Cirrus Logic Inc (CRUS) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic fourth quarter fiscal year 2009 financial results conference call. At this time, all participants are in a listen-only mode. Following the presentation, the call will be open for questions. Instructions for queueing up will be provided at that time. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce our host for today, Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may now 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, you're reminded 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 first quarter fiscal year 2010 revenues, gross margin levels, combined R&D and SG&A 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, 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 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 nonGAAP financial information provided in today's call to the most directly comparable GAAP information is included in today's press release and on our website in the Investor section. NonGAAP 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 nonGAAP financial information internally to evaluate and manage our operations. As a note, the nonGAAP financial information we use may differ from that used by other companies. These nonGAAP measures should be considered in addition to and not as a substitute for the results prepared in accordance with GAAP.

And now I'd like to discuss our results. Net revenue for the March quarter was $33.5 million, down 25% from $44.8 million in the quarter a year ago and down approximately 24% from $43.8 million in the December quarter. Individually, sales of audio products contributed $18.8 million in revenue compared to $22.3 million in the quarter a year ago and down sequentially from $25.9 million in revenue in the December quarter. Energy product sales generated $14.7 million, down from $22.5 million in the March quarter a year ago, and down sequentially from $17.9 million in the December quarter. While March quarter sales are typically down sequentially, revenue for the March quarter was further impacted by weak demand and as a result of the current global economic recession. Historical revenue breakdowns by product category are available on our website.

Gross margin on a GAAP basis for the March quarter was 55%, which is unchanged from 55% in both the quarter a year ago and in the December quarter. Gross margin a year ago was impacted by certain charges related to the closure of Caretta Integrated Circuits, a subsidiary based in Shanghai. Excluding these charges, gross margin a year ago on a nonGAAP basis was 57%. There is no material difference between the GAAP and nonGAAP gross margin in the third and fourth quarters of fiscal year 2009.

Total GAAP operating expenses for the March quarter were $24.2 million compared to $22 million in the third quarter. GAAP operating expenses in the fourth quarter included a $2.1 million charge associated with the impairment of certain intangible assets. Additionally, our GAAP operating expenses included stock-based compensation charges of $1.1 million and amortization of acquisition related intangible charges of approximately $400,000, as well as certain one time legal expenses of approximately $400,000, and $100,000 in charges related to a facilities accrual. NonGAAP operating expenses excluding these items were approximately $20 million for the quarter compared to $20.4 million in nonGAAP operating expenses during the December quarter. The loss from operations on a GAAP basis was $5.7 million. Excluding the charges noted above, the nonGAAP loss from operations was $1.5 million.

We recorded a GAAP net loss for the quarter of $7.8 million, a loss of $0.12 per share based on 65.2 million diluted shares. In the same quarter a year ago, we reported a net loss on a GAAP basis of $13.7 million or $0.16 per share based on 85.3 million diluted shares. On a nonGAAP basis, which excludes the items noted above as well as an additional charge of $2.7 million related to the reduction of our deferred tax asset, we recorded a net loss for the quarter of $900,000 or $0.01 per share. In the March quarter a year ago, we reported nonGAAP net income of $5.2 million or $0.06 per share.

Moving to our employee headcount, we ended the March quarter with 479 employees, up from 473 employees at the end of the December quarter. The additional hires reflect our view that the current economic situation represents a great opportunity for us to hire outstanding engineers.

Moving to our balance sheet, we ended the March quarter with $13.3 million in net receivables, down from $15.6 million at the end of the December quarter. Our days sales outstanding remains consistent, and as we have stated before, we will continue to actively manage our credit risk. Ending inventory also decreased $3.5 million or 15% in the March quarter to $19.9 million. We ended the quarter with $120.2 million in total cash and marketable securities, an increase of $2.7 million from $117.5 million at the end of December.

As you recall, last quarter a $20 million stock repurchase program was approved. We have not completed any stock repurchases under this program to date. Capital expenditures for the March quarter were $2.3 million compared to $1.4 million in the December quarter. The increased expenditures are related to the purchase of certain computer aided design tools, highlighting a continued investment in our engineering capabilities for strategic programs. Depreciation and amortization expansion in the March quarter was $2.1 million.

Now I'd like to turn the call over to Jason to discuss our business operations and guidance for the upcoming June quarter. Jason?

Thank you, Thurman. FY 2009 was a tough one for the semi-conductor industry as a whole, and Cirrus certainly felt the impact of the recession along with the rest of the industry over the past two quarters. That said, I'm pleased with the progress we have made on initiatives that are under our control. We have a strong financial position highlighted by a healthy balance sheet with no debt. We continue to manage our operating expenses closely, and more importantly, we remain committed to our vision of being the preferred supplier of analog and digital signal processing components for audio and energy markets. In FY 2009, we significantly grew our market share in portable audio from 5% in FY 2008 to approximately 15% in FY 2009. Revenue from portable audio product was $30 million, well beyond our initial target of $20 million.

In FY 2010, we are looking forward to advancing our leadership in portable audio as we continue to serve Tier 1 customers and expand into new markets such as smartphones. Our success in portable audio, along with numerous key customer programs currently ramping into production, underscores our ability to identify exciting markets and execute a successful strategy to take market share.

Our portable audio strategy serves as a blueprint for success in our energy control and audio DSP initiatives. We launched more new products in FY 2009 than any year in recent history, which together with upcoming launchings of our new PFC family and our ultrapowerful new audio DSP family are expected to drive continued growth in our revenue from new products. We believe that these difficult financial times represent an excellent opportunity for to us grow our market share and we remain committed to doing so.

Let me give you a brief update on our products, beginning with the energy category. These products include integrated circuits designed for a variety of energy exploration, measurement, and control applications. In the March quarter, revenue came in at $14.7 million, which is down by 35% compared to the March quarter a year ago. Q4 performance represents general weakness across our product lines due to the global economic recession. While we anticipate continued near term weak performance from our energy products, longer term we are optimistic about our energy controlled 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 depressed state of global oil exploration.

In energy control products I'm pleased to report that our SA306 motor control IC, which we introduced last fall received the top award in its category from the editors of trade publication EDN Magazine. Longer term, we are excited about kicking off our first power factor correction or PFC chip. In the previous quarter, we discussed this chip's early promising lab results. This quarter I'm pleased to report that we have been demonstrating our PFC to key potential customers and the feedback has been even more positive than we anticipated. We estimate the current PFC market opportunity at about $400 million and growing. This is a market that has been traditionally dominated by analog solutions. We believe that we bring unique digital signal processing technology to this market that will enable more efficient smaller power smaller supplied products that eliminate the need for numerous passive components. Additionally, our PFC maintains high efficiency across the full range of load, which is a key differentiating factor going forward in this market. While economic conditions will continue to have an impact on near term quarterly earnings, we view energy control as a key driver of our long-term growth opportunities.

Turning now to our audio products, which include integrated circuits that are used in a wide variety of consumer, portable, professional and automotive applications. Revenue from these products contributed $18.8 million of our revenue for the March quarter, down 16% compared to the March quarter a year ago. Revenue from portable audio products was a continued highlight this past quarter, and bookings for portable audio products continued to accelerate as key new design wins are ramping this quarter. We believe that we will continue to grow market share in FY 2010 as we are on track to break into smartphone applications as well as other consumer applications such as camcorders and portable gaming devices.

Current economic conditions are causing market weakness across home and automotive audio product lines. Despite this weakness, this quarter we anticipate growing revenue in these audio products despite -- driven by new revenue in new sockets. For example, several Blu-Ray disk players now feature Cirrus Logic ICs and we continue to obtain design wins in the new soundbar market. In fact, several Tier 1 soundbar customers such as Samsung and [Viveo] have new products that are available now on retail shelves and they are getting great reviews. Soundbars are an application which we provide both mixed signal converter ICs as well as audio processors. I'm also proud to announce that we recently taped out our first 65 nanometer audio DSP, which when it is introduced later this year we expect will be the most powerful audio processor in the world for home and automotive audio applications. With our strong portfolio of new products this quarter we expect to buck general industry demand trends as well as our own recent historical Q4 to Q1 demand patterns by delivering growing revenue from audio products.

Now let me review our guidance for the first quarter of fiscal year 2010. Our overall expectations are as follows. Revenue is expected to range between $36 million and $40 million. Gross margin is expected to be between 52% and 54% and combined R&D and SG&A expenses are expected to range between $22 million and $24 million, which include approximately $2 million in share-based compensation and amortization of acquisition related intangibles expenses. While we continue to actively manage our supply chain cost, the sequential decline in our forecasted gross margin is due to product mix changes as we continue to see growth of our new product revenue from our audio products. Relative to last quarter, our guidance of operating expenses during the first quarter includes more new product tape outs, including our new 65 nanometer audio DSP.

While global economic conditions remain challenging, Cirrus Logic continues to be positioned for long-term success. Revenue from new products such as portable audio continues to be the highlight for the Company and we are eagerly anticipating our first major venture into the high volume energy control market through new PFC products. 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 are confident that our continued focus on core growth strategies puts us in a position to emerge from this economic uncertainty even stronger, and we remain committed to our vision of being the preferred supplier of analog and digital signal processing components for the audio and energy markets.

Operator, we are now ready to take questions.

(Operator Instructions). Our first question comes from the line of Tore Svanberg from Thomas Weisel Partners. Please go ahead.

This is Evan Wang calling in for Tore Svanberg. Thank you for taking my call. I'd like to ask if you can clarify your gross margin guidance. I understand it's due to mix shift, but do you expect this to last beyond the Q1?

I would certainly expect some overlap with that range going forward. We are managing our supply chain as closely as possible. We have a significant ramp in as we said in new products in new applications, and then as well, compared to a year ago a significant amount of revenue that has been pretty week from the seismic product line. So the combination of those two have pushed margins down a little bit. We are certainly working to drive those back up going forward.

Your revenue was expected to be guided much higher. Could you add some color on your revenue guidance as well? In particular, could you also talk about the smartphone and what ramp you are looking at for the coming quarters?

I don't want to get into too much detail, but we do have a backlog for smartphones at this point that we do expect to ship in Q1. So that's a significant part of that guidance. Broadly there's a couple of things going on -- it's a pretty significant bump up from Q4, which is countercyclical for us. Normally in Q1 in the last few years at least has been down from Q4, so that's good news. Partially we are seeing the overall market get a little bit better. When we talk to the foundries we work with, when we talk to the assembly sites and test sites, they are definitely booking up and it seems like it's coming back sector by sector. It's certainly not anything turning around, turning on a dime. It's a long, slow recovery I suspect. But things are improving slowly. That's part of it. And the other part and frankly the bigger piece is new revenue coming from new products and new sockets, one of those being smartphones.

Could you also just help us understand the revenue guidance a little bit more? Could you talk a little bit about your backlog and bookings trend?

In general terms, our bookings are strong relative to that revenue guidance. We go through the same procedure every quarter where we look at the billings plus backlog crawl chart at the time that we release guidance and lay some historical trends on top of that and project where we are going to come out. We'reif anything we are ahead of the curve relative to where we would normally expect to be. So it reflects a little bit of a cautious nature given the overall environment which I think is prudent. So we're not expecting any exorbitant amount of turns business or anything like that.

Could you give the coverage number at all -- where, what part of that guidance is covered by backlog?

Let me look up exactly, we don't typically -- that was at the beginning -- we don't break that out, so.

Okay. Thank you very much.

You bet.

Thank you. Our next question comes from the line of Adam Benjamin from Jefferies. Please go ahead.

Jason, some followups on the portable audio ramp -- obviously you are talking about a smartphone. I'm just curious if you look out, is it a singular one phone or one product program ramp that you are referring to that relates to the June quarter? And then as you look out the rest of the year, the make up of that portable audio of revenue, it was basically 100% portable media players in 2008. As you look out to this year, how does that split shake out? Is it still mostly PMPs, or is there a breakout you can give in terms of handsets as well as gaming devices? And do you care to give any target that you think is realistic given that you just did $30 million last year? Thanks.

You bet. No, I think we are going to pass on the target setting other than to say that it's a pretty significant amount of growth that we are expecting for the year in the portable space in and of itself. Portable media players are a pretty big segment, so for the foreseeable future that's probably the biggest piece of it for us. But the phone can be a pretty cool category as well. I think we talked about on the last call and we mentioned it in here as well -- we are expecting some growth in portable gaming as well as a smaller number from things like camcorder

So is it fair to say that maybe as you look at the mix of the revenue at the end of the year, you will be 70% to 80% still PMP?

Probably not quite that high, but probably in the universe of correctness.

Then just to follow up on the gross margin, obviously you have a mix due to the ramp -- the portable audio has been running lower. One of the things you talked about is getting that margin back up to your corporate average of mid 50s. And I just wonder what do you have that you can do there, and in terms of the wins that you have been getting, are you getting them on price, performance, and should we expect the margin to be lower as portable audio becomes a higher percentage of the mix?

Our sense at the moment modeling it is that we still have some opportunities to improve the margins in these newer product lines. It does take a while when you experience this kind of a ramp on a brand new product to get tests dialed in, yields dialed in, work various other opportunities you have to improve margins. So we think we have a little bit of potential improvement coming within the portable space as well. So I wouldn't -- we don't anticipate them getting, going down from where we are at today, from the number that we've got today.

Obviously your customers and competitors are listening, so I don't want to give up too much. So just one last question on the visibility and the backlog coverage that was asked earlier, if you compare your turns and needed to meet the 36% to 40% versus your turns needed last quarter, is it a lower number or higher number? You seem to indicate lower, but just want to clarify.

Versus last quarter at this time, it's we are ahead of where we were.

Okay. You care to give more color in terms of -- 50% turns you needed or lower?

No, it's, it's a lot lower than that, but we don't typically break it out.

Okay, guys, that's all I have. Nice job. Thanks, Adam.

Thank you. Our next question comes from the line of Vernon Essi from Needham and Company. Please go ahead.

Thank you very much. Just to step into this audio question, if we put the portable bucket of revenue on the side and just talk about the core audio, what is the pattern of demand looking like for that? Some other pure companies have been talking about a decent build rate in some of the consumer electronics markets that those would end up in. Are you seeing that trajectory into the June quarter or is the bulk of this growth in portable right now?

A fair amount of it is portable due to product ramps, but we have other products that are ramping as well. It's broader than just portable. And then, too, there's an element of just some of the more inch deep mile wide business coming back. It's interesting -- we get a bookings report every morning and it's interesting to see who shows up on it. And I tell you for the bulk of Q4 it was basically only the big guys that showed up on the list. And then the last I don't know month or so it's been started, it's a lot of smaller names and the folks you haven't heard from for a long time started to show back on the list. It does feel like generally speaking the whole contraction we saw for a while there with CMs and disties that were drawing down inventory -- at least at this point we're seeing the end demand rates reflected in the backlog which -- in the bookings, which is nice.

Okay. And then just follow on the gross margin question -- if you anticipate there being some level of lift here in terms of your orders, what are the pushes and pulls, if you will, of the gross margin structure that we can expect to see? Do you expect you are going to get any purchasing power going forward or is there any refresh on new wafers or anything along those lines where you might see some cost advantages or vice versa for that matter?

Well, yes, for sure we work on all those aspects. Two, you have to remember there's an element of figured cost that -- so when we run as low of a volume as we did last quarter and to some extent we are still digging our way out of that, the absorption number is higher or the absorption percent in the margin line is higher than would you like to see it. So as we get back the volume set, that helps a little bit. Certainly negotiating test costs and wafer prices and all that is a part of it. And then continuing to just keep -- once you've got a new part out for a new application and you are working on your second phase of products for that application, you tend to have more opportunities to really refine exactly what mix of features, et cetera, is in your next wave of products, so you can get the margins to slowly go up over time. If I look at the first high volume thing we shipped in the portable media player versus the second, for example, we certainly improved the margins going from product to product, for example.

Okay. And then finally just on the OpEx side, you talked about taking this newer product, and I'm just wondering if it raises the question -- do we have any one time lumpiness in the R&D costs that might be going away in the near term? In other words, can we expect that R&D number to trend lower later in the year, or should we look at that as being a relatively fixed run rate right now?

I would look at it as closer to fixed. I mean obviously we are not going to be taping out a 65 nanometer chip every quarter, and those aren't cheap. But, no, we don't anticipate it being much lower than it was. I would -- we try to do a diligent job of putting the middle of the range about where we expect things to come in and give ourselves a little bit of room around that, and this last quarter we did a pretty good job of working it down to the bottom end of the range. Relative to that, we do have a significant number of new tape outs this quarter that would make it pretty tough for us to get back down to that $20 million that we hit in Q4.

And I'm sorry one last question, on inventory -- of course Thurman is doing a great job on the working capital side here or asset management, rather -- I'm just wondering this is a rearview mirror statistics looking at the days in inventory right now, but what do you feel is an adequate level to maintain going into the summer months? Should we anticipate that to be rising on a dollar basis?

Just because we are expecting to do relatively seasonally better revenue over the course of the year, you're certainly going to see some ramps and other things, but we do expect inventory to remain relatively flat or slightly up through our more busier months, but you're not going to see any significant builds.

Okay. Thank you.

Just to put a little color on that, I think we talked about last couple of calls -- we've put a pretty strong focus on supply chain management and instilling further discipline in that whole process. While we do anticipate a pretty significant ramp on a number of fronts, we are trying real hard to maintain that inventory at a reasonable level. And then in the long-term really even get towards the better turns number than we've been at. I agree, my hat's off to finance and the supply chain folks for a good job of managing that.

(Operator Instructions). Our next question comes from the line of Rick Schafer from Oppenheimer. Please go ahead.

Hey guys. Just a follow up on the inventory -- how are you feeling in general about inventory in the channel, the levels we are at right now? I think it was last call you guys talked about, I think you mentioned talking about keeping a close eye on Asian disty. How do you feel about things there? Maybe in general any commentary you can give where channel inventories are, and maybe part of that -- do you expect inventories to be in that channel to be kind of flattish in June quarter? Do you plan to see a little bit of a restock there?

I would say if anything -- well, it's down. We were already thinking it was down -- it was already getting pretty tight last year and we was definitely had some conversations with folks about it, what is an appropriate returns ratio for the kind of margin we are paying. I would anticipate that as people get a little bit more confident that in fact end demand is really there that the disty channel should probably see a little bit of a loosening up with some of their inventory. They've been pretty tightfisted about it. So.

Could you remind us, how big is Asian disty for you guys just in general -- your exposure, just how much -- ?

Overall roughly on the order of 60% of our total business goes through distribution, something like 30% of that is Avnet. So 30% ish then is would be that, would be the number you're talking about there -- as maybe a little less than that actually because we have Digikey and some of the [catalog] guys as well.

Okay. That helps a lot, though. Just the second question here -- just on portable audio, how big is portable audio as a percent of total audio sales now? And maybe give us an idea -- even if you only give the number, maybe some idea of the magnitude of the differential between portable audio gross margin versus just audio gross margin?

I'm going to pass on that last one if you don't mind, but overall -- so we did about $30 million in portable last year. So that's out of what the total ended up, $90 million ish of total audio last year.

And obviously you expect that ratio to continue to favor portable, it sounds like to me

Yes, in the short term over the next year I would imagine that portable continues to grow as a percentage of the total audio piece. Longer term, I think the DSP business has some pretty significant legs and it will be nice to have the -- it will be nice to have a new arrow in the quiver in terms of the high power DSP coming up. That will help a lot.

One final question on the industrial segment -- it didn't sound like you expected much of a rebound in the June quarter from that business. But what about the back half of the year? Any specific update to what's going on with digital metering with [Itron] and all that.

I guess the comments that we are putting on at the moment relative to industrial would be mixed. We are taking a pretty cautious and conservative approach relative to seismic. If anybody has a good idea about how to forecast seismic, I would love to hear it. But we haven't lost any sockets. We own basically all of the available market we can get in that space, so it is what it is with respect to the market. So that's contrasted with continued strength in what we think is a pretty exciting market that you mentioned is the power meter stuff, both on the strength of the relationship we've got with Itron as well as general positive trends in that market due to the whole smart grade initiative and everything else. So, yes, we would anticipate further strength in the second half of the year on power meters that we are not experiencing this quarter, for example.

So would power meter be big enough to offset -- let's say seismic stays weak this year, in the back half of the year -- would it be enough that you can actually see some growth in that energy business in the second half of the calendar year?

I don't think it's going to quite get to the growth part of the curve yet. We are very optimistic about it in the longer term just due to the sheer size of the opportunities we are chasing with the new stuff. The cool thing about PFC and that whole energy control initiative is for one, it fits the mission of the Company very well and the vision of what we are actually very good at, and on top of that it's a neat way to deploy that set of technologies into a market that's very rapidly growing and very much needs the new technology. As opposed to having it be a -- nice to have the regulations that are coming in Europe and through Energy Star and California and at a slower rate elsewhere in the world basically are forcing people to get to a performance level in a power correction product that you are not going to be able to get there with an analog PFC. It's a big market and growing fast, and there's a pretty strong technology impetus to push people to a digital PFC once it's available. So we think that should more than offset in the long-term the declines we've had.

Great. Thanks.

You bet.

(Operator Instructions). Our next question come from the line of Christopher Longiaru from Sidoti & Company.

Hi, guys, how are you?

We are doing good.

Okay. Well, I just wanted, could you give us a little update on what's going on with Japan and your efforts there?

Yes, let's see, so we definitely, I think we talked about that on a couple of calls where we've set out Japan as an area where historically we've underperformed relative to the size of the market. I don't think in the long ago past -- I don't think we had a terribly mature approach to it in the sense that we treated it like, you have this much revenue, so you can afford to send this many people there, which was just enough to fail. So we set it out a couple of years ago that we were going to treat it as an investment in an area where failure is not an option. We hired some excellent people. It's been a significant improvement. The quality of meetings, quality of customer engagements has gone away up. At this point we are having detailed dialogue with significant customers in applications such as portable, even to the level of incorporating their IP into our products, which I think is pretty cool. It's a good indication of the kind of relationship that those guys are driving. Additionally the DSP that we talked about, the new 65 nanometer part, is squarely targeted at a lot of the Japanese applications such as AV receivers and other home and automotive applications.

The key thing for an American semi-conductor company to do well in Japan is you probably better show up with a part that not everybody else has. I mean, we compete against AKM. We compete against a number of different guys. If it's a toss up, they're going to win every time. So we need to have a great sales team and great focus on the right kind of markets, but we also need to have a best in class product. And the DSP we are bringing out is going to be that -- the power factor correction stuff. And all of the various vertical markets that that enables is going to sell extremely well in Japan, and I feel actually quite good about the progress we've made with the team there. So overall, it's not going to be a lightning paced turnaround, because that market just doesn't work that way, but I think all the initial signs are pointing in the right direction for us.

Great. Thank you.

You bet.

Thank you. (Operator Instructions). We have no further questions at this time. Management, I'd like to turn it back over to you.

Thank you for all your questions and your interest in Cirrus Logic. Thanks again for joining us on the call today.

Ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation and for using ACT conferencing. You may now disconnect and have a great day.