Cirrus Logic Inc (CRUS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Cirrus Logic first quarter fiscal year 2011 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. Instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Thurman Case, Chief Financial Officer. Mr. Case, you may begin.

Thank you and good morning. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer.

Before we begin I would like to remind you that during the course of this conference call we will make projections and other forward-looking statements regarding, among other things, estimates for second quarter revenues, gross margins, levels, combined R&D and SG&A expenses, amortization of acquired intangibles and share based compensation expense, as well as other estimates and assumptions regarding long-term gross margin and operating profit goals, future demand for products and expected revenue and market share growth. These statements are projections that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information the Company undertakes no obligation to update or revise any projections or forward-looking statements whether as a result of new developments or otherwise. Please refer to the press release issued today which is available on the Cirrus Logic website, the latest Form 10-K and 10-Q as well as other corporate filings made with the Security Exchange Commission.

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 today's press release and on the Company's website in the investor section. Non-GAAP financial information is not meant as a substitute for GAAP results but is included because management believes such information is useful to investors for informational and comparative purposes. In addition, management uses certain non-GAAP financial information internally to evaluate and manage operations. As a note, the non-GAAP financial information the Company uses may differ from that used by other companies. These non-GAAP measures should be considered in addition to and not as a substitute for the results prepared in accordance with GAAP.

I would like to now discuss our results. Net revenue in the June quarter was $81.9 million, up approximately 118% from $37.5 million in the June quarter last year and up 31% from $62.6 million in the previous quarter. Audio products contributed $54 million in revenue for the June quarter. This product group includes components used in a variety of devices such as home theater systems, portable media players, smartphones, media-centric computers and car audio amplifiers. As you see in the tables we included with our press release today, quarterly sales of audio products grew 118% year-over-year driven by continued increase in portable audio and strength in general home audio products. Sales of energy products were $27.9 million for the June quarter. This product group includes components designed for a variety of energy measurement and energy control applications.

Revenue for our energy products was up 119% on a year-over-year basis due mainly to growing demand for both power meter and energy exploration products as well as renewed strength in some of our baseline energy businesses such as high power and general industrial products. Historical revenue breakdowns by product category are available on our website. Gross margins for the June quarter was 57%, up from 56% in the previous quarter and up from 52% in the quarter a year ago. This excellent result is due to both the outstanding efforts of our supply chain team to deliver improved manufacturing efficiencies and a shift in revenue mix within our energy business to a higher margin product such as energy exploration.

Total GAAP operating expenses for the June quarter were $29.2 million compared to $27 million in the previous quarter. Non-GAAP operating expenses were approximately $26.6 million for the June quarter compared to $24.9 million for the March quarter. The increase in non-GAAP operating expenses is primarily due to additional overall employee-related expenses. We ended the current quarter with 525 employees, up from 505 at the end of March.

Income from operations was $17.5 million or 21% on a GAAP basis, and $20.2 million or 25% on a non-GAAP basis. GAAP net income for the quarter came in at $17.6 million, or $0.25 per share based on 70.8 million diluted shares. In the same quarter a year ago, we reported GAAP net income of $221,000, or $0.00 per share based on 65.3 million diluted shares. On a non-GAAP basis net income for the quarter was approximately $20.3 million or $0.29 per diluted share. In the June quarter a year ago we reported a non-GAAP net loss of $800,000, or a loss of $0.01 per diluted share. We experienced an increase in our diluted share count this past quarter largely due to the impact that the rising stock price had on previously granted options.

I'm quite pleased with our quarterly results as they demonstrate that we are delivering strong earnings from our R&D investments. It's interesting to note that earnings growth has accelerated to the point where our non-GAAP EPS this past quarter exceeded non-GAAP EPS for all of fiscal year 2009.

Moving to our balance sheet, we ended the June quarter with $34.5 million in net receivables, up from $24 million at the end of the March quarter. Our average days sales outstanding remained consistent with previous quarters. Ending net inventory increased to $42.4 million from $35.4 million at the end of the March quarter with net inventory turns of 3.3 as we positioned ourselves to support our current backlog and projections for production ramps of new design wins. We ended the quarter with $161.7 million in total cash and marketable securities, an increase of $20.1 million, from $141.6 million at the end of March. Cash flow from operations was $11.9 million for the quarter. Capital expenditures for the June quarter were $4 million, up from $1.3 million in the March quarter as we invested in capacity expansion with our manufacturing partners as well as technology enhancements while depreciation and amortization expense for the quarter was $1.9 million.

I would like now to turn the call over to Jason to discuss our business operations and guidance for the upcoming September quarter.

Thank you, Thurman. As I'm sure you've determined from our most recent financial performance, Cirrus Logic is executing at a very high level. All of our key financial metrics clearly demonstrate we are making progress on our vision of becoming the first choice in signal processing components for the world's best companies. Our revenue in Q1 grew nearly 120% year-over-year which, as you might suspect, is well above our corporate model. Gross margin exceeded guidance due to outstanding work from our supply chain team, coupled with increased contributions from some of our higher margin energy product lines such as seismic. With non-GAAP operating margin of 25% and earnings of $0.29 a share, the Company is executing to our strategy and gaining momentum.

Revenue from portable audio products remains the driver of overall Company growth but I'm pleased that we experienced significant growth contributions in Q1 from numerous audio and energy product lines. Demand for our energy measurement and energy exploration products was strong with solid growth from our Apex precision power line of products for industrial applications. And an overall strengthening of demand in home audio products such as audio DSPs and converters. Over the past several quarters we've been hiring great engineers to help ramp up for long-term demand.

Let me give you some highlights from the audio side of our business. As you know, our strategy has been to target growing markets such as portable media players and smartphones and develop great relationships with tier 1 customers in those markets. As a case in point, the success we've had in supporting our largest customer did not happen by accident, now did it happen overnight. It is a result of several years of cultivating a strong relationship focused on solving difficult engineering challenges that they face. Four years ago we showed them some new portable audio technology, and they gave us a list of additional problems to solve. And our team delivered. This type of focus has allowed us to solve key audio related challenges and we've delivered a portfolio of custom parts for them that are shipping in every one of their major product lines.

We've applied this approach with several customers in the audio market such as the new custom IC for a tier 1 account in Japan for portable audio applications which began shipping in the June quarter. Also in the automotive area of our business we are sampling a new custom IC chip set for a leading manufacturer of audio amplifiers representing a great growth opportunity due to the high dollar content per unit. It is satisfying to know that our most important customers are able to differentiate their products in part by the type of innovative ICs we're developing.

Q1 audio revenue was strong both on a quarter over quarter and a year-over-year basis. While this growth was driven by continued success with our number one customer, we also saw strong growth from a wide range of home audio products such as sound bars, home theater systems, and Blu-ray disc players. Longer term we continue to focus on growth by going full speed in developing new products for audio applications. Recently we introduced a new D/A converter for home audio applications and we're aggressively targeting long term growth from smartphone applications. In June we introduced our first general market smart audio CODEC, with CS42L73 which will enable future devices to use less power and extend battery life. As we mentioned on our April earnings call, the CS42L73 can currently be found as part of a 3G reference design from Infinium.

We also recently introduced the CS35-LL1 family of hybrid Class D audio amplifiers for mobile communication and other portable applications. This chip focuses on reducing the system power while producing up to 3 watts of high quality audio through this phone speaker. Overall we're excited about expanding into new generations of smartphones in 2011 as we are currently engaged with new customers for both of these new product as well as several products currently in the development pipeline. In sound bars we continue to expand our share of this market by winning several new designs with additional tier 1 home theater brands.

Looking now at our energy business, we saw improvements in a variety of our product lines throughout the quarter. Our current investments in the energy product lines are focused on energy measurement and the energy control area such as power factor correction, lighting and motor control. We have been in the energy measurement business for many years. The recent push for smart grid enhancements combined with our focus on providing leading OEMs such as Itron with outstanding metrology ICs has created a lot of new opportunities world-wide for digital energy meters and other energy monitoring applications. Our traditional industrial business also saw benefits from improving economic conditions, and in particular revenue from our energy exploration products continued to grow sequentially. Forecasting the seismic business is challenging but our current backlog indicates that this business will experience strong sequential growth and be a more meaningful contributor to revenue and gross margin for Q2. In addition revenue from our Apex precision power line of products grew meaningfully in Q1, driven by a rebound in demand in numerous industrial markets such as semiconductor test equipment.

Longer term we're excited about new programs that are launching from our energy product lines. In June we introduced our first digital power factor correction controller ICs which target both power supplies and lighting ballast systems. These chips bring a highly innovative digital approach to solving energy efficiency and system design challenges. We are currently sampling the leading customers in these markets which I'm pleased to say have validated our approach to digital power factor correction. And we're gathering a great deal of customer feedback that will drive our roadmap of new derivative products and pave the way for significant long-term growth opportunities. There are very relevant parallels between our approach to enter the PFC market with the successful approach we took in portable audio, and we're anticipating our entrance into this market in FY11 will translate into growing revenue opportunities starting in FY12.

As Thurman mentioned, we increased inventory levels substantially during Q1 just as we did in Q4 of FY10 in anticipation of continuing strong demand in upcoming new product ramps. The inventory build is largely comprised of our newer products for secure design wins in existing business and it enables us to keep up with our rapidly expanding demand for key products. We will continue to carefully manage our expenses going forward even as we continue to aggressively but selectively hire the right talent to join our successful team. We continue to put significant effort into hiring and retaining the best talent as we are already hard at work on new projects that will enable us to sustain our momentum. Our headcount growth over the past few quarters reflects the focus that we are putting on hiring experienced engineering talent to staff our R&D projects. Our focus on creating a corporate culture that is both challenging and rewarding has allowed us to attract and retain outstanding talent, and we are proud of our inclusion and strong showings in numerous best places to work surveys.

I'm excited that we're outperforming our business model for revenue growth, gross margins and operating margins, and we will remain focused on growing revenue while keeping a sharp eye on where we are investing our dollars. Looking forward to the second quarter of FY11 we expect revenue to range between $98 million and $106 million, gross margins to remain between 56% and 58%, combined R&D and SG&A expenses to range between $28 million and $30 million which includes approximately $1.7 million in share-based compensation and amortization of acquisition related intangibles expenses. So on the heels of near 120% year-over-year growth in Q1 we're forecasting continued strong growth in Q2 with revenue increasing by more than 75% over last year. Revenue from portable audio products remains the driver of overall Company growth and I'm pleased with the relationships we have with our largest customers. Everyone at Cirrus knows that helping our existing customers succeed is job number one.

We continue to hire great engineers to staff our key programs and our team has done an outstanding job of delivering new products and design wins. Longer term we expect our new growth programs in power meter, smartphones and PFC will help drive revenue growth and expand our customer base in audio and energy. Our goal is to continue to execute flawlessly as we work hard to meet near-term revenue growth opportunities even as we focus our efforts to develop new products to drive growth in FY12 and beyond.

Operator, we're now ready to take questions.

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

Thank you very much and congrats on this huge guide. Just to dive in, of course one of the bigger questions out there, your major customer, can you discuss how you see that faring out into the September quarter. And just so we understand how much of your guide or the incremental growth you are seeing would be due to that customer, any sort of detail you could provide would be appreciated.

I don't want to get into real specifics, but obviously the kind of products that we ship in portable audio, it's typically a pretty big Christmas build, and there's a couple of -- you might have heard of some recent product introductions that appear to be doing pretty well. Obviously that's at the moment doing a bit of an up and to the right.

Should we be thinking about this in terms of percent of sales as growing meaningfully then sequentially?

It's growing some. It's not getting out of control. I don't actually have the percentage in front of me. Yes, it's up single-digit percent-ish.

Just to move over to the energy side, the exploration business has picked up. I want to understand, obviously it's a great business for you. It's helped gross margin in the quarter, it sounds like, in the quarter, as well as revenue. Can you give us an understanding of the gross margin guide, you've got it up a couple hundred basis points versus where you were a quarter ago. Is that mostly due to seismic or should we be looking at this as a new level of setting the bar in terms of your gross margin on this sort of revenue volume?

It's a lot of little things actually. Seismic for certain helps. No doubt about that. So we continue to think that the long, long term model should probably remain about 55%, but with seismic running the way that it's running, and frankly some of our other product lines as well, that's what's got us above the model for the near future. But our supply chain team really has done a nice job really last year of working with some of our manufacturing partners to drive our costs down. So given the growth that we've had in audio, the fact that we've been able to remain even above our target is pretty remarkable. And then just to circle back on your growth question, I did want to highlight that more than half of our growth is actually not coming from our largest customer.

Into the third quarter, or the September quarter guide.

Right, right.

That's good to know. Finally, just your opex guide looks to be flattish sequentially. And R&D had a nice growth into the June quarter. How should we think about that going forward? Are there some one-time items in there? The opex seems to be pretty low on this new revenue into September.

On direct SG&A and R&D we're forecasting it to be flattish. Up a little bit, but nothing notable there. It's funny, we're targeting to slowly increase that as we can hire great talent, so really what you're seeing on a quarter over quarter basis is really more things like tape-outs. We always forecast it at the beginning of the year, and it looks all nice and smooth, and then it never works out that way in reality. It causes our finance guys to pull their hair out a little bit.

Just to elaborate on that, you're saying R&D should be pretty much a flattish, sequential thing. We're not going to see it tip back down? There was no big incremental spend going on?

Right, no, no.

All right, that's helpful. Thanks a lot.

The next question is from the line of Jeff Schreiner with CapStone Investments. Please go ahead.

Thank you for taking my questions. One question I just want to understand, Jason, is have you guys been seeing any foundry or back end supply constraints which maybe could cause you to be a little bit more cautious on what your customers may be willing to ship in the back half of the year?

Oddly, the one thing I've heard from, for the most part, smaller customers has been, of all things, limitations on getting discrete MOSFETs. I don't know what's up with that. But we really haven't seen anybody scaling their forecasts back. They seem to have either taken that all into account already or they figured out how to get what they need, so we haven't seen a lot of noise on that front.

Okay, and just maybe following up on that, what about customer lead times? Have you seen them pull in at all recently, or where are they relative to maybe where they were in Q4 '10?

Q4 of FY10, they might have pulled in a little bit. It's really case by case. The thing with so much of our revenue coming from really well established tier 1 customers, a lot of what they will do with their backlog is spelled out pretty contractually. It just kind of lays in there, and it's pretty mechanical, so it doesn't move in or out a whole lot based on what's going on. It varies, so it's more like they'll place it and then they'll move it around if they need to, because they can. But in some of the noisier territories, it gets a little more cloudy, because a lot of that business goes through POP distributors, so if their lead times contract, it can be tricky for us to figure it out sometimes. But overall I read the same newspapers as everybody else does is and I have a hard time correlating the success the semiconductor industry appears to be having with all the tales of doom and gloom.

One last question for me. I was wondering if there was any push-outs in June quarter revenues that may have gotten pushed into September.

There's always some stuff at the quarter boundary that moves around, some in, some out, but nothing particularly notable.

Okay. I'll get back in the queue. Thank you very much, gentlemen.

The next question is from the line of Rick Schafer with Oppenheimer.

Congrats on a good quarter. I just have a couple questions. One quickly on seismic. I know you talked about it being notoriously lumpy or tough to forecast. Are you guys just too far removed to see any potential impact from the Gulf spill or anything specific to that? It seems like that could have a ripple effect in that business, or am I over-thinking that?

Yes. We are as far removed from the broken ocean as you can possibly be. Sorry. No, it actually is a remarkable distance between whatever is going on with gas prices. People tend to -- if oil is $70 a barrel then seismic is going to go nuts. It doesn't appear to be anywhere near that simple. There's some pretty long time frames, just an unimaginably huge amount of capital that's at play. And it is a very very long-term focused kind of business by necessity, so it doesn't seem to have a whole lot to do with whatever happens to be going on in the news at the moment.

So what are your order lead times in that business? I'm curious because it would seem to me that it ought to be one of your more stable businesses to forecast just given the kind of lead times you have there.

For sure. For the most part we tell people that if they don't book it, we're not going to build it. So from a quarterly visibility, we usually have quite good visibility. From what are we going to do in Q1 or Q4 of next year we have very little visibility.

That helps. Then Thurman and you guys talked about the big ramp you guys have seen in your profitability over the last year. Can you give us an update on where the current NOL balance is? Could you guys end up paying taxes next year at this kind of run rate?

My friend, if we pay taxes next year, you'll be talking to somebody else on this call. No, we should be in the $460 million range, something like that. I look forward to the day we pay taxes.

Got it. Then the last question, back on portable audio for a second, can you quantify how big your largest customer is now, just in general?

We said in the Q it was 34%, in Q1, and then it's hard to know exactly where our revenue comes in and exactly where they come in, because there's a lot of moving parts, but it will be up single digits most likely.

So it will be up. I just wanted to clarify that. Any update on traction outside of your largest customer there? My real question is what's been the primary issue with that ramp? Is it just the long design cycle that's typical in PA? Have you guys had bandwidth issues internally, whether it's capacity, or support staff?

No, I don't there's any issue there at all. We just launched the product this quarter, actually last quarter, and we have obviously been out shopping it to folks during this spring. But, yes, it takes a good year or so for those folks to make a major platform change, which is what that would be. So I feel like those developments are going pretty well. We've got good engagements with a bunch of different folks in that market, and it just takes some time.

But we'd be talking about some new portable audio guys next year, larger OEMs?

I'd like to see that. When we talked about the CS42L73, in particular, we said the earliest that we would be able to see revenue would be basically sometime in FY12 and I still remain pretty optimistic that we will see some of that.

Okay, great. Thanks a lot and congrats again.

The next question is from the line of Torrance Svanberg with Stifel Nicolaus.

This is Eric for Tore. Very good, guys, congrats. Maybe just circle back. You talked about energy, and energy seems like it's grown really nicely. Obviously off of a little smaller base than audio. Maybe two things. One is, it seems like it's closing the gap in terms of (inaudible) very nicely last quarter. When do you see energy -- you talk a lot about opportunities (inaudible) you see that gap with audio, or does audio start to take off once you launch new products and sign up new customers? -- what if audio started to take off once you launched new product and sign up new customers?

I'm sorry, the phone cut out so I'm going to paraphrase you, and you can let me know if I goof it up. You're saying do we expect that the energy growth rate has closed the gap on what audio has been doing so we should expect more balanced business in the near future or is audio going to re-accelerate and widen the gap? Is that about right?

Yes, that captures it.

I have to say I'm a little bit surprised. I've been saying that I expect audio to widen the gap before it narrows. So energy has been doing extremely well, and there's a couple of different reasons underlying that. One of them is that the investments we've made in power meter have been really well placed, and that business is doing extremely well. The other piece of it is we've got some older products, in particular seismic and some other areas, that are also doing pretty well, especially when you're doing a year-over-year comparison. We obviously think about those two categories differently. One of them we expect things that we're investing in and new businesses to continue to grow. We are certainly hopeful that the old stuff does well and seismic has a long, long run. But we don't plan on it.

So in a nutshell, energy is quite strong for the moment, and obviously actually for the foreseeable little while here, but over the next year or so it wouldn't surprise me if audio widened the gap a little bit, because we really have laid in a lot of new stuff. Now, longer longer term, to expand a little bit on your question, the other investments we're making, in the power factor correction, for example, the power control areas of energy, that's something we're investing in, in a pretty big way, for the future of the Company, and that's something that could in the long term actually could drive us back to a much more balanced 50/50 type model. Those are some pretty remarkably interesting areas for our technology to help differentiate our customers' products.

Great, that's helpful. In terms of cyclicality, I apologize if this has been said before, but I'm sure audio goes through a down cycle in the calendar Q1, but does energy go through similar types of cycles, or is it a little bit more of a steady business?

It has cycles to it but they appear to be moving to their own drummer, so it's sometimes a little more difficult to predict. Like I said, in particular on seismic, by the time we get to calendar Q1, we feel very good about Q2. We feel pretty good about Q3. By the time we get to Q1 that one is a little more difficult to predict. But, yes, it's hard to put a seasonality, any kind of seasonality color on the energy stuff.

That's all I have. If I think of others I'll get back in the queue.

The next question is from the line of Adam Benjamin with Jefferies & Company. Please go ahead.

Just a couple follow-ups there. On the gross margin specifically for the portable audio, you guys have done a pretty good job seeing a gradual lift for the last several quarters in a row, based on the implied gross margin. I know you don't break it out. But you talked a little, Jason, about some efficiencies in the supply chain. I'm just curious if you can give some more color in terms of that gross margin trend. Obviously it's still below the corporate average, but the trend has been in your favor, and how much of that is being driven by cost downs or just efficiencies in the supply chain?

Sure. There's a couple points to make there. One, like I've said, nobody hopes that you go into a recession, but we went into one a year or so ago, and our team did a really good job of doing what you should do in a recession which is invest through the downturn, come out with some great new products, and at the same time beat the hell out of your supply chain and really get these costs under control and benchmark against the best pricing out there. And what we found when we did that was we were leaving some low hanging fruit on the table, if I can mix a few metaphors there. And so we were able to drive the cost down really. And it's not just in portable audio or the new things that we're doing or anywhere else, but we were able to drive our cost basis down pretty substantially. We monitor as a metric the margin on the top 10 products that we spend money on. People always want to focus on the margin of their lowest margin product, and it turns out that actually doesn't make a lot of sense. You should focus your margin improvement efforts on whatever you are spending the most money on regardless of the margin. So across the board that's been a helpful thing.

In portable audio, the biggest benefit really is the fact that it's a pretty rapid cycle business. Meaning you don't sell the same part five years. You get an opportunity to do new products. So in a competitive space people care about their building material costs so they always want to talk about the price of the component. And fair enough. But if we're doing our job well and we're introducing new products what we ought to be able to do is help save them money on other things, reduce capacitor count in the system, reduce the component count overall, save board space, et cetera. So that the purchasing guy doesn't take a beating for not reducing his bill of materials, we actually can help them with that. If you are talking about installing the same part quarter after quarter you are going to give them a penny a quarter, and you are going to go back and forth, and it maybe helps him meet his MBOs or something but it's not that meaningful. Whereas if you come out with a new product, we can keep our ASP the same, or maybe even increase our margins and ASPs, and actually take meaningful content out of their bill of materials. That's really where the benefit of us doing either custom or semi-custom products for a bunch of different folks. It's actually a growing piece of our business. That really enables you to partner closely with whoever you're selling to, understand exactly what their needs and their pain points are, and really go to work reducing them. That focus has had a pretty profound effect on our business.

That's helpful, Jason. Just as follow-up on that, if you look at the portable audio segment in terms of reducing the bill of material where do you stand? Can you give some kind of percentage? Are you 70%, 80% along the way in terms of what else you can pull in and reduce bottom costs, or you still have a lot more to go there?

There's a lot of innovation that we can still do that in space to save people money.

Got you. Moving to the energy segment, a lot of questions there. Maybe you can talk about it this way in terms of the growth. How much of the growth was driven by new products in terms of if you can quantify that both for the quarter and your expectation for the September quarter.

I don't have a detailed breakout in both those categories sitting in front of me, but power meters are a pretty significant portion of the growth that we're seeing. Then it's a groundswell of a variety of other things -- test equipment stuff from the Apex precision power line of products, seismic stuff. We've got SAR rated e-converters, and any number of different things that are in that category that are all doing pretty well at the moment.

I guess what I'm getting at is you do have some legacy products, and you have some things coming back, as you mentioned, testers that will not see growth forever, but you clearly have some new products there. So just trying to parse through what's recovery mode and what's new growth.

Actually, just to correct that, the ATE stuff is largely products from the Apex precision power line of products. And a lot of those are either new or new to the design. That's an actively invested in, growing, we hope growing, kind of a business. Those folks are doing very well for us at the moment. So I would not put that in the legacy category at all. I'll call it 50/50.

Okay. Got you. Then just one last question. You guys have a bunch of things you've been working on in terms of PFC, some smartphone wins outside of your big customer in the portable audio segment, the power meters you mentioned, and the motor controllers. I wonder if you can rank those businesses as you look out into next year in terms of the timing of when they are going to contribute material revenue and rank not only timing but also the size of those opportunities that could impact the growth next year and beyond.

That's a damn good question that I don't have a real crisp answer for, so thanks for that. We think they all could be pretty significant. Obviously PFC is a very new business for us so it's pretty uncommon in our space that you come out with one new product and, boom, just this huge home run and off to the races. What I've said is like this year on PFC is really about getting a lot of information. We expect to win some designs. We don't expect they're going to blow the doors off of revenue for FY12, but if we could really lock in some design wins and be shipping volume next year I think that would be a huge win. So I wouldn't anticipate that being a huge revenue contributor.

So, not to put words in your mouth, and I know you didn't prepare it, but is it fair to say if you think about this order, power meters first, smartphones outside of your biggest customers, then PFC, then motor controllers, is that fair?

I would say it's kind of a horse race at the moment, in particular our smartphone stuff and power meters. There's some pretty cool stuff going on in power meters that could make that a very interesting play, especially when you look at non traditional power meter segments like these energy monitoring applications. It's remarkable the number of power meter chips people are designing into server supplies and all manner of different things. So that turns that into a pretty interesting play. And then on the smartphone side, there's not that many companies making smartphones that would likely bother with differentiating on audio, so you win one of those, and that makes it a pretty interesting number. So I would call that one a horse race with motor control and PFC distant behind that.

Got you. That's helpful, Jason. Thanks.

(Operator Instructions). The next question is from the line of Christopher Longiaru from Sidoti & Company. Please go ahead.

Can you hear me?

We can hear you.

Congratulations. Great quarter and really great guidance. A lot of my questions have been answered. I wanted to dive a little bit into inventory, if you could break out where the increase was predominantly. I guess most of it is in preparation for the sales number. Just what your guidelines are for managing that inventory going forward.

We watch it pretty closely. Obvious it's a big portion of our spend, and as you mentioned, you have your revenue up as much as we have and you have to build some inventory. The bulk of the growth from Q4 to Q1, from the end of Q4 to the end of Q1 is on a pretty small number of products that are in portable, and they're for non design wins, they're for ramps that have either been shipping or are ongoing now, so we feel very good about that. One way to characterize it, the one thing that we look at in particular when we're considering a significant inventory build is, okay, it's a large dollar quantity of this particular component, but when it's, for example, designed into a product and we know that the volume we have on hand is a small fraction of the total lifetime volume of that product, then it gives us a little more confidence that it's okay to go ahead and build a few extra, because if the forecast goes up or down a little bit it just means we hold it a little longer or a little shorter. It doesn't matter so much. It's a good use of our cash to take some risk off the table. In particular with some of our bigger customers, we don't want to be the limiting item on their building materials.

So basically right now the ramp up is for mostly smartphones and portable, that type of a ramp-up, and the expectation for that basically is Christmas shopping season, 2011? Am I right on that?

It's based on the forecasts that we're seeing from our customers, the forecasts or backlog. I can't over-emphasize how nice it is to do business with customers that book with rationality done. It's a really nice blessing. We've seen over the past two or three years the percentage of our quarterly revenue that we have on backlog going into the quarter has increased pretty remarkably. And then this particular quarter is no exception to that. We've got this quarter's number very well covered from a backlog perspective.

Great, that's very helpful. Thanks, guys, congratulations again.

All right, I think that's all the questions we've got today. As a reminder, when we do these calls you can always, as an investor, you're always able to write in to Investor Relations at Cirrus.com, and we're happy to cover those. I would like to address one of these questions that was sent in to our Investor Relations department recently. Specifically this investor noticed a position available for a switching power supply expert on our website and asked us if we could expand on that a little bit. Why we would be hiring such a person, et cetera. Actually, I didn't look up the exact job posting, because we actually hire switching supply, or I should say we would like to hire switching supply experts in a couple of different areas. The Apex precision power line of products has a lot of need for that kind of expertise. The audio products that we develop, a lot of them contain switching power supplies to generate, for example, a negative power supply so that we can drive a headphone without the AC coupling capacitors. We're doing some other interesting areas with tracking power supplies and what-not for our audio products. And then obviously the energy side of our business, a power factor correction device is essentially a switch mode power supply, at least in part. It's got a lot of other things to it but it's actually a very complicated sort of switching power supply. So basically if you have a good friend that is a switching power supply expert and he would like a job, you should definitely have him give us a call.

So before we sign off, one last thing I would like to highlight that if would you like a more in-depth discussion on the growth areas that we discussed today and the Company overall, we have a voice annotated investor presentation on our website that will provide a lot more details on these areas. And thank you for joining us on the call today.

Ladies and gentlemen, this concludes our conference for today. If you would like to listen to a replay of today's conference please dial 1-800-406-7325 or 303-590-3030 and entering in the access code of 4328597. We would like to thank you for your participation. You may now disconnect.