal or the Times or whatever and not be a little bit concerned about the overall economic circumstances, but generally, we feel like our growth is being driven by taking share in some spaces where even though we've had success, we're still a pretty, we still have a pretty small market share. So we think we've still got growth opportunity anyway. And at the same time, our revenue for the current quarter is well supported by backlog. Our backlog it's fairly early but our backlog currently for the following quarters is perfectly reasonable relative to historical norms, so overall, we don't, we're not currently seeing any major impact to the overall economic situation.

Thank you.

Yes.

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

Hi. On the portable audio side, is there a good way to just handicap the revenue potential for you guys in calendar '08? Anything in terms of either a hard revenue target or maybe just the market share target would be helpful?

Yes, I mean we're currently kind of the in the ballpark of a 5%-ish market share. We would expect that to go up fairly substantially in the calendar year, certainly more than 10% but we haven't established a formal target, not yet.

And how is that going to look like? is that going to be fairly linear through the calendar year or is this going to, are we going to see a step function increase sometime in the second half of this year ?

Well, we should be so lucky it will be linear, that kind of thing is a little bit hard to predict, customer cycles are pretty funny, but there's some big games in town and those type of products tend to ramp pretty quickly. So we expect we've got work to do to keep up with our customers in that space.

And what would be, I guess, something that would lead to upside to this 10% market share figure that you are aiming at and maybe you can also, if you can also talk about the risks to the downside in terms of achieving that target, that would be helpful.

That's a pretty low estimate. I'm not too worried about that as a downside. But it's a big market. There's a lot of moving parts to it. It's funny, people tend to be pretty dismissive of some of the broader opportunities but there's a lot of customers out there that are shipping in the, if you figure $1 ASP in round numbers, there's a lot of customers that are shipping 5 million units, so it doesn't take too many of those to move the needle.

Thank you.

Yes.

At this time, there are no further questions. I will turn it back to management for any closing remarks.

Thank you for all of your questions and your interest in Cirrus Logic. Before we sign off I'd like to point out we'll be presenting at the Roth Capital Growth conference on February 19, in Dana Point, California. Thank you once again for participating in the call.

Ladies and gentlemen, that does conclude the Cirrus Logic third quarter fiscal year 2008 financial results conference call. ACT would like to thank you for your participation. Have a pleasant day. You may now disconnect.