Cirrus Logic Inc (CRUS) 2009 Q3 法說會逐字稿

Welcome to the Cirrus Logic third quarter results financial call. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. I will now turn the conference over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, please go ahead.

Thank you. Good afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer. Before we begin, you are reminded that during the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our estimates to our fourth quarter fiscal year 2009 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 market share growth. 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 issued today, which is available on our website at cirrus.com, our latest Form 10-K for the fiscal year ending March 29, 2008, as well as our other filings made with the Securities and Exchange Commission for additional discussion of risk factors that could differ materially from our current expectations.

I also want to mention before we proceed, that all financial members are prepared, unless noted, in regards to GAAP. A reconciliation of the non-GAAP financial information provided in today's call to the most directly comparable GAAP information is included in today's press release and in 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 informational and comparative purposes. In addition, we use certain non-GAAP financial information internally to evaluate and manage our operation. 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.

Net revenue in the December quarter was $43.8 million, down 10% from $48.9 million in the quarter a year ago and down 18% from $53.3 million in the September quarter. Individually, sales of audio products contributed $25.9 million in revenue compared to $27.3 million in the quarter a year ago and down sequentially from $30.6 million in revenue in the September quarter. Energy product sales generated $17.9 million, down from $21.6 million in the December quarter a year ago and down sequentially from $22.7 million in the September quarter. The declines in revenue for both audio and energy products were spread across multiple product lines, as well as end customers and products. We noted significant decrease in new orders throughout November and December; however, the percentage of revenue from new products, in particular our portable products, grew sequentially. Historical revenue breakdowns by product category are available on our website.

Gross margin for the December quarter was 55% compared to 56% in both the quarter a year ago and in September quarter. Total GAAP operating expenses were $22 million compared to $24.2 million for the previous quarter. Operating expenses included $1.25 million in stock-based compensation expense and approximately $350,000 in acquisition-related amortization of intangibles. Non-GAAP operating expenses, excluding these items, were $20.4 million for the quarter compared to $20.9 million in non-GAAP operating expenses during the September quarter. And I would like to point out that our direct SG&A and R&D expenses have decreased in each of the last four quarters.

Income from operations on a GAAP basis was $2.1 million, representing an operating margin of 5%. Excluding the items noted above, income from operations on a non-GAAP basis was $3.8 million, representing an operating margin of 9%. We reported GAAP net income for the quarter of $2.8 million, or $0.04 per share, based on [65].3 million diluted shares. In the same quarter a year ago, we reported GAAP net income of $4.2 million, or $0.05 earnings per share, based on 89.5 million diluted shares. On a non-GAAP basis, net income for the quarter was $4.4 million, or $0.07 per share. In the December quarter a year ago, we reported non-GAAP net income of $6 million, or $0.07 per share.

I would like to mention that on December 8, 2008, we closed the transaction to purchase the assets of Thaler Corporation in Tucson, Arizona, for $1.1 million. 50% of the purchase price was paid on the day of closing while the remaining $550,000 is to be paid later this year. We ended the December quarter with 473 employees, up slightly from 470 employees at the end of September. These numbers are inclusive of employees associated with the Thaler asset purchase.

Moving to our balance sheet, we ended the December quarter with $15.6 million in net receivables, down from $25.6 million, at the end of the September quarter. Our day sales outstanding remains consistent, and we intend to continue to actively manage our credit risk. Ending net inventory also decreased to $4.7 million in the December quarter to $23.4 million as we reacted to decreased demand from our customers. As we progress through the current quarter, we intend to closely monitor our inventory levels both here and at our distributors.

Capital expenditures for the December quarter were $1.4 million, which includes the Thaler asset purchase, compared to $1.8 million in the September quarter. Depreciation and amortization expense in the December quarter was $2 million. We ended the quarter with $118 million in total cash and marketable securities, an increase of $8 million from $110 million at the end of September. And now I would like to turn the call over to Jason to discuss our business operations and guidance for the upcoming March quarter.

Thanks, Thurman. We entered Q3 with a strong backlog and high expectations for continued year-over-year growth. Third quarter revenue reflects the sudden decrease in new order bookings midway through the quarter, a direct result of global economic recession. As we approach the fourth quarter, we believe the weak global economic conditions will continue and our near-term revenue expectations reflect these ongoing conditions. Yet the despite the weakness in Q3 and our muted expectations for Q4, it's important to note that relatively speaking, we believe that Cirrus Logic is weathering these challenges better than many of our peers. Our continued strength in revenue from new products gives us confidence as we continue to invest in key growth initiatives in portable audio and energy control applications.

In addition, our balance sheet remains healthy. We have no debt and we are managing our operating expenses closely. In fact, Q3 operating expenses were approximately $4 million lower than the same quarter a year ago. We believe continued investment today and our key strategic programs will allow the Company to expand the market share during the tough times. When the economy recovers, we expect that Cirrus Logic will be in a strong position and ready for growth.

Let me give you an update on our products, beginning with the energy category which includes integrated circuits for designed for a variety of energy exploration, energy measurement and energy control applications. In the December quarter, revenue came in at $17.9 million, which is down by 17% compared to the December quarter a year ago. Q3 performance reflects general weakness across our product lines due to the global economic recession.

While we anticipated continued near term performance, longer term, we are optimistic about our energy controls for strategic initiative that we expect to serve as a strong component of our overall Company growth. Demand for energy exploration products was especially impacted and we anticipate continued weakness for the foreseeable future due to the suddenly depressed state of global oil exploration. Last quarter we announced new motor control devices, the SA306 and SA57. I am pleased to report that we are already experiencing significant design-in activity with these devices. Building on the success in 2009, we are expanding our product portfolio to include new energy controls (inaudible) for power factor corrector applications, or PFC.

PFCs are important building blocks enabling a variety of power control applications that can benefit from disruptive digital technology. This is a market traditionally dominated by analog solutions and we believe we can use our analog and mixed signals capabilities to develop new digital innovations in this area. Initial feedback from key customers has been very encouraging and we are excited with the early lab results from this new product line. We're committed to making this product line successful and, in fact, approximately 60% of our patent filings over the past year were associated with energy related products, including PFCs.

As Thurman mentioned earlier, in December we acquired certain assets from the Thaler Corporation in Tucson. Thaler manufactures high precision voltage references and other hybrid devices which will further diversify the Apex Precision Power product line. We believe our expended sales presence will greatly benefit these products. Economic conditions will have an impact on near-term quarterly earnings, we continue to invest in key energy positions to help drive long-term growth opportunities.

Turning now to our audio products which include integrated circuits used in a wide variety of home, portable, professional and automotive audio applications. Revenue from these products contributed $25.9 million of our revenue for the December quarter, down 5% compared to the December quarter a year ago. Portable products were a continued highlight this past quarter and bookings for portable products remain strong. I'm pleased to report that we surpassed our goals for revenue from this product line.

With a number of new design wins we expect to expand our application base for media players and navigation units to include portable gaming devices, digital cameras and multimedia phones. Outside of our portable products we are experiencing weak demand across other home and automotive audio applications caused by the current economic conditions. While we expect continued weakness in automotive, we still view this market as an attractive long-term opportunity for our audio products.

One bright spot worth noting in home audio is we are gaining solid traction for our audio markets in growing market for sound bars. This application represents the high content sales opportunity for us as we provide various solutions for these devices, such as audio amplifiers, DSPs, audio converters and interface. Sound bars, especially units with Blu-ray disk players, are becoming increasingly popular with consumers as they augment the sound from flat panel TVs.

The momentum for new sound bar products is one of the bigger stories at this year's consumer electronics show and we are pleased to have numerous design wins as a leading OEM. We expect continues long-term growth in this market as consumers increasingly begin to favor sound bars. With our strong portfolio products we expect to continue to grow market share in the portable audio market. Despite the economic downturn, we are focusing on developing innovative new products and I feel we are in a strong position to grow market share in audio.

Now, let me review our guidance for the fourth quarter of fiscal year 2009. Our overall expectations are as follows, revenue is expected to range between $31 million and $36 million. Gross margin is expected to be between 54% and 57%. And combined R&D and SG&A expenses are expected to range between $22 million and $24 million, which includes approximately $2 million in share-based compensation and amortization of acquisition-related intangibles expenses. Our belief is that great companies are often forged during challenging environments, and during this global recession, we remain committed to our strategic plan. Overall, we believe we are weathering this economic downturn better than many of our peers in the industry. The fundamentals of our business remain sound. We continue to have a strong balance sheet, outstanding engineering talent, a great lineup of new products and some of the best customers in the world. We continue to meet and surpass our expectation for revenue goals from new products, especially portable audio. Looking forward, we are engaging with key customers as part of our energy control initiatives that we believe will drive long-term growth opportunity. While global economic conditions remain weak, we are confident that our continued focus on core growth strategies puts us in a position to emerge from this economic uncertainty even stronger. Now, let's take your questions.

Thank you, sir. (Operator Instructions). Our first question is from the line of Vernon Essi with Needham & Company. Please go ahead.

Thank you very much. First off just, Thurman, good job on the balance sheet, on the asset management side. I'm wondering specifically what steps you took to keep the inventory in such control while everything was getting slammed on the brakes around in the industry? Anything particularly you'd highlight that you did to -- you are definitely separating from a lot of other companies on that front. I'm curious what you did.

Well, it's a normal course for us to manage our inventory levels and we have taken not only recently but over the last few years, we have taken a lot of steps improving our supply chain management tools and organization and it is paying off. And we -- knowing that there was some weakness in the industry, we really watched that on a week-to-week basis and made sure that we kept it under control the best that we could.

And Vern, I appreciate the question because that was the goal that we had internally for that was about that at the beginning of the quarter, when we thought revenue was going to be a lot higher. So especially appreciative of the supply chain team that did an outstanding job keeping that under control.

And where do you -- the obvious question we are all going to have. How do you feel? I didn't hear a lot of color on the channel too much. Where do you feel you are at in terms of channel inventory and sort of what sort of supply you see going into the post lunar new year?

We're in pretty good shape. There's -- obviously that was -- in my opinion, that was a pretty significant portion of our issue last quarter was -- and I think we actually said this at some point was that contract manufacturers, really any manufacturer as well as especially distributors and keep in mind we are POP, on a POP basis in Asia, they were all being extremely, extremely cautious with inventory. They were all in a position of trying to draw down their inventory in the quarter as well. So actually when we look at it, we are in aggregate at the distributors in particular in Asia. We are at aggregate, somewhere in the six to seven turns range. We don't feel too bad about that and obviously you are always working that issue and you really got some guys that are a little higher than that and a little lower. Overall we feel very comfortable with our position in the channel with respect to the inventory.

Okay. And then in terms of the -- I guess -- I don't know if I see the data anywhere here Thurman, but on the stock compensation, what is the split between the R&D and SG&A roughly?

Hold on a second.

Specifically the split in share-based compensation?

No. No.

Yes, the share-based compensation for SG&A was about $733,000. For the R&D piece of that, it was about $522,000, and we had another 55k that hit the cost of sales.

Okay. And any -- any news on this -- this is an off question here, but the litigation side, do you have that derivative suit? Any update on that? Or anything we should be thinking about from a modeling perspective?

Yes, unfortunately we really -- we can't comment on ongoing litigation. I can't really put any specifics on that one for you.

Okay. And then lastly on the portable audio side, I just want to make a clarification here. You said that the revenue grew quarter to quarter. Was that on a percentage basis or a dollar basis?

Both.

On both. And then do you have a new --

And to clarify, I mean, it was not a lot. I mean, in absolute dollar basis, it was right about there but obviously in percentages, significant amount.

Sure. Sure. Do you have any milestones you want to share with us for 2009?

No. I think putting anything out there in this environment, is probably -- is probably not terribly prudent. I mean, we do expect to continue to grow market share in the portable space. We are -- we have a lot of good things that we feel like are coming in and that engineering team continue to just absolutely knock the cover off the ball from an execution point of view. We are hooked up with some pretty good thoughts in the customer space and we continue to get good things from that product line.

Okay. Thank you.

Thank you. Rick Schafer with Oppenheimer. Please go ahead with your question.

Hi, guys. This is Carl LeStrange on Rick's behalf. Just a couple of questions. First, on the audio side of things. Within portable audio, how much of the percentage increase quarter to quarter was going to new design wins versus existing designs?

Well, not a lot due to -- I suppose it depends on the time frame you are referring to. We didn't -- I don't think we saw a lot of new stuff go to production for the first time in Q3.

Okay.

So, certainly there was an element of things that probably started shipping somewhere during Q2, and then we got a full quarter of that in Q3.

Right. Got it.

And then, of course, for portable products one of the nice properties is it's a hot Christmas item and unlike other products like AB receivers and things like that, they tend to be smaller, it's easier to get them around the globe a little quicker. So you do actually see for a semiconductor manufacturer we see revenue in the -- later in the December quarter all the way up through Christmas, whereas with bigger products, they end up having to get shipped on big giant boats and those tend to be earlier.

Right. Okay. Where are you guys right now on portable design wins? Can you quantify how many you have? The number you may be moving towards in --

Well, we expect it to continue to increase. I don't know about how much value in characterizing the absolute number then you have to get in to big or small and all this good stuff. We continue to feel good. Like we said in the script, we feel like we've got an additional number of applications, such as games and working on a couple of different camera opportunities, phones. There's a bunch of different stuff that we feel like we've got coming.

Great. And on the gross margin guidance, could you go into a little detail as to what will keep us in the 54% to 57% range in the quarter?

A lot of blood, sweat and tears. It's something that you just have to work on all the time, like we have said. The same group in supply chain management that's working the issues real hard. Our customers pressure us for cost reductions and everything else, but fortunately this is a pretty good environment to be having that discussion with your foundery partners and supply chain, as well you can imagine.

Right. Right.

So certainly from pluses and minuses, we feel we made some progress across the board on that. Minuses, obviously, seismic not doing as well as it could be in the overall macroeconomic conditions, that doesn't help, but we feel real comfortable with continuing to hang in there in that 55% range.

Right. On seismic, do you guys have any idea, and I know visibility is very clouded across a variety of verticals, but when things might turn around for that business? I know historically it's been a lumpy business. Any thoughts on when we can see things head in the right direction?

Not real soon. The only color I can really put on it, -- you are right, it's lumpy and that could surprise me. As recently -- even when we updated our guidance, that set of customers was more rosy than they are now. That's definitely an area that's going to be soft for the foreseeable future. But at some point somebody is going to go looking for oil again and we continue to feel like we have the best solution on the open market. And we'll make sure to defend that position.

Okay. Great. And then on the metering side of things, in particular residential metering business, any color on that this quarter and what you can see in the next quarter and how that is being affected by the macro picture?

Well, I mean, we've got a fair amount of new backlog for some of our newest devices so, again, it's validation that we develop new products. We are going into good markets and we develop good products, the people are excited about picking them up. We are looking at a couple of numbers right quick. Overall, it's not experiencing a tremendous amount of growth, but right now it's hanging in this and it's kind of -- like I said, with these new products kicking in, it is at least hanging in the flattish range in a pretty tough environment. That speaks to the strength of the product line we're developing, I think.

Okay. Great. And then quickly on backlog. Where is backlog at the start of this quarter, versus where it was exiting the year -- I'm sorry, starting the previous quarter?

Previous -- the previous quarter, the beginning backlog, I think we gave some color on this on the call. We don't actually give out a specific percentage.

Okay.

But what we said at the last call was it was a fairly high percentage relative to normal at the last call. And then literally if you look at the bookings for us in the period following the call, the rate of growth just came to a real slow crawl pretty quickly thereafter. Our backlog at this point is very consistent with what we normally experience relative to Q4s in the past and really relative to overall the history that we've got is very consistent with the backlog that we should have at the beginning of the quarter. We're in that period right now where if we extrapolate from our backlog today, we can make a very reasonable position for kind of the middle of the range, which is that we have given which is why we gave it. If you are wanting to rub your lucky rabbit's foot or cross your fingers or something, lunar new year is early this year which hopefully gives us a few more weeks of strength in the quarter than we normally get. Normally it takes a little while after lunar new year gets over for the quarter to pick back up again.

Got it.

Hopefully we'll have some lift from that but there's nothing elaborate baked in to the numbers from that. We are kind of known for our pretty reasonable set of curves based on our bookings history in the past.

Okay. What is the turns number required to hit the midpoint of the guidance?

Well, I mean, we are looking at turns in the range of about 3.3, 3.5 or so. You are talking about inventory turns?

No, I'm talking about top line versus backlog. I mean --

On an average quarter, we come in with something a little bit north of 50% on backlog. Again, we don't get into a ton of details on it, but we are consistent with that.

Okay. Great. That does it for me. Thanks, guys.

Heidi Poon with Thomas Weisel, please go ahead with your questions.

Thanks, guys. Could you give a little bit more color on the market share and portable audio? Like is your initiative in Japan, is there any progress there? And, secondly, looking at the energy control products, do you anticipate that to be a more material segment or would you be breaking out the revenue there at some point?

Well, I hope that it gets so big that somebody makes us break it out, but, I mean we don't break out anything, other than audio and energy. So for the foreseeable future, it won't be broken out but it is absolutely something that we are committed to make successful. We think we've got some pretty kick ass technology. We've had a lot of patents in that area and it's something we're expecting to be successful. Any time you have the opportunity to bring disruptive digital technology into traditional slow moving analog space that often represents some good opportunity to separate people from dollars. So that's what we are working on. The engineers are excited about it. Like I say, we have our first product back is in the lab. There's things we need to do to it still, but the initial results are very promising. And it is a pretty disruptive solution that we are expecting to bring forward so we are excited about it.

As far as market share in portable, we have had business in Japan. We continue to work with the customers there. We've seen some good signs pretty recently as far as new developments are concerned. We are pretty excited about some of the new stuff we have under way at the moment, specifically for the Japanese market. So, again, like I say, there's -- pretty much everything has gone on in our portable space is something that we are proud of.

Great. Could you also give us some color on whether, there's increased pricing pressure in channel, especially given the current environment? (inaudible) growth margin trends later in the year.

There's some flow in and flow out on that one. Certainly our customers are always vigilant on their pricing and that continues. The good news, like I said is that we've got a fair amount of opportunity in this environment to take that same message back to our suppliers and we've certainly done a fair amount of that. So it is a good environment for us to be negotiating with wafer fabs and assembly and test and shipping and there's not a lot of people trying to charge you for freight surcharges right now.

And finally, with the new acquisition -- I mean you guys have done a decent job with cutting OpEx over time. In the case of a longer projected loss situation, is there -- how much more room do you think you have in terms of cutting OpEx to prevent a larger cash burn?

Well, it would kind of depend on the scenario. Obviously if things got really horrible, then we are looking at sustained losses and we didn't feel we would be able to turn it around then, yes, we would be able to find some revenue to decrease the OpEx, but at the same time we feel like we have a lot of things that are going our way and as I said pretty consistently, we are not managing this Company for one quarter or two quarters. We are managing it for the long term. We intend to grow our market share in the intended markets and we are not going to do anything draconian to our expenses simply to meet very short-term kind of arbitrary expectations. So, in short, if things get a lot worse, we have plenty of things we can go do. We don't feel any of that is warranted at the moment. We are obviously paying a lot of attention to our expenses. We will continue to manage that closely. At the same time there's a lot of opportunity at the moment to improve our position through things. Whenever I see competitors that make announcements about how they are going to save a lot of money by not traveling it makes me scratch my head. That always struck me as a curious way to dig yourself out of a hole to not visit your customers very much. In any event, we are trying to be smart about the way we spend our money but we are not going to mortgage our future to satisfy the short term either.

Makes sense. Do you anticipate to hold it at roughly this range that you have given this quarter for maybe the next two quarters?

I don't think you -- I think you can be confident we are not going to be completely nuts and spend a lot more money. We do have -- at that level, for example, I mean just to put some specific color on it, at that level, in any particular quarter, we could have one or two more takeouts that could drive half a million dollars worth of expense. You can see some fluctuations but we are not looking to add -- we are not looking to add a tremendous amount of expense and obviously we will keep working on opportunities to decrease it. That's certainly my goal.

Great. Thanks.

Thank you. (Operator Instructions). Next we have a follow-up from Rick Schafer. Please go ahead.

Hey, guys, just real quick on tax rate. Thurman, should we expect the NOLs to carry throughout the rest of the year?

Yes, probably for many, many years. We have a lot. Our NOLs are at a level where we don't expect to pay taxes for some time.

Okay. Great. That's what I thought. Thank you.

Thank you. There are no further questions at this time. Management, please continue with any closing comments.

All right. Well, before -- yes, before we sign off, I would like to announce we will be participating in the Thomas Weisel Partners technology and telecom conference in San Francisco on February 9 at the Fairmont San Francisco Hotel. Thanks for all of your questions and your interest in Cirrus Logic.

Thank you.

Ladies and gentlemen, this concludes the Cirrus Logic third quarter fiscal year 2009 financial results conference call. At this time you may disconnect. Thank you very much for using AT&T conferencing. Have a very pleasant rest of your day.