Cirrus Logic Inc (CRUS) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic third-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 queuing up will be provided at this time. As a reminder, this conference 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 fourth-quarter revenues, gross margin levels, combined R&D and SG&A expenses, amortization of acquired intangibles and share-based compensation expense, diluted share count, as well as other estimates and assumptions regarding long-term gross margin and operating profit goals, deferred taxes, 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 other 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, and latest form 10-K and 10-Q as well as other corporate filings made with the Securities & Exchange Commission for additional discussions 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 would like to talk about the results. Net revenue in the December quarter was $95.6 million, up 47% from $65.2 million in the December quarter last year, and down sequentially 5% from the $100.6 million in the previous quarter. Revenue from audio products in total, contributed $72.7 million and represents 76% of total revenue in the December quarter. As you see in the tables we included with our press release today, quarterly sales of audio products grew 55% year-over-year, driven by continued increase in portable audio and strength in general home audio products.

Revenue related to our largest customer was approximately 54% of total revenue for the December quarter compared to 44% of total revenue in the September quarter. Revenue from energy products was $22.9 million for the December quarter. Revenue for our energy products was up 27% on a year-over-year basis, due mainly to stronger demand for both power meter and energy exploration products, as well as strength in our Apex brand of products compared to last year.

Gross margin for the December quarter was 55%, down from 56% in the September quarter, but an increase from 54% in the quarter a year ago. Total GAAP operating expenses for the December quarter were $29.4 million compared to $27.7 million in the previous quarter. Non-GAAP operating expenses were approximately $28 million for the December quarter compared to $27.6 million for the September quarter. The increase we saw quarter-over-quarter in non-GAAP operating expenses was primarily due to an increase in product development costs and employee-related expenses. We ended the current quarter with 549 employees, up from 534 at the end of September. A reconciliation of GAAP to non-GAAP expenses is included with our press release today.

Income from operations was $23.1 million or 24% on a GAAP basis, and $24.5 million or 26% on a non-GAAP basis. GAAP net income for the quarter came in at $24.6 million or $0.34 per share based on 71.7 million diluted shares. This represents an increase of $13.5 million or approximately 120% over the same quarter a year ago when we reported GAAP net income of $11.1 million or $0.17 per share based on 65.6 million diluted shares.

On a non-GAAP basis, net income for the quarter was approximately $24.2 million or $0.34 per diluted share, which represents an increase of $12 million or approximately 100% from the December quarter a year ago when we reported non-GAAP net income of $12.2 million or $0.19 per diluted share. Our average diluted share count decreased this past quarter from 72.9 million to 71.7 million. During the December quarter, we repurchased 1.8 million shares at an average price of $12.94. We anticipate that the diluted share count at the end of March will be approximately 72 million shares.

Moving to our balance sheet, we ended the December quarter with $37.3 million in net receivables, a decrease of $11.2 million from the end of the September quarter. Days sales outstanding at the end of the quarter was approximately 35 days, and is consistent with the DSO in the December quarter a year ago and the guidance we gave on our last earnings call. Net inventory decreased slightly to approximately $40 million from $42 million at the end of the September quarter, while net inventory turns for the quarter increased slightly to 4.3.

Total cash and marketable securities increased $7.9 million as we ended the December quarter with $190.3 million. This net increase includes the use of $22.8 million to repurchase approximately 1.8 million shares during the quarter. We experienced strong cash flow from operations during the quarter of just over $30 million. Depreciation and amortization expense for the quarter was $2 million.

Finally, I would like to note that due to our improved financial performance, we believe that a large amount of our unrecorded deferred tax assets, or DTAs, such as our federal NOL, will be utilized in upcoming years. As such, we anticipate recording a large non-cash income tax benefit of approximately $100 million in the fourth quarter in order to properly value the DTA.

Looking to the next fiscal year, while we'll continue to pay a small amount of federal income tax in the form of alternative minimum tax, or AMT, we accept recording an additional non-cash quarterly tax expense at a rate of approximately 35%. To be clear, both the anticipated large tax credit in the fourth quarter and the expected non-cash quarterly tax expense during the next fiscal year, will have no impact to the Company's cash balance, and will be treated as non-GAAP adjustments by management for purposes of evaluating our operating performance.

Now, I would like to turn the call over to Jason to discuss our business operations and guidance for the upcoming March quarter.

Thank you, Thurman. Calendar 2010 was an incredible year for Cirrus Logic, as we outpaced the semiconductor industry and our peers, with revenue growth of 78%, and achieved 25% non-GAAP operating profit. We further strengthened our relationships with existing customers, which helps us drive more content opportunities in a greater number of their products. We also made important inroads with new customers, and launched many new products to support our long-term growth.

Our biggest problems are that our largest customer is the best company in the world, and it will be a challenge to hire enough engineers that meet our standards in order to staff everything we want to do going forward. In my opinion, both of these are very fine problems to have.

In audio, revenue exceeded our expectations largely due to the performance of our largest customer. Looking forward to 2011, we are engaged with them on multiple new developments, our relationship continues to be outstanding, visibility remains excellent, and we expect to grow our revenue with them substantially this year.

In other audio news, we were excited to see a tablet introduced at CES, which will feature our new 65 nanometer DSP, along with the low-power CODEC and amplifier chips that we launched last June. The DSP, which is based on our proprietary architecture that we've shipped in other applications for many years, offers a remarkable combination of low-power dissipation and high-processing power in a small and low-cost footprint. The fact that this device will ramp into production so quickly after first silicon, speaks volumes about the opportunity that offers our customers to differentiate their products; and it has opened a number of doors in applications such as tablets and handsets. It remains to be seen how much success these newer tablets will have in the market against a very strong incumbent product, but fortunately for Cirrus, we're already shipping in the incumbent product.

We remain focused on broadening our customer base in the smart phone space, and we're very optimistic about our longer-term opportunities for doing so. But we do not have anything to report regarding smart phones at this time.

In our energy products, as we expected, Q3 was a weaker quarter sequentially for our seismic products, and this product line was responsible for a significant percentage of our overall sequential decline in revenue from Q2 to Q3. Fortunately, this market has stabilized and we have a reasonable level of backlog of seismic products for the current quarter. As we've mentioned in the past, seismic is difficult to forecast long-term, but our outlook at the moment is favorable.

Power meters continue to be a highlight in energy as our relationship with Itron remains excellent and our opportunities overall continue to grow. We received a new power meter product back from the fab in Q3, and we are in the process of sampling the device to key customers now. Our energy team is very focused on broadening our customer base in metering, as well as capturing a significant share of the growing energy monitoring market. This device is a key milestone on the way to that objective.

Our first power factor correction device has continued to generate a lot of interest. And we received silicon back from the fab on the next member of the PFC family in Q3. As we've said previously, we don't expect significant revenue from PFC in the near term, but customer reaction to the products and the technology they showcase has been very favorable, and we believe that this is a good indication we're on the right track with our energy control initiative.

Probably the highlight for the quarter in my opinion was the progress we made on our LED lighting controller device. As always, our strategy is to partner with the best companies in this market and develop custom or semi-custom chips for them. In this case, the technology that we've been able to demonstrate has allowed us to work with one of the best names in lighting, and develop a chip to precisely meet their specifications. This device is on track to tape out in the spring, with initial projections for full production around 12 to 18 months from now. For more details on what we're working on in this space and the magnitude of the opportunity, I would encourage you to check out the updated IR presentation on our website.

Keeping focused on the future, we recently completed the process of updating our strategic plan. For obvious reasons, we can't share a lot of data on these plans in advance, but they're critical to the way we run the Company and we're pretty excited about the opportunities in front of us. It is interesting to note that when this team completed our first plan a few years ago, it highlighted that the opportunity could grow to greater than $500 million in five years. While we were excited about that possibility, I have to admit we were a bit skeptical that we could achieve that goal, but we went after it anyway.

As with any long-term plan, some areas went better than expected; some areas not quite as well. But overall, we're on track to meet that plan today. And as amazing as that has been, our outlook for the future is even more exciting. I am very much looking forward to the next few years at Cirrus.

One of the bigger challenges in driving this level of growth for Cirrus Logic is hiring enough talented engineers who fit our unique corporate culture so that we can make it happen; and we've done a great job on this front in the past year. Construction of our new downtown headquarters is now underway, and we were recently recognized for the third consecutive year on the Best Places to Work in Texas list, this time moving up to sixth place. If you know of any outstanding engineers looking to work on solving challenging problems in exciting new markets, please send them in our direction.

Now, looking forward to the fourth quarter of FY '11, we expect revenue from audio products, and portable audio, in particular, to continue to drive overall corporate year-over-year revenue growth, with solid revenue contribution from our energy product lines. And as I've stated earlier, we continue to hire and staff key projects, and expect R&D expenses to grow next quarter. As a result, our guidance for the quarter is revenue to range between $88 million and $94 million, gross margins to be between 54% and 56%, and combined R&D and SG&A expenses to range between $31 million and $33 million, which includes approximately $2.5 million in share-based compensation and amortization of acquired intangibles expenses. I'm pleased with the Company's overall performance of delivering strong year-over-year revenue growth, and we expect to continue that trend with revenue growth in excess of 40% in Q4.

To sum it all up, we expect revenue from our portable audio products will continue to drive overall corporate revenue growth, and our relationship with our number one customer remains outstanding, enabling us to develop products that expand our content opportunities with them. In 2010, Cirrus Logic grew revenue faster than both the semiconductor industry as well as our peers. We are confident that we will be able to meaningfully grow revenue in 2011 with new production ramps in tablet and Bluetooth applications, combined with new chips and automotive entertainment. While most semiconductor industry growth estimates for this year are between 5% to 9%, we expect to achieve our business model of 15% annual growth.

You also may recall that our long-term business model is for 20% operating profit, and with the revenue growth we've seen, we've obviously exceeded that mark. While we expect to continue to grow our R&D expenses with hiring and technology investments in 2011, we believe operating profits will remain in the mid-20%s range for the foreseeable future.

So, in conclusion, our ability to hire outstanding engineers has helped us execute to our customers expectations, and make significant progress on key investments in audio and energy programs. With all of this going on, I'm more excited than ever about the current year and the Company's long-term prospects.

Operator, we're now ready to take questions.

Thank you, sir.

(Operator Instructions)

Your questions will be pulled in the order they're received and there will be a short pause while participants register for a question. The first question comes from Adam Benjamin from Jefferies. Please go ahead.

Hey, guys. Couple of questions here. In terms of the revenue breakout, Jason, you talked about portable audio having a nice quarter in the December timeframe. I think you sort of implied that that business would also grow in the March quarter. If you can, maybe directionally, talk about the nonportable audio, the portable audio, and the energy buckets and how we should be thinking about them into the March quarter, that would be helpful. Thanks.

Well, I think probably the best news on that front, like we were talking about, was seismic. It's sometimes difficult to forecast. It was nice to see that didn't just continue to fall away. That stabilized. We had a fair amount of older products. If you look -- there is a chart in our IR presentation on the web site that breaks down products and revenue in the category of age. You can see with that, kind of a run-up last year of some of the older products, and then that took a pretty good size haircut last quarter. So, it was good to see the industrial product line stabilize after that.

Like we said, we expect to see solid revenue contributions from energy -- not real radical growth until we really get some traction with these newer energy control initiatives. But longer term, I think that's actually where the biggest growth potential is. Q4 for the nonportable audio applications is typically the weakest quarter in the year. Really, what we're looking at is something of a seasonal decline which is what's baked into the guidance, but I don't see anything alarming there one way or the other.

Then, of course, portable audio, which is the biggest investment we're making, just continues to do pretty well. Both with our biggest customer and then -- it would be difficult to overstate how important the reception that the new DSP has gotten. It has just really been remarkable to be have a product that's really pretty unique, that is that critical to what our customers are being able to differentiate on. It has opened a lot of doors for us in the past quarter, giving us some pretty good confidence that portable audio in general has got some good legs to it.

All right. That's helpful, Jason. Two follow-ups on that. On the seismic side, I know that's been a high single-digit business for you and it has significantly dropped down on your expectations in the December quarter. Has that come back up a little bit? And also, as you vet your guidance for the March quarter, is that still coming off a little base -- I think you originally talked about that business not coming back until the June quarter. Has that come back a little sooner than you thought?

It came back a little bit within last quarter, even. I think we -- on seismic, at least from my expectations going into the December quarter, we finished out the quarter with more seismic revenue than I expected to see at that point. And so it depends on when you talk about starting to measure. I think it is up a bit at this point for the current quarter, but my main concern is it didn't continue to slide. So, it is still a fairly good haircut relative to the September quarter, but recall that was an all-time record.

Sure. And then a follow-up on the DSP commentary -- you mentioned a tablet design. Obviously, we've seen zillions of tablets at CES. Is this a high-profile -- without giving us the name of the OEM, is this one of the high-profile tablets that are out there?

It is probably one of the ones you would want to be in. I'm not going to dance around it. We're not in all of the ones I would like to see us in the long-term, but, at the same time, it is definitely in one of the better names. It has got a pretty good channel. A customer that we've currently got a reasonable amount of business with, as well. So, we feel pretty good about its prospects. Again, who knows how well these things will do relative to what's already out there? But yes, you're right, there certainly were no shortage of them announced at CES. That's for sure.

Ok. And then just last question, the OpEx. Historically, you guys have been recovering from a bloated OpEx. When you came in and took over as CEO, there was a lot of things that needed to be pulled back. And OpEx has been -- there's been pieces of it growing, some of it declining, but the net of it has been more steady. You have seen a pretty sizeable jump up in the R&D here and in the investment of opportunities that you're facing. With the jump up that you guided to in the March quarter, does that start stabilizing off those levels as you go through the rest of this year?

Our goal is essentially to stabilize it, in terms of percentage. Like we said -- the comments in the script -- from an expectation point of view, I would probably model us right there in the mid 20%. We've been hovering around this last quarter, 25%. That's probably a good model for the year. We're staffing to support our ability to maintain that revenue growth. And so if we get the opportunity to bring in more folks, we're not going to worry about managing that number quarter on quarter. We're really more focused on the long-term, but again, for your modeling purposes, I would run the line down for operating profit percentage, kind of right there in the mid-20s. So, hopefully as revenue scales, that means we get to bring in more and more talented folks.

Ok. Just to clarify, you weren't talking about OpEx at 25% of sales. You're talking about operating margin on a pro forma basis at 25%.

Right. Yes, sorry if I wasn't clear on that. That would imply that as revenue grows, R&D continues to go up and then we keep operating profit right there in the mid-20s.

Gotcha. That's all I have, guys, thanks.

Thanks, Adam.

Thank you. The next question comes from Tore Svanberg from Stifel Nicolaus. Please go ahead.

Yes, thank you. A few questions. First of all, and maybe to follow up on the OpEx or specifically, R&D. So, is the plan here to be selective on some engineers or are the investments that you want to undertake going to be so big that you potentially want to look for some acquisitions?

Well, no, the R&D expense would be hiring and tapeouts, other kind of product development expenses. If we were going to do an acquisition, that would be in another bucket. Since you mentioned acquisitions, as always, we would love to find one that makes sense, that would help us accelerate along the course of our strategy. But, the opportunities for doing so and, in particular, doing so by acquiring an excellent company are pretty limited. So, we keep our eyes on it. We would love to find one, but we're very, very cautious on that front. We don't want to make a mistake and jeopardize the organic opportunities we've got in front of us.

The investments going forward, should we expect them to continue to be more on the audio side or are you actually looking to diversify and venture into some new product categories within the mixed-signal space.

Well, yes, I guess you could categorize our energy product line as new, in that sense. We're certainly spending in a disproportionate fashion on the energy product lines as well as the heavy investment in audio. One of the things that we really changed about the Company a number of years ago was just learning that as a Company, our size, we really need to focus. Our strength is being able to focus on a problem that we add particular value to, and solve it better than other people do. So, at the moment, we've got more than enough opportunities like that within the audio area and the energy control initiative that we've got underway. So, I wouldn't look for us to stray too far from those markets right now.

Very good. You've been very successful in portable audio here the last two years. How has the competitive landscape changed? Any new players that you are starting to see out there or is it pretty much the same cast of characters?

I would say it's more or less the same cast of characters. It is an interesting little niche. There's not too many folks that approach what we're doing the same way we do. There are certainly other alternatives -- the customer has always got many different ways they can implement their end product. So, TI is a fine company -- we compete with them in a bunch of different product lines of ours. It is fundamentally a different proposition. In the bulk of our product lines that we're heavily investing in for the future, it very rarely comes down to, here is this pricing discussion and we're knocking it out with -- between the sales teams -- on a penny here or there. It is just really a different proposition.

We want to target customers that are differentiating meaningfully on the thing that we're very focused on doing, so that we can get the kind of margins we need to support the business we're growing. So, it is just a little bit different approach. And, we certainly have competition and there are some very good companies among those names. We like to think we've taken a little bit different approach to go into the market than most of them do.

Great, and lastly, LED lighting -- how seriously are you approaching that market? I know you mentioned some revenues potentially next year, but is this something that could potentially be a big segment for the company going forward?

We're very serious about it. I'll repeat what was in the script on the call to go look at what we've got in the investor pitch which is updated on the web site. There are a couple of slides in there that put a little more color to what we're doing for LED lighting because it is really kind of two thrusts. One is with the PFC product line to get into LED lighting ballasts. Then the other one, which is usually what we're talking about when we say LED is an LED lighting controller. It is a very serious thrust for us; it is a significant investment. We're extremely bullish about our opportunities. We've got some great technology, a lot of patents filed.

And, the good news, there, you work on some of the advanced new developments for a long time and it sometimes is difficult to get meaningful feedback and good guidance so that your products come out and meet the actual needs of customers that are building products around them. But, in this case, we've gotten to the point with one of the bigger names in lighting where we've got more of one of the semi-custom relationships with them and getting direction directly from their engineers about what they want the chip to look like. So, if you look at the landscape in the marketplace, sometime between now and 2015, you go from a $40 million unit kind of a market, $40 million-ish to $1 billion or $2 billion, and so, we're probably not going to get 100% of that market but I don't mind splitting a billion units. We're generous in that regard. It is a tremendous opportunity for the company. And in my mind, it is the best opportunity we have to mitigate the customer concentration issue-- well, to mitigate it in a positive way, I should say,

Very good. Good quarter. Thank you.

Yes, thanks.

Thank you. The next question comes from Vernon Essi from Needham and Company. Please go ahead.

Thank you. And, I appreciate the comments, Jason. It is very comprehensive, covering all of your markets. I think this question will probably come up a lot with investors, but, if you could revisit the DSP win in this tablet customer just from the standpoint of what you brought to the table that would differentiate you from others. Obviously, we all know it is a price performance at one level, but what, technically -- to the ability that you can kind of explain that, has made it a differentiation for you to win that socket?

It is usually a lot of little things and in that particular case, this DSP is really pretty remarkable. It is just tiny. It's 65 nanometers. It is very purpose-built for being able to do the kinds of processing that you would want to do in applications such as camcorders or tablets or headsets, and handsets as well. Whether it is noise cancellation or small algorithm, other kinds of stuff, noise suppression, whatnot. So -- but the amount of processing power you get per milliwatt, the amount of board space the thing takes up, and the tools that we provide--. We've got other customers outside the tablet guide that are programming their own algorithms, their own secret sauce into the thing now. We've got our own library of algorithms and our own relationships with the big houses -- the Adobes and DTSes and all that -- so if there is any particular mobile applications or mobile algorithms that people want to license, we've already got all that stuff that done from our existing DSP business.

I think for the applications we're targeting, we're a very focused audio DSP supplier and it leads to a much more turn-key discussion with customers when they're trying to implement something very specific. Usually, we can just hand it to them. And if not, we've got tools they can use to do it on their own. The device itself is really just remarkable.

And then, combining that with one of the most advanced phone-type CODECs -- I say phone-type because most people building tablets are building them around a very phone-centric platform. But the CODEC we launched last June is just a great solution and it is hard to describe from an investor point of view why it is unique or why it is so much better than what else is out there. But it is just such a comprehensive solution to the audio signal path and amplification and analog to digital conversion, digital to analog conversion, sample-rate conversion, all of the different clock demands that might be in a phone, all of the different sources and syncs, where audio might be coming from and going to. When you're in the position of being our customer's engineer designing his end product, you look at this device and you just go, wow, that just took a whole section of my board and consolidated it into a chip. It is just easier to use our part.

So the combination of having all three of the devices, so the amplifier as well, is nice. The DSP is remarkable and the CODEC is as well. The combination three plus a lot of little things.

That's helpful. And just to move over to another point here. Can you just revisit your model in terms of growth rate?You had mentioned a 15% growth rate, of course, but then you threw out a $500 million number. I was wondering what that really pertained to when you were going back to an objective.

They weren't intended to be connected. The model that we put together a number of years ago was 55% gross margins, 15% annual revenue growth, and 20% operating profit. And, the combination of operating profit and growth, in particular, we felt was very important. If we could achieve both of those simultaneously on a steady-state basis, then, at the time, we felt pretty good about that. Obviously, we've eclipsed both those marks. We were just trying to -- When we referred back to the growth rate and the forecast for the industry at the moment, we just wanted to indicate that we felt even in a 5% to 9% environment for the industry, that we felt quite good about being able to hit that 15% mark.

The reference to the strategic plan of the $500 million. A number of years ago, when this company had been drifting along at about $180 million for a bunch of years, we sat down, put together a plan and looked at all of the markets that we were engaged in and added up, kind of a sum of best cases. Like, each of the markets that we're looking at, how big could it be? You want to make sure you're engaged in a meaningful enterprise. And, we added all of that up and, actually, the sum of the best case was higher than that. We felt like a reasonable plan based on that was, actually that, over a period of time, we could get to $500 million. It was a pretty staggering looking chart at the time. A bunch of us were a little bit skeptical about it.

It was more of a [sam] kind of analysis behind the scenes, so to speak.

It was more of a - - If we execute really, really well, how good could things get? But, no, it wasn't for public consumption, for sure. It's one of the things we use to manage the company on the inside. And we repeat that process every year; We keep that up-to-date. We recently re-did that and the number that came out the other end was staggering again. So, we just mention that to highlight that our track record of executing to our plan is pretty good at this point and we have got some pretty good opportunities in front of us.

Okay, thanks. That's helpful. Thanks a lot.

Yes.

Thank you. The next question comes from Jeff Schreiner from CapStone Investments. Please, go ahead.

Yes, hey, guys, thanks for taking my questions.

Sure.

I was just wondering if maybe Thurman, or Jason, you could talk to maybe inventories. We're not seeing a real big build in the December quarter like we maybe saw last year and just wondering if you could give me any color to that.

The biggest -- we were trying. We were trying to build inventory a little bit in the quarter. The quarter turned out a little better than we expected going in. So, actually, the inventory had gone down a little bit. We are building to support a pretty significant ramp this spring. So, I think our current outlook is that inventory at the end of this current quarter is likely to finish out up a bit. But, we've got a very sophisticated supply-chain team; we're not going to get inventories out of line. Our target is to keep things around that -- the inventory turn range of four. If we get a little bit ahead of that, it is likely because we're just trying to make sure we have some extra parts in stock for a significant ramp upcoming. We don't want to get behind on that kind of thing.

We have a lot of cash. So, when we know a design win is secure and the product is final -- we're already shipping and feeling good about things -- if there is a good opportunity for us to lay in a little bit of extra inventory ahead of time and take some risk off the table, that's a positive. The other piece I think you have to be mindful of externally, is we've done, I think, a very good job of becoming more disciplined on managing our inventory on some of the older products, some of the industrial stuff, seismic and old SARs and some of these older products. So, while some of those are going down, even while we're still being able to support the customers there, we in many cases are taking the opportunity to strategically build out a little inventory on the audio side to decrease the risk that we get caught by surprise by more successful than expected ramp.

So, that's kind of the color I would put on it. I don't think we're expecting anything really radical to happen on the inventory front.

All right. Thank you for your color, Jason.

Sure.

Was wondering if you could talk about some strength in power meters. Was wondering if you could talk a little bit about what key customers like Itron are telling you in terms of how demand is shaping out for calendar year 2011. We are hearing a lot of talk out there that there could be a plateau or a pause. I'm just wondering what you're hearing.

I think power meters are going continue to do quite well. I haven't heard anything about a pause. It's a good bit of business for us and we're just focused on adding to the breadth of the tier one accounts that we have got. The new device that we just got back will definitely help with that. It is more of -- it is a general market part. The part we sell the Itron folks is a proprietary thing that we did for them.

So, this kind of takes our latest and greatest technology and puts it in a form factor that anybody can buy. It is applicable for meters and it is also -- the number of new devices, power strips or you name it, consumer devices that have power meter chips embedded in them, is something we expect to go up quite a bit. And, this device is a good entry point into a lot of those. So, we think there is a lot of opportunity there. It is not a radical growth number by any stretch this current year. It is a slower-moving, industrial market. Nonetheless, we expect it to be good, steady business this year and we're just continuing to focus on winning some more tier ones.

All right. Thank you very much, gentlemen.

Sure.

Thank you. The next question comes from Rick Schaefer from Oppenheimer. Please go ahead.

Hey guys, this is Dan Morris calling in for Rick. Just wanted to touch back on some your diversification comments. You highlight that tablet win with the new DSP, and I think you also mentioned, Jason, that you really don't have any update on smart phones but if you look out over this calendar year, should we expect to see meaningful revenues from diversification efforts and portable audio?

Well, we think-- it is not a trivial amount of revenue that we have got plugged in for some new products and new customer. New wins in tablets, headsets, and automotive are some of the highlights. I think we're doing quite well on that front. It is just when you measure it in comparison to our largest customer who, you may have noticed, is on a bit of a winning streak, it just gets overwhelmed. But we're doing quite well. These new devices have only been out, in the longest case -- the CODEC and the amplifier we launched last June.

Historically, for general market products, going back a number of years, it takes general market devices about three years to hit their peak revenue. The fact that we're expecting to start shipping both of the devices we launched last June and the DSP we haven't even publicly launched yet -- later this spring is really pretty remarkable and a very good indication that these diversification efforts are going to be successful.

Okay. Great. And, you did mention the automotive segment there. And last quarter, you talked about the automotive amplifier win that you have. Do you have any -- are we still on track then for a mid-year launch of that design win that you talked about last quarter? Could you just give us a rough sense of how much exposure you have to the automotive market now?

Yes. Things are -- on that particular design, what you're referring to -- and again, there is a little bit more content on this in the IR presentation on the web site. But, we developed a chipset for a notable supplier in the automotive market last year that is an actual amplifier and controller device. So, it is north of a $10 ASP so the units don't have to be so high to have it turn into a meaningful amount of revenue. We're pretty excited about that. That's on track to go to production this year. So, that's one positive there. We're just continuing to work with the customer to see if we can broaden out there, help them be successful in other accounts, and we'll see how that goes.

We don't break out the revenue in terms of percentage, but it is meaningful to us. It is not where we would like it to be. I would like it to be back north of 10%. A number of years ago, we had automotive revenue in the 10% range and I would like to see it get back into the double digits. It is not the fastest moving market so it takes a while to do that. But it is a market where you're seeing more differentiation of new cars on the entertainment systems that are involved. And the customers involved care about a lot of the things that are our strengths. They want to work with people who have been around for a long time that have their own FA labs so we can process any kind of field returns in a big hurry. So, it plays to a lot of the strengths that we've got. It is a fun market to participate in as well.

Okay, great. Just one last one for me. Probably goes to Thurman. In terms of the tax changes that you mentioned, does that mean that going forward, we should use the 35% -- is that a GAAP or non-GAAP rate? Or both?

The $0.35 rate is really -- you're going to see a credit in this quarter in order to begin utilizing our DTA. And basically, we're going to treat that, as we noted in the discussion, as a non-GAAP measure because it is a noncash event. So the credit this quarter and the 35% tax rate going through next year will all be considered non-GAAP, for us.

Ok. Great. Thank you.

Meaning it will show up in our GAAP numbers and not show up in our non-GAAP numbers, just to be clear on that.

Thank you. The next question comes from Christopher Longiaru from Sidoti & Co. Please go ahead.

Congratulations on the guidance. Great number.

Thanks, Chris.

My question has more to do with -- it looks like you're growing your consumer audio business quite well and you have your gross margins up there as well, with the guidance that you gave. That's despite the fact that your industrial business has kind of fallen off and that's where your highest gross margins are. What are your expectations going forward in terms of your industrial business and how that affects your gross margin and what are your gross margin expectations?

You know, it is complicated, all of the moving parts that are in there. We're confident that we'll keep it in that 55% range. It is not something to get too hung up about quarter-on-quarter whether it goes up a point or down a point on mix. If you just keep track of it as being around 55%, you are going to be doing about as well as we can do in terms of modeling it. So, again, we just don't expect to see too big of a move from that in the near future.

And what did --?

Our team has done a really, really good job. You highlight a good point. Our supply chain team has done an excellent job in working with our vendors and making sure that we're taking advantage of the scale that we're developing, working with foundries and what not on pricing and yields, and test-time reductions and packaged-cost reductions and everything else. Then, at the same time, the fact that in portable audio, we get to update our devices as frequently as we do, is a really good opportunity for us to solve increasingly hard problems for the customers we work with, which often means that we can engineer a win-win situation where their bill of materials goes down and our ASP and/or margin can go up. That's when you see that result, that's when you know your team is really playing the game at the premium level.

Great. That's very helpful. Thank you, guys.

You bet.

Thank you. There appear to be no further questions. Please continue with any other points you wish to raise.

All right. Thank you, operator. I would also like to briefly address a few questions that were sent to our Investor Relation department from the investor community. We welcome and encourage our shareholders to submit questions; we've had quite a few submitted for today's call. The first shareholder question relates to the strategy with our new low-power DSP. It reads - - several years ago, Cirrus developed an award-winning ARM processor for hand-held industrial devices. Are there any plans to develop an ultra-low-powered ARM processor for use with the new DSP and the new industry-leading low-power mixed-signal devices?

The short answer would be, no. The ARM processors are a very fine thing; we used to have a product line in them. The upshot, the number of years ago, was that, when we really focused on what we could add value to, where could we really differentiate, other people's IP wasn't one of them. We really -- we're happy to support the existing ARM processors but we don't intend to do new ones. The only caveat to that would be, if we were ever developing a device that, by its nature, our IP was made better by the inclusion of having a micro on the side of it, ARM would certainly be one of the things at the top of the list for consideration. But, at the moment, we don't have any real intention to do so.

The next shareholder question asks for more information about our LED lighting solution, specifically related to our competitive standing, where our chip will reside, dollar content and timing, which I thought was quite a good question. And I'll touch on that, although again, I'll direct you to the pitch on the Investor Relations web site, because it covers this topic in some pretty good detail.

So, specifically, when we're talking about LED lighting, we're mainly talking about a component we're trying to develop which will reside in an actual light bulb itself -- or at least that's the primary market. You could put it in a fixture as well. So, this would be a device that -- our intent is we want to make sure a chip which enables a manufacturer to vary -- on a relatively inexpensive basis, make a light bulb you can screw into a standard socket and have it work with any dimmer out there better than anyone else is doing. And, it is something we've developed, we've spent quite a long time putting that together. We've been able to demonstrate our technology to a bunch of folks and really impress them.

Relative to competitors, the big thing to focus on is just dimmer compatibility. These dimmers that you find in your wall, the existing infrastructure, there are zero standards for them. There are a million different kinds. They all work differently. And that worked fine for incandescent bulbs but making it work with solid state lighting is really, really hard. I think, among our best and brightest, they've all universally said this is by far the hardest problem they've ever worked on in their career. So, it is really gratifying to see some light at the end of the tunnel there, and to have a couple of customers really salute what we're working on. There's certainly no such thing as a sure thing. We don't want to get too excited in advance, but it is definitely a market that we think matters a lot.

Dollar content -- it varies quite a lot. Could be anywhere in the $0.40 to $0.50 range; it could be something even higher than that in a fancier solution. But, how that will unfold as the market proceeds from what it is today, which is quite small, to over a billion units, it kind of remains to be seen. We like our opportunities there and we've got some pretty talented folks working on it. So, stay tuned on that one.

We have another shareholder who asked if we could provide a bit more information on our automotive offerings, new developments, dollar content. I think it is pretty public knowledge we're in the Ford Sync system. I'm not sure everybody is aware, we've been in that for quite a while now, actually, I think since it's debut. It is a standard CODEC that we sell. I don't want to get into dollar content because it is a general market product, but, you can imagine CODECs such as the one in there is in the couple dollar range.

It is a neat thing to see that, as time goes on, more cars and, at the lower end of the price point from a car point of view, the fancier entertainment systems are kind of trickling their way down. Which is good because, frankly, if you think about it, those are probably the people who are going to use them. My folks could buy a Cadillac but they're unlikely to figure out how to pair their phone with the Bluetooth in the car, in the first place. So, maybe our kids can. Anyway, the Sync -- when I first heard about it, I was thinking Ford's got some navigation/entertainment thing, how well is that going to work? If you haven't played with one, it's really pretty remarkable. Supposedly, the data system -- cars that are equipped with that system stay on the lot about half as long as cars that aren't. So, it is a pretty good indication that it is a compelling solution.

On the broader scope of automotive, we talked a little bit earlier in the Q&A on the chipset that we developed that we expect to ramp into production. That's probably more significant from a revenue point of view. And particularly, as time goes on, and that ramps into full production, just due to the dollar content being substantially higher.

The final shareholder question asked if there have been any further discussions internally about announcing a stock dividend. It is one of the things that we discuss. Of course, as the board discusses uses of cash and what's the best way to deliver shareholder value with our cash asset. As I've said before, it is not burning a hole in our pocket. We've discussed dividends. We, as you saw last quarter, occasionally, if the opportunity is right, are certainly amenable to doing buybacks. We would love to do an acquisition if we found one that was a great fit for us and didn't distract us from the organic opportunities we already have in front of us. First rule is do no harm, I think. Certainly, it is one of the things that we discuss but nothing to announce at this point. So, that was it for the Q&A.

Before we sign off, I would like to mention again, that we have updated the Investor Relations section of the Cirrus web site today. There are new video Q&A segments, as well as our new Investor Relations presentation. If you have questions that were not addressed today, you can submit them via our investor web site on the Ask the CEO page and we will try to get them answered. Thank you for joining us on the call today.

Thank you. This concludes the Cirrus Logic's third quarter fiscal 2011 conference call. Thank you for participating. You may now disconnect.