Cirrus Logic Inc (CRUS) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second 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 call 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.

As always, before we begin, I would like to remind that during the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, estimates for third quarter revenues, gross margin levels, combined R&D and SG&A expenses, amortization of acquired intangibles, and share base compensation expense, diluted share count, as well as other estimates and assumptions, regarding long-term gross margin, operating profits, cash investments, future demand for products and expected revenue and market share growth. These statements are predictions 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 Cirrus Logic website, and the latest form 10-K and 10-Q, as well as other corporate filings made with the Securities and Exchange Commission, for additional discussion of risk factors that could cause actual results to differ materially from current expectations.

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.

Now I'd like to discuss our results. Net revenue in the September quarter was $100.6 million, up approximately 81% from $55.7 million in the September quarter last year, and up 23% from $81.9 million in the previous quarter. Audio products contributed $71.2 million in revenue for the September 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 in our press release today, quarterly sales of audio products grew 73% year-over-year driven by continued increase in portable audio and strength in general home and audio products.

As reported in our 10-Q, sales related to our largest end customer, were $43.7 million representing approximately 44% of total sales. Sales of energy products were $29.4 million for the September quarter. This product group includes components designed for a variety of energy measurement, and energy control applications. Revenue for our energy products was up 104% on a year-over-year basis, due mainly to strong demand for both power meter and energy exploration products, as well as the continued strength in some of our base line energy businesses, such as high power and general industrial products.

Gross margin for the September quarter was 56%, down from 57% in the previous quarter, and up from 52% in the quarter a year ago. While our gross margin benefited from strong sales of our high-margin seismic business, it was unfavorably impacted by the seasonal increase in sales of our lower-margin portable audio products.

Total GAAP operating expenses for the September quarter were $27.7 million, compared to $29.2 million in the previous quarter. Non-GAAP operating expenses were approximately $27.6 million for the September quarter, compared to $26.6 million for the June quarter. The increase we saw quarter-over-quarter in non-GAAP operating expenses, is primary due to variable compensation expenses. We ended the current quarter with 534 employees, up from 525 at the end of June. While GAAP and non-GAAP operating expenses were essentially the same in total this quarter, I'd like to touch on a few of the reconciling items noted in the tables provided with our press release this morning.

Stock compensation expense this quarter was $3 million, we expect quarterly stock compensation expense going forward to be approximately $2 million. Additionally, we recognized an impairment of $500,000, related to an investment we made previously in a small technology company. Finally, we benefited from the sale of certain patents, and recorded a gain of $4 million.

Income from operations increased to $29.1 million, or 29% on a GAAP basis, and $29.2 million or 29% on a non-GAAP basis. GAAP net income for the quarter came in at $30.9 million or $0.42 per share based on 72.9 million diluted shares. This represents an increase of $24.1 million, over the same quarter a year ago, when we reported GAAP net income of $6.8 million, or $0.10 cents per share, based on 65.5 million diluted shares. On a non-GAAP basis, net income for the quarter was approximately $28.8 million, or $0.40 cents per diluted share, which represents an increase of $21.8 million from the September quarter a year ago, when we reported non-GAAP net income of $7 million, or $0.11 cents per diluted share.

We experienced an additional increase in our diluted share count this past quarter, up from 70.8 to 72.9 million, as the full weighted effect, of the rising stock price and stock option exercises in the June quarter was realized. We expect that the diluted share count will increase by approximately 500,000 shares in the December quarter.

Moving to our balance sheet. We ended the September quarter with $48.5 million in net receivables, an increase of $14 million from the $34.5 million at the end of the June quarter. Our average days sales outstanding at the end of the quarter was approximately 44 days, and is consistent with the DSO in the September quarter a year ago. We experienced our normal seasonal shipping patterns as our customers ramped production for the holiday season, and we expect our DSOs to decrease to less than 40 days at the end of the December quarter.

Ending net inventory decreased slightly to $42 million, from $42.4 million at the end of the June quarter, with net inventory turns of 4.2 as we were able to meet strong demand and production ramps on new customer design wins, while successfully managing our sales channel.

We ended the quarter with $182.4 million in total cash and marketable securities, an increase of $20.7 million from the end of June. This increase includes approximately $9.1 million received as a result of stock option exercises during the quarter, which was offset by $12.8 million in capital expenditures, as we invested approximately $10.8 million for the purchase of land for our new corporate headquarters. We are finalizing the design phase of this project, and expect to begin construction towards the end of the December quarter. Once construction begins, we expect our quarterly cash investments related to this project to be approximately $3 million on average.

Finally, depreciation and amortization expense for the quarter was $2 million.

I'd like to now turn the call over to Jason, to discuss our business operations and guidance for the upcoming December quarter.

Thank you, Thurman. I'm pleased to report that Cirrus Logic continues to execute at exceptional levels. Our key financial metrics clearly demonstrate that 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 Q2 grew nearly 81% year-over-year, and we maintain a strong gross margin, due to continued outstanding results from our supply chain team. With non-GAAP operating margin increasing to 29%, and diluted earnings of $0.40 per share, our strategy is clearly working.

While revenue from portable audio products remains the driver of overall company growth, I'm pleased that we experienced significant growth contributions from numerous audio and energy product lines. Demand for our energy measurement and energy exploration products was strong, with solid growth from our Apex brand of products for industrial applications. Revenue from non-portable audio products, such as audio DSP's and converters, also increased due to strong demand for home audio products. Our ability to hire great engineers has helped us execute at a stellar level, as we meet our key customers' demand for innovative and custom products. I'm also encouraged by the progress being made on a number of fronts that go beyond near term financial metrics, and indicate that our growth programs, particularly in energy-related applications, should provide meaningful revenue contribution longer term.

Here are some highlights from the audio business. Our strategy has been the target growing markets, such as portable media players and smartphones, to develop great relationships with tier one customers in those markets, and to develop high performance components that help these customers differentiate their products. I'm pleased to report that we continue to maintain an outstanding relationship with our largest customer, and meet their expectations in delivering numerous innovative custom IC's for multiple high volume applications. Our outlook for this business is stronger than ever, and while we generally don't comment on rumors, I'd have to say in that case that rumors of our demise have been greatly exaggerated.

Q2 audio revenue was strong, above a quarter-over-quarter and a year-over-year basis. While this growth was driven in large part by our number 1 customer, we also saw strong growth from a wide range of home audio products such as; sound bars, home theater systems and Blu-Ray disk players, as well as other portable audio products.

Longer term, we are excited about the opportunities to expand and diversify overall audio revenue through key new growth programs. In automotive audio, we have secured a major design commitment in a tier one amplifier system that includes multiple Cirrus Logic products, with a total content of more than $10 per-amplifier. This total system is targeted to begin initial production in mid-fiscal year 2012, and has the potential to ramp to more than 1 million units annually.

We are committed to the automotive market, and our strategy to develop innovative custom IC's for leading customers in large markets, provides us with an opportunity to expand our market share in this space. We are also targeting growth in portable audio, via smartphones, tablets and Bluetooth accessories, and we received back from the fab, our first ultra-low power audio DSP targeted at these markets. This DSP packs an incredible amount of signal processing horsepower into a tiny wafer level chip scale package, and will compliment our highly advanced audio codex's as we seek to help our customers differentiate their products with outstanding audio. This has been very well received, and several customers are designing with it already. Also in May, we announced two new smartphone products, that have led to discussions with several tier 1 customers in this space.

Looking now at our energy business, we continued to experience growth in a variety of our product lines throughout the quarter. Our current investments are focused on energy measurement and the energy control areas, such as power factor correction, lighting and motor control. The recent push for smart grade enhancements, combined with our focus on providing leading OEM's with outstanding metrology IC's, has created significant opportunity worldwide, in digital energy meters and energy monitoring applications, where our products meet demonstrated customer needs.

Our traditional industrial business experienced growth over the last several quarters. We received strong revenue contributions from our Apex brand of industrial products, driven by continued solid demand in semiconductor test equipment. As we've frequently pointed out, the seismic business is difficult to forecast. We achieved record levels of seismic revenue in Q2, but the outlook for this business softened as the quarter went on, and we currently believe that demand will decrease to lower levels for the remainder of the fiscal year. Long term, we are excited about our new energy products that we believe will help drive long temp growth, and expanded market share.

In the September quarter, we taped out a next generation IC for smart meters, that showcases our high precision signal processing technology. Worldwide demand for energy usage monitoring is driving the expansion of new measurement opportunities in applications such as; white goods, smart energy strips for the home, and power supplies for server applications. We believe this exciting opportunity is tailor-made for our approach to energy management. Our precise and flexible low cost mixed signal IC's compete effectively with the more expensive inflexible system-on-a-chip alternatives, and we expect long-term revenue growth in this sector.

In the power factor correction product line, we've taped out our second PFC project in September, as we continue to pursue growth opportunities in both power supplies and lighting applications. I'm extremely pleased with the products we launched in May, have already resulted in several design wins in power supplies for LED lighting fixtures. These wins are exciting, as they validate our digital approach to PFC.

We are also investing in mixed signal LED lighting controllers for dimmer compatible replacement bulbs, and we are encouraged by the strong feedback we have received from tier 1 suppliers in this market. As I have stated before, there are very relevant parallels between our approach to the digital energy control market, and our successful approach to portable audio, as we are targeting key tier 1 accounts with custom solutions.

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 we are putting on hiring experienced engineering talent to staff our key R&D projects. Our focus on creating a corporate culture that both challenges and rewards our employees, has allowed us to attract and retain outstanding talent, and we are frequently recognized for the unique corporate culture that we foster and celebrate.

Looking forward to the third quarter of fiscal 2011, we expect revenue from portable audio to continue to grow, even as we anticipate a seasonal decrease in demand for other consumer audio products. In energy products, we expect higher year-over-year revenue, although revenue will be down sequentially, due primarily to weaker demand for energy exploration products. As a result, our guidance for the quarter is, revenue to range between $88 and $94 million, gross margins to be between 54% and 56%, and combined R&D and SG&A expenses to range between $28 and $30 million, which includes approximately $2.5 million in share based compensation and amortization of acquisition intangible expenses.

I'm pleased with the Company's overall performance, highlighted by our 29% operating margin this past quarter. We achieved strong year-over-year revenue growth last quarter, and we expect to continue that trend by growing more than 35% in Q3 over last year. We continue to successfully maintain proper levels of channel inventory, while cash grew by $20 million. We continue to hire great design engineers to staff our key R&D efforts, and our team has done an outstanding job of delivering new products and design wins for portable audio, PFC, and automotive applications. Our audio teams have been executing at an exceptional rate, by delivering new products on time, and with a high level of quality and we are now seeing this level of execution from the energy group as well. With multiple new chips completed in both the audio and energy product lines we're focusing on long-term success from a diversified revenue base. WE're excited about new growth opportunities in LED lighting, portable audio, automotive, and power monitoring applications. With the potential for meaningful growth in this many different markets, I am more excited than ever about the future for Cirrus Logic. Operator, we're now ready to take questions.

Thank you, sir. Ladies and Gentlemen, at this time, we will begin the Question and Answer session.

(Operator Instructions)

Our first question comes from the line of Vernon Essi with Needham & Company. Please go ahead.

Thanks for taking my question. How's your morning?

So-far, so-good.

Let's dive into the major customer here, and just wanted to go over some of the numbers. If we do the math on the concentration and look at the units that they've been shipping, we see on either a blended ASP basis, you've got a pretty big rise in your content per unit, or perhaps the possibility that you're shipping ahead of the unit consumptions out the other side with this customer. I wondered if you could discuss that going into the next quarter, and if you're indicating that this business looks to be, at a minimum, flattish if not up, sequentially? You said portable audio looks up. Then, do we have to revisit your ASP assumptions that you've given us in the past? I was wondering you can discuss that to the extent you can?

Yes, that's tricky. Overall, we do expect portable audio to be up. The outlook for portable, in general, is very strong. The thing I think you have to be careful about is, relative to ASPs, is there's a couple of things; one is mix, of course, because a product that ships in a phone, for example, has got a higher ASP than a media player. I don't actually think we've given you a whole lot of guidance on ASPs in the past, so --

And then number two is, just the thing that I've tried to touch on as best I can, in portable audio, one of the reasons it's a neat opportunity for us is that there's meaningful opportunity for us to help our customers differentiate, and what that means over time is, of course, we've got customers that are in very competitive spaces pricing-wise and, so, they need help decreasing their bill of materials, and the wrong way to do that is just continue to decrease the price of your products quarter-over-quarter or what-not.

The right way to do it is to work with them closely to figure out how do we help them decrease their bill of materials while we increase our ASPs, and to a large extent, we've been quite successful at that. So, the nice thing about portable is the product cycles are fast enough that you have an opportunity to do new products all the time, and that gives us the ability to increase our ASPs, potentially, as we're able to sweep-in more functionality and help them decrease their overall bill of materials.

So, all that, of course, is a general portable audio statement. It's worth noting, relative to our largest customer, that there are other products in there than portable and those ASPs are somewhat different.

Okay, and so, just generally speaking though, we should be -- I mean, your ASPs have actually climbed, even with your largest customer, but we should assume that's not obviously reversing anytime soon?

Yes, I think that's a very good statement, or a very accurate statement.

In your release you obviously talked about the power factor correction market and gave some interesting new data points here on the LED front. And when you're talking about Tier One customers in that space, can you give us an understanding of how you see that market next year? I mean, this is kind-of the big question mark for a lot of companies pursuing that. How do you size that and sort-of --

For LED lighting, in particular? Or --

Yes, yes.

So, I mean, we -- that's a tricky crystal-ball question in the next-year timeframe. We're clearly in kind-of an 'are we about to hit the hockey stick? Is it out a year or two? By the time you get out to 2014 or '15, there's no question, LED lightbulbs -- I guess the industry doesn't much care for the bulb term, but that's how most people think about it -- it's just an immense, immense market. As incandescents get fazed-out through legislation, and the price points on LED bulbs come down to where they're competitive with compact fluorescents, which nobody likes.

So, it's certainly in the tens of tens plus millions of units for the next couple of years, somewhere ramping-up well over a billion units in the 2014, 2015 timeframe. What it takes to get there is a couple of different things. It takes the overall bill of materials, or the retail price point for the bulb itself, to be in the $10 or below range, currently they're $50 to get a good one.

Right, right.

And then on top of that it takes that they actually have to work right, and that's really where we're trying to provide our value. We don't control the price of the LEDs themselves, so we can't help as much on the cost front, but what we're trying to develop and have demonstrated in a couple of different ways; one through test chip, and the other through board-level emulation.

What we're developing is, essentially, an LED controller that would be in the bulb itself, so this is a screw-in replacement-type target, and be compatible with every dimmer that's out there. And that's the tricky bit, because there really are no specs on these dimmer's in your wall. Everybody has got a different one, you don't even know what's in there, and if you don't work with all of them, then whoever the retailer is gets a pretty significant rate of returns, and that really kind-of hoses-up the economics of the whole situation.

So, what we've got is the pretty-tricky solution that will enable these LED lamps to be compatible with any dimmer out there to deliver great efficiency, and it's -- you wouldn't think it's actually that hard, but our technical fellows say it's easily the hardest problem that one of them, in particular, has ever worked on, and we've got a solution that our customers appear to think is world-beating. It's obviously on us to actually deliver the chip.

So, I don't want anybody to get ahead of themselves like this is a next-quarter-type thing. We still literally need to put silicon in their hands, but the feedback is really, really good, and this is a really big market. So, the new products in the energy space, to me, represent our best opportunity to really diversify our revenue base over the long-term. You know, again, this is not a, 'We're not talking about it because it's going to blow the doors off next year;' it's a long-term investment, like everything we do is, but it's definitely a bright spot on the horizon for sure.

Okay. And my last question, just to switch gears here, your $4 million patent sale, there's not much detail in your [queue] about this, could you give any detail, if possible, as to what that was?

Not really. I mean, it's just some older patents. We have quite an enormous patent portfolio for a company our size, and Cirrus Logic has been a lot of different things over many years, and every once-in-a-while, we have opportunity that something we've got is no longer necessarily central to anything we're doing, and it's of interest to somebody else, so we're able to work a deal with it. But, I would say that's in the more-or-less 'nothing to see here category,' other than, we just had to call-it-out to explain the difference between the GAAP and non-GAAP.

Got you. Okay. Thanks a lot.

Thank you. Our next question comes from the line of Tore Svanberg with Stifel Nicolaus. Please go ahead.

Yes, thank you, and good morning.

Good morning.

I was hoping you could talk a little bit about your non-portable consumer audio business. Is there a potential inventory correction going on in that market? And if so, do you think we are sort-of at the beginning of that correction, or are we actually getting close to the end of it?

No, I don't think so; I mean, specifically I don't think there's -- at least relative to us, I'm not aware of anything that's an inventory-related issue. Non-portable audio tends to peak in Q2. A lot of these products are things that are kind-of bigger-box items that have to be on boats to make it for the Christmas season, so they tend -- the demand on us tends to be in the September quarter, So -- no, I don't see a meaningful -- anything meaningful that we're aware of on inventory. If there is in the retail channel, that's not something that we have any visibility on.

That's fair. And moving onto portable audio, I know you're obviously implementing some diversification strategies there, and can you maybe, specifically, talk to your smartphone strategy and how that's going? I know you've talked about diversifying there in the past, and just wanted to get an update.

Sure. I mean, I think we've gotten pretty good opportunities out there. It takes quite a long time, because these devices are very specialized. What we've said remains true, which is that these opportunities -- you come out with a general market part and, ideally, you'll win a socket with the general market parts like, for example, the ones we came out with in June, and we do have very good prospects for those in the overall portable audio market.

Within smartphones, they've opened some interesting doors for us; we're having good discussions with people on potentially customizing a version for them, but nothing in the real short-term that's going to be meaningful on the smartphone. But anyway, I feel pretty good about where we are on those efforts, but you just have to recognize it does take time.

Very good. And then on automotive, looks like there's a lot of design activity there. When should we start to expect automotive to be a more significant revenue for you?

I mean, it's a moderate amount of revenue now, but I would expect it to grow -- we've got enough good things in the pipe for next year that it'll grow in FY12, I guess I should say. And, it's a long-term investment strategy, it grows -- it's going to grow, not like portable audio does; it grows slowly, but it's something, that once you've won a design, it lasts for a very long time, so you kind-of slowly add them up, and they become meaningful over a period of years, not quarters.

Thanks, Jason, and then last question for Thurman. Thurman, what shall we model as far as inventories in the December quarter, your internal inventories?

We would expect it to end relatively flat to this quarter, maybe a touch down, but we've got ramps coming in for the next year, so if there's a decrease in inventory it'll probably be seen in the March quarter, more-so than this quarter.

Very well. Thank you, guys.

Sure.

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

Adam?

Hey, guys. Just a little bit of a follow-up on the guide. I know you guys typically don't provide that much color on it, but just some simple math; I know that the non-portable audio typically sees some weakness in this quarter, and you just highlighted that, Jason, but you're looking at roughly about a $10 million sequential decrease, and the portable audio is increasing, based on your biggest customers' builds. And you talked about some seismic weakness, which is [energy] about a $30 million business, and you've talked about seismic being about 20% of that. So, even if that $6 million were to split in half, I'm having trouble getting to a $10 million sequential increase -- sorry -- decrease, even if you're talking about a big decrease in the non-portable audio of $3, $4 million and another $3, $4 million in the industrial. How do you get to that guidance with the portable audio being up?

Yes, well, the industrial is bigger than that. The biggest component of it is seismic, there are a lot of other little moving parts in there, in really what I would term the very old, traditional industrial parts that we used to build -- I mean, we still build them, but we don't design new ones. So, that's kind-of one of those things, that it's -- they're old products, they're modulated to a large degree by the economy. Obviously, like we said, seismic is really tricky to predict. It doesn't seem correlated to anything; although, I'm sure a moratorium on drilling doesn't help it much. So, that was the biggest component of it.

A few other moving parts in the traditional old industrial business and then, as you say, a drop-off in the remainder of home audio. That's largely, again, economy. It's the folks that seem to be slowing down the most are the guys that you don't typically even get a forecast from. D to A converters are a very good bellwether for that, in particular, out of China. It just modulates up-and-down depending on how many relatively low-end doodads people are building for Wal-Mart or what-not.

The good news is that literally everything that is at all under the Company's control is going better than ever. We don't have a lever on the economy, and that has an impact; we're not immune to it.

I know a lot of people have got a thesis on us that is all about our largest customer, and that's all well-and-good, but you really do have to pay attention to the fact that there's still a big chunk of our business that isn't them, and that chunk is not immune to the economy. So, it's a good opportunity for us to just continue to keep our heads down and work on growing market share, and I think everything will be just fine along [the line].

Right, so just a follow-up on that, Jason. I mean, can you talk a little bit about what you saw in that other non-portable business, in terms of just order trends, as you got throughout the September quarter and even into October? Clearly, you guys are more cautious and things have slowed. Can you just talk a little bit when you started seeing that, and kind-of where it is today and what you expect -- how you expect the trajectory through the rest of the quarter?

Yes. There's really nothing -- there's been nothing that is a sharp disconnect. It doesn't appear to be a repeat of the fall of '08 or anything, where there's just this remarkably dramatic, shut-off of things. This has been a general slowdown, and I don't know that it's different than what anybody else has seen. It's just been kind-of a slow, gradual decrease, and to some extent, I think it's actually more of a return to normal than it is anything falling off a cliff. I think it's -- for the latter-half of last year and the first-half of this year, our space was just red-hot, and I think, to some degree, things are getting back to a normal pace. I'd like to remind you, we are putting it into context of guidance that says the middle of our range is up, what, 40% year-over-year. So, I wouldn't put that in 'The Sky is Falling' category.

No. That's fair. So is it fair to say, Jason, you think you were maybe shipping at an elevated rate and now you got this reset, and then going forward, you can grow with true [end demand]?

That's a speculation; I think there is more to it than that; I mean, there has been some slowdown for sure in certain areas, and seismic being one of them. That's not a -- there's clearly secular issues going on in that space.

Got you. All right, guys, that's all I have.

Thanks, Adam.

Thank you. Our next question comes from the line of Jeff Schreiner with CapStone Investments. Please go ahead.

Yes, good morning, gentlemen. Thank you for taking my questions.

Sure.

Jason, I have to go to this question here. Given your comments on the call today about still developing other Tier One opportunities outside your largest customer, and highlighting in your call, in your press release, that you're prepping for additional product ramps. Do we need to assume that these additional mobile or portable product-ramp opportunities are likely to remain within your largest customer, given you've not guided us to expect anything, in terms of new Tier One shipments?

Yes, I'm going to leave that one to you to draw your conclusions from. I really don't want to get into the business of speculating about what our largest customer might or might not do in an upcoming quarter.

But, could we also then infer from your comment about rumors that perhaps they've been over exaggerated, that concerns about any products that may happen in the next quarter or two, likely we'd see no change in terms of overall designs, given your comments on the rumor?

Yes. Well, again, I don't want to comment on what may or may not get launched, but our position is in great shape. If you're buying and selling stock based on what blogs say about Taiwan Press publishes, then I'm not sure how to help you. The outlook for a portable audio remains really, really good, and I think we've kind-of given you the data points; you need to piece that together.

Okay. And Thurman, were there any inventory issues within distributors in the quarter? I noticed your differed revenue from distributors has been up the last two quarters, pretty decent on a sequential basis, and then ticked-down this quarter. Do your distributors maybe have enough inventory at this point, and were there any issues with that in the quarter or in the guidance that occurred?

No. I mean, our -- we think that our -- we've got two sets of distributors, and the ones where you're seeing the deferred revenues with our largest distributor, which is Abnet, and that's just a piece of the seasonality in what's going on in the economy and what's selling; these are bigger quarters for us.

The rest of our channel inventory is -- the turns are right around where we think they should be, and we've not seen anything alarming out there one way or the other, so we feel pretty comfortable that the channel inventory is in good shape; they're not -- and Abnet is -- we work with them on a regular basis, so we don't have any concerns there.

Okay. And Jason, coming back to you. I think in talking last quarter or previous with you, you've talked about, there's still a lot of integration to occur within audio, and we've heard this from other competitors of yours as well. And just wondering how that plays into the use of a potential Qualcomm-based fan chipset, which would have integrated audio, but wondering how much fine-tuning you can do in that type of integrated solution, versus what customers are looking for and what you feel you can deliver in further integration?

Sure. It's really -- that's actually a really good question; I appreciate it. That's a good topic to touch on for everybody; it really highlights what it is that we do and the kinds of customers we target.

You know, If the built-in audio that's in the baseband chipset is good enough, then that's not a target customer for us, right? I mean, we need to get reasonable margins out of people, which means we need to really be able to help them differentiate in a way they care about, and if what you're trying to do is make sound come out and talk to your wife on your cell phone and be able to understand her, then that level of audio is good enough for you, then you're right, it doesn't make any sense to spend the money for the additional dollar or whatever it happens to be for an audio codec.

We target customers that are differentiating based on the technology that we bring, so people that care about audio, and there's plenty of customers that potentially would use a Qualcomm chipset, for example, and go "Yes, you know what, that audio is fine; we don't need anything else." There's others that would use the very same chipset and that audio would not be good enough, but I would not expect that trend to change within a supplier based on which baseband chips set they're with -- which cellular chipset they're using, right? Their view on their differentiation is likely not to change based on that, right?

Okay. Just one final question for me. Gentlemen, thank you very much for your time. We have talked about non -- I mean, we've talked about portable margins being a little bit lower; it seems that they've been a little bit stronger here than the rest of the business, and some of the industrial energy that may have some stronger gross margins. Do we see a return to prior levels in the 56%, 57% range, or should we now be thinking the new norm is more the 54%, 55% range going forward?

Well, our long-term target has and remains to be 55%. Whether we get a bump up or down a point or so from that in a given quarter is more a matter of mix than anything else, and we feel very good about our ability to maintain 55% in the long-run, but you might as well just model that, would be my suggestion.

Okay. Gentlemen, thank you for your time.

Sure.

Thank you. Our final question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Hello, Chris.

Mr. Longiaru, your line is open if you have a question.

Hello, can you hear me?

Hello, Chris.

How are you doing, guys? So, I wanted to ask about -- it seems like you're having a little bit of weakness right now in industrial. The gross margins are not much higher, you still maintain that 54%, so you just said, modeling 55% going forward, and I realize that consumer audio is going to make up a larger and larger portion of your business, but wouldn't you see some upside to that based on the industrial weakness right now? I guess, I'm wondering because of that --

We are not handing out long-term guidance, so -- and, like I said, we don't expect a huge rebound in industrial in the short-term.

No, I'm talking about going longer-term, longer-term view here on gross margins.

Yes, I'd model 55% for the foreseeable future, and we'll let you know if anything remarkable changes in that. I mean, it's a balancing act, and a lot of the newer things that are going to drive our growth in the energy business, while they're very good from a margin point-of-view, they're not the very high levels that seismic enjoys. Literally, we just at this point we -- we internally we forecast seismic business when they book it, so if seismic has a big rebound next year, then yes, it would -- they would go back up, but I don't -- the value of forecasting that is kind-of dubious.

Got it. Okay, and the other part, or the other question I wanted to ask was, just in relation to your diversifying and the design opportunities. Can you quantify, I guess, you don't win every design you're in, but I guess I think that the number I've heard for design opportunities that you have are somewhere between 12 and 15. Can you quantify what the size of that total opportunity is for you, in basically over the next three years?

I'm sorry, 12 or 15 --

I've heard somewhere between 12 and different 15 design wins that you currently are working on.

In a particular space? I'm --

No, I mean really -- for fiscal 2012.

Oh, God, if we were looking -- literally, every design win that is on our customer resource tracking tool, I mean, it's hundreds, if you really want to focus on the ones that are moving the needle.

Yes.

Maybe it is in the 10 to 12 range; it's hard to say. I can say that we've got more opportunities that are in the $10 to $30 million range than I can ever remember in the past.

I mean, it's kind-of -- it's interesting, over the last couple of quarters, the sentiment that I get more and more from new target accounts when we go out and meet with them, or even you just read the sales reports that come back from our field sales personnel, and the sentiment about us has changed very favorably.

We're now much more viewed as an elite supplier. If you're thinking about having a part that is in our area of expertise, and you're kind-of dreaming up what your wish list might be, we're much higher on the list of folks that customers are going to call to explore those options. It's really a much-improved situation versus a couple of years ago; our position is a lot, lot stronger.

Okay, that's very helpful. All right, thanks, guys. That's all I have.

Sure.

Thank you. At this time, I would like to turn the conference back to management for closing remarks.

Sure. Thank you, operator. I would also like to briefly address a few questions that were sent to our Investor Relations department from the investor community. As always, we welcome and encourage our shareholders to submit questions in advance of the call.

The first question asks if the new production ramp in portable audio we announced with a large Japanese OEM will lead to additional design wins in future products. We certainly expect so; actually, whether it's already tripped into a design win or not, I'm not 100% sure, but we feel like we've got a couple of things in the sales funnel that are pretty positive in that account. It's not a new account for us; this is somebody we've done a fair amount of business with in the past, so I wouldn't be mentally thinking of that as something that's going to take off like our largest customer, but, nevertheless, very good opportunities there. Our team in Japan has done a very nice job of focusing on customers there that matter and really trying to drive success.

The second question refers to the press release we put out recently announcing a power meter reference design with free scale, and asked if there's a timeframe for when we might see revenue as a result? Really, no; the thing about reference designs is when you're working on them, you know they're good and you definitely want to be on them. Especially, if you're in our position as a peripheral -- the analog mix signal component in the design. But what typically happens is you get on a number of these things and the reference designs go out there and into the world, and some point-in-time in the future, orders magically show-up. Occasionally, somebody needs more help, and they'll call in advance and you work through system issues with them, and you get a little more advanced notice.

But, if you've really put out -- kind-of ironically, I guess -- if you put out a really good reference design that enables people to run with it on their own, then in a strange way you get less visibility about when it's going to turn-up because they're able to get pretty far down the field on their own.

But, nevertheless, we were quite excited about the opportunities there as we seek to broaden out our -- the success we've had in the power meter business, which as we pointed out in the script, is brighter than ever, both because of our product offering, but also because of what's going on in that market space.

So, before we sign off, I'd like to call your attention to the new Investor Relations section of the Cirrus website, which has been redesigned with more information; new tools to help investors. For more in-depth discussion on the growth areas we discussed today, please see the investor presentation on our website, it's voice annotated and provides more details on these areas. Thank you for joining us on the call today.

Ladies and gentlemen, this does conclude the Cirrus Logic second quarter fiscal 2011 conference call. Thank you for your participation. You may now disconnect.