Cirrus Logic Inc (CRUS) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second quarter fiscal year 2012 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 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.

Before we begin, I would like to remind you that during the course of this conference call we will make projections and other forward looking statements regarding, among other things, estimates for second quarter revenues, gross margin levels, combined R&D and SG&A expenses, amortization of acquired intangibles and share-based compensation expense, as well as other estimates and assumptions regarding long-term gross margin and revenue growth goals, 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 the Cirrus Logic website, the latest form 10-K and 10-Q as well as other corporate filings made with the Security 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. The non-GAAP information -- 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. This non-GAAP measure -- these non-GAAP measures should be considered in addition to, and not as a substitute, for the results prepared in accordance with GAAP.

With those disclosures out of the way, I'd like to now discuss our results. Net revenue for the June quarter was $92.2 million, up 13% from $81.9 million in the June quarter of last year, and up 1% sequentially from $91.4 million in the previous quarter. Revenue from audio products contributed $71.1 million, representing 77% of total revenue in the June quarter. As you see in the tables we included with our press release today, quarterly sales of audio products grew 32% year-over-year. Revenue related to our largest customer was approximately 53% of total revenue for the June quarter, which is consistent with the March quarter.

Revenue from energy products was $21.1 million for the June quarter, which is down 24% on a year-over-year basis. Gross margin for the June quarter was 52%, up from 50% in the March quarter. As we announced on April 14, our overall gross margins have been impacted due to a production issue with a new audio device that entered high volume production in March 2011.

As previously stated, we expected an additional impact to our gross margins in the first two quarters of FY 2012 due to lower yields of in-process inventory on this product. We've been actively working on improving gross margins on this product, which contributed to the overall improvement in the corporate margin from the previous quarter, and we expect that the production issues will be fully resolved in the September quarter.

Total GAAP operating expenses for the June quarter were $33.4 million, compared to $32.4 million in the previous quarter. Non-GAAP operating expenses were approximately $30.7 million for the June quarter, compared to $29.7 million for the March quarter. A reconciliation of GAAP to non-GAAP expenses is included with our press release today.

Income from operations was $14.3 million, or 16% on a GAAP basis, and $17.1 million, or 19% on a non-GAAP basis. GAAP net income for the quarter came in at $9.2 million, or $0.13 per share based on 70.4 million diluted shares. In the same quarter a year ago, we reported GAAP net income of $17.6 million, or $0.25 per share based on 70.8 million diluted shares. Our diluted share count decreased this past quarter from 72.3 to 70.4 million.

During the June quarter, we repurchased approximately 3.5 million shares at an average price of $15.94. The reduction to our diluted share count was less than the total number of shares repurchased because we used a weighted average method. As the full amount of those repurchased shares is realized in the second fiscal quarter, this resulted in additional reductions to our share count.

As I stated in our last earnings call this quarter, we recorded an estimated tax expense as we began to realize income against the deferred tax asset on our balance sheet. As a result, our GAAP net income for the June quarter includes a tax expense of approximately $5.3 million. The bulk of this estimated tax expense is non-cash and will be treated as a non-GAAP adjustment. The actual estimated tax we expect to pay is approximately $300,000. Therefore, on a non-GAAP basis, net income for the quarter was approximately $17 million, or $0.24 per diluted share, which represents a decrease of $3.3 million, or approximately 16%, from the June quarter a year ago when we reported non-GAAP net income of $20.3 million, or $0.29 per diluted share.

Moving to the balance sheet, we ended the June quarter with $42 million in net receivables, an increase of $2.9 million from the end of the March quarter. The average day sales outstanding at the end of the quarter was approximately 40 days.

Ending net inventory increased to approximately $47 million at the end of the June quarter as we prepare to support upcoming customer production ramps. Net inventory turns for the quarter decreased slightly to 3.8. We ended the March quarter (Sic) with approximately $156 million in total cash and marketable securities, a decrease of $59 million over the March quarter. This reduction includes the use of approximately $56.5 million for repurchases -- for the repurchase of 3.5 million shares during the quarter. At this time, we have approximately 20 million remaining and authorized in our current program. Additionally, we invested approximately $6.4 million in our new headquarters as well as an additional $5.8 million in new CAD licenses.

Cash flow from operations during the quarter was $10.6 million. Depreciation and amortization expense for the quarter was $2.3 million. Lastly, as of the end of the June quarter, we had 608 employees, up from 570 at the end of March. The increase in head count is primarily focused on staffing new R&D projects.

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

Thank you, Thurman. I'm very pleased with the execution by our team as we saw results come in very much in line with our expectations. We saw good sequential growth in our audio business which more than compensated for the year-over-year decline in some of our older industrial product lines. You may recall that fiscal Q1 and Q2 of FY 2011 were quite strong quarters for seismic and some of the other industrial products. So the fact that our newer audio products have more than compensated for this decline is a great sign that our investments are paying off.

As highlighted on slide 33 of the investor presentation available on our website, the percentage of our revenue coming from relatively new products is much higher than it was last year, which is an important indicator of the health of our business.

In audio, we made good progress towards resolving our production issue and we expect to be done transitioning to the new higher yielding version of the product within the September quarter. Obviously, this impacted our overall margin in Q1. Without this issue, our margin would have been in-line with the Company target. We expect a smaller impact during Q2 and then back to normal to begin the December quarter. These challenges are unfortunate but they do happen from time-to-time and our team has done an excellent job resolving the issue and taking care of the customer.

As we highlighted on our last earnings call, we expect a number of new design wins to be ramping between now and the end of the year, both with new and existing customers. One new product with an existing customer is VIZIO's new tablet, which is now available for pre-order. They have been a great customer for us for several years and we're excited that they chose to develop their tablet using our low power audio platform, which includes two products introduced in 2010 as well as our new low power audio DSP. We believe this is the first of many wins for this DSP as it is a perfect fit for a variety of portable audio applications.

We have a variety of additional production ramps in audio scheduled for the rest of the year and we will keep you informed as those products become available, at least in the case of customers that we talk about externally. I often get questions regarding the time line of new chip developments and how long it takes to get new products into full production and we recently posted some Q&A on this topic on the ask the CEO section of our website. I think this is a critical element of our business for shareholders to understand and I encourage you to check it out. Regarding our largest customer, our relationship remains outstanding, long-term visibility is excellent and our outlook is very exciting.

In our energy product lines, our older industrial products remain relatively weak, as expected. Power meters remain a good business for us and customers are showing strong interest in our newest energy measurement IC for both traditional power meters as well as newer consumer energy monitoring applications. We've also made significant progress on expanding our business with Itron beyond the North American market.

Longer term, the investments we've been making in energy control product lines continue to show great signs that this will become a successful business for Cirrus. As we mentioned on the last call, our first LED lighting controller has been extremely well received by a tier one customer and continues to be on track for revenue within this fiscal year. Additionally, our new brushless, sensorless, DC motor controller is now sampling to key customers and has also been very well received. It will take some time to build a successful business in the energy control area, but success with these new products is a critical milestone along that path.

We are fortunate to have an extraordinary number of excellent opportunities with both new and existing customers and when coupled with our 67% growth in FY 2011, that means we have a significant hiring challenge that must be met in order to capitalize on these opportunities. Fortunately, the investments we've made in developing a powerful and positive corporate culture have helped us attract and retain some of the best talent in the industry and we are on track for our hiring goals so far this year. Our progress on bringing in new people and also maintaining an extremely high level of talent density remains a continued highlight.

As a result, our guidance for the upcoming quarter is revenue-to-range between $101 million and $105 million. Gross margin is expected to be between 52% and 54%, reflecting the residual impact of the production yield issues we discussed earlier. And combined R&D and SG&A expenses to range between $34.5 million and $37.5 million, which includes approximately $3.8 million in share-based compensation and amortization of acquired intangibles expenses.

Since the last call, our revenue expectations for fiscal Q2 have improved a bit, though we still expect Q3 to be a stronger quarter due to various product ramp schedules. As we mentioned earlier, we also expect Q3 to mark a return to our typical margin levels as our low yielding product issues should fully be -- should be fully resolved by that time.

We're extremely pleased with the reception that our new products have received from key customers. The low power audio DSP, the LED lighting controller and the sensorless DC motor controller represent significant new developments from each of our major product development groups. If each of these new product lines ramp to production, as currently expected, it will be an excellent indication that the successful approach we developed within portable audio has spread throughout the Company.

As always, our focus remains on building a great Company for the long-term. We're very pleased with the culture we've developed, the strategy we're pursuing, the talent and passion of our employees and the relationships we have with some of the best companies in the world. Based on the reception that our customers have given our newest products, I believe the future of Cirrus Logic remains very bright.

Operator, we're now ready to take questions.

Ladies and gentlemen, we will begin the question and answer session at this time.

(Operator Instructions)

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

Thank you. Jason, wondering if you could go over the guidance in -- specifically, I know you had made some commentary before about how production schedules can create sort of a tough range of us to get our arms around in terms of the September revenue levels. But can you discuss just generically what the puts and takes are there and what could possibly happen with your customers and what you're seeing?

Sure. I mean, we do the best we can do to model it and obviously this quarter we've got better visibility than we would have had on that a quarter ago. But it is a challenge because if you're building products for Christmas, for example, which a lot of our audio stuff has a very Christmas -- Christmasy cycle to it, the bulk of the orders for those kind of products tends to be in September and October and there's often some pretty steep delivery curves kind of towards the end of September. And so if a customer has a delay or pulls something in, it can have a pretty significant impact. And it's kind of one of those ironic things that has a big impact on our earnings and on our guidance for a particular quarter, but has absolutely no bearing on our business in general, whether somebody moves some deliveries around a week, one way or the other. But anyway, it's -- as I say, it's something we've got more visibility on now than we had last quarter. And it's maybe shifted around a little bit since then but the general trends that we're seeing this year remains, as we said in the script, that Q3 should be a stronger quarter than Q2 this year.

Right, and then just in terms of the -- I know you won't give, obviously, too much leeway, although I'm going to try, on the December quarter, are you feeling more confident that that's going to look like a decent quarter this year? And that actually kind of segues into another larger question which is, if you look at the audio business outside of the portable area, how do you feel the health of that is for the remainder of the calendar 2011 timeframe? I mean, with your big correction recently, do you feel that there's some good foundation there in terms of channel inventories and what have you, or is this a situation where you could have some lack luster numbers in that side of things?

Well, my crystal ball is not that great so anything can happen. But our current visibility says that the December quarter looks excellent. We're very pleased with the outlook. Channel inventory for us is -- it's not got that big of an ability to hurt us. There's -- for our largest customer, that stuff is -- there's very little inventory in the channel. A lot of our business is POS. So the remaining amount of business that's in the channel where we recognize revenue on a sell-to basis is really pretty small. So its ability to impact our overall numbers is not huge. And we see really good things across the board in our audio business. As we mentioned, we've got product ramps coming with new and existing customers. We're excited about the new tablet and some of these things should take hold and gain some steam by the end of the year. So -- feel pretty good about it.

Okay. And congratulations on the VIZIO win there. And just if I could ask sort of the larger question of the other major sort of perceived player in the tablet space and that's Samsung, your competitor there that was sort of a legacy situation is still in the newer product. Can you discuss, perhaps, what happened there in the sense that you can? And then maybe even the larger question that looms is, are you precluded to be in that product for any reason otherwise in technology, let's say, or price and performance?

No. I don't think so. I mean, generally speaking, Samsung's a great company. They've got a different approach than a lot of our companies -- a lot of our customers do. We really -- in particular, in the case where we're going to develop a custom product for somebody, which is certainly not all of the business we have for portable, but it's a lot of it. That's really not their style as much. It's difficult to -- they're a very purchasing-driven organization and so that tends to not -- that approach tends to not work. You've really got to have kind of a general market catalog and go after the business with that. So now that we've got the new portable audio DSP out there and making some noise, it's something that's gotten a broad degree of interest from a bunch of different customers. That's the kind of thing where if it just happened to line up with something they were looking for, it would be a good opportunity for us. The thing is, it's a -- you can go broke developing codecs for the tablet business right now because products are expensive to develop and most people that are making tablets aren't shipping a whole lot of volume. So it's kind of a tricky thing. But anyway, no, we're not precluded from doing business with anybody that I know of and as we are able to flesh out that general market audio road map, in particular the -- where the DSP can bring some additional differentiation, I like our opportunities for being able to broaden out our business there.

Okay. Thanks a lot.

Thanks, Vern.

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

Yes, thank you. Looking at the audio business with your largest customer, I think I would have expected that to be up a little bit more, given what they just reported. Is that just a question of timing or is there some pricing dynamics that we should be aware of? Just please help us clarify that.

Yes, it's a little bit of a puzzle to me why -- how that one's hard to model. For a while, if you look at it in a short-term sense, there's all sorts of things that are not directly connected between the two businesses. They've got -- we don't carry -- we don't have a ton of inventory in our channel, but I suspect they do. It's not something I have a ton of visibility into. And then moreover, when we give guidance, we're usually a third of the way through the quarter and if a customer hasn't given us a pretty good indication of what they would like us to build for them, then, well, they're going to have a hard time getting our products. So usually we've got a pretty good forecast about what they would like to have the ability to ship. So when you see a customer that's pretty well known for giving conservative guidance, it's not too surprising that they need to give us a forecast that supports whatever upside they maybe want to be able to support. So I would hesitate to try to draw the conclusion that if one of our larger customers beats their earnings, then that must mean that our -- then that was a big surprise for us. Now, we don't know how our volume translates into somebody else's revenue nearly as well as we might, so I would hesitate to try to make that connection either.

Understood. And can you talk a little bit about the pricing environment then? Has there been any changes there or is it still fairly benign?

Well, generally, our strategy is always to be introducing new products and increasing our content in the system and increasing our billing materials while at the same time, we're driving -- increasing our ASP while we're driving the customers billing materials down. And I think we've done a great job of that over the last couple of years and this year is no exception. So, no, overall, I think things are looking pretty rosie.

Very good. And are you actually shipping the smart audio codec at this point or are we still talking about preproduction?

The smart -- well, essentially I think what you're referring to the smart audio codec because -- I what we talked about in the VIZIO tablet platform, when where it's a DSP and the codec we launched last year along with one of the amplifiers.

Very good. And then you mentioned some revenue contribution expected for this fiscal year in LED. Could you talk a little bit about the magnitude of that? Are we talking about millions of dollars or is this just going to be some minor revenue contribution.

I don't think it's huge for this fiscal year. The design win overall is significant though. The design win overall we expect to measure in millions. Whether that's exactly the timing and whether it's ramped to that, it is kind of towards the end of the fiscal year. So we'll see how that ramp goes. But the important thing is, really, the indication that somebody that matters really latched onto our LED lighting controller and we think that market is just going to do amazing things. Our technology has been validated, again, by somebody that matters. And so longer term, I think that's the best opportunity we have to really provide some meaningful differentiation in where our revenue comes from.

Very good. And last question. As always, the seismic business is pretty volatile and lumpy and hard to predict, do you have any idea how that's going to fare in the second half of the calendar year?

Well, we don't expect anything amazing from it in the second half of the year. So as usual, our approach is we'll just factor it into our plans at a very, very low level and then we'll be positively surprised if something actually does come in.

Sounds good. Thank you very much.

Thanks, Tore.

And our next question is from the line of Jeff Schreiner with Capstone Investment. Please go ahead.

Yes, good morning everyone. Jason, I want to start off with maybe two questions and I'll bring them up for you here. It seems to be concerns that, let's say, investors who maybe are not believing in the (inaudible) at this time are out there talking about it. And the first one I want to talk up -- about was a follow-up a little bit to the prior analyst's question. But a lot of people are starting to say that because you've seen some decline in margins and you guys have referenced a manufacturing issue, that really the manufacturing issue is more of ruse and you're seeing a lot of pricing concerns within your lead customer. How can you maybe speak to that or what are your thoughts on that and how can you maybe subside those fears for investors at this time?

Well, for one, I've never heard that. I would say a naive and fairly comical notion that we would be able to pull a ruse such that over on our auditors and our board of directors and everything else. I don't know what to say other than we have a part, it had a production issue, it had a significant impact in Q1 and Q2 and we're well on our way to having that resolved. And if you're really hung up and worried about it, then I guess we'll see what we see in October, right?

Okay. Fair enough. And then I guess the -- some of the other commentary's been that your largest customer is now looking for maybe a lower end phone and I think that this also speaks to feature phones somewhat, or some investors may believe, that integrated solutions are going to really start to replace your overall [tam] and availability. Where are you at right now in terms of how integrated power management, maybe audio solutions, are really playing in the market and where do you see them competing against the stand-alone product that maybe Cirrus offers?

We haven't seen any significant impact from integrated power management and audio codecs. The kind of customers we target are differentiating on audio quality. As yet, the integrated power management stuff is nowhere near the circles that we play in. And it's something that we have to be vigilant on and always work on making sure we're adding more value so that as they're catching up on the low end of whatever the space is today that we're always adding more features and more performance and everything else so that our products continue to add value. That is, to some degree, the name of the game in the analog space is you got to stay ahead of the integration curve, find customers that are going to continue to care about having the best in breed rather than the most integrated. But at the moment, anyway, I don't feel any more pressure along those lines than we ever have historically. And again, it gets to the visibility kind of question that I referred to in the script. We had a section of the Q&A that we've put on our website -- which is worth signing up to just get the updates when they come out on that -- where we talk about, look, if we're developing custom products for somebody, our visibility is really pretty good because otherwise, they're wasting an incredible amount of their time and resources helping us develop a platform. So when you factor that visibility in, I think that kind of concern goes down quite a lot.

Okay. Thank you very much for clarifying those two issues. I wanted to just speak to maybe what, if any, impact in September and if there's maybe some upside to gross margin in September, and if maybe this is also helping you get back to kind of your normal operating gross margin levels as you stated, I believe, in the December quarter. But are you seeing any relief in the supply chain constraints that has plagued your largest customer?

I don't comment on their supply chain constraints other than that we haven't provided any supply chain constraints for them. So other than that, you probably know as much about it as I do.

Okay. Fair enough. And last question for me and I'll step off. But just wondering maybe how are we looking into the industrial business in terms of maybe its reacceleration in contribution? What are some of the key catalysts that we're going to need to see happen? Is it the end markets? Is it the global macro environment? Is it your new products? Can you help us understand maybe when that contribution can come back onto the top line to kind of help along your audio business?

Yes, no, that's an excellent question. Yes, no, it's really a product-driven cycle. Obviously, if the economy helps -- if the economy improves or macroeconomic stuff goes up or down, that impacts our older products in that business. But as you know, a few years ago we made a pretty hard switch to make a heavy investment in the energy control area. These signs that we're seeing with LED lighting, with motor control and all that, are really positive -- great signs the products are getting a great reception. And once those really start contributing some meaningful revenue, which we expect to really start meaningfully next year, then we can start to expect some sustainable good things from the energy product lines. In between -- until then, really, whether old products or more or less because of the economy got better or worse is -- I mean, it has an impact, obviously, but it's not really relevant.

Okay. Well, thank you, gentlemen.

Sure. Thanks, Jeff.

Thank you. And our next question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Hi, guys. Congratulations on the guidance.

Thanks, Chris.

So one thing I'm looking at here is just -- can you give me a little insight into the inventory for this quarter and what the expectation is for your inventory going forward?

Well, it's up. Like I said, we've got a couple of pretty significant ramps to try to support, so it's up for that reason. And, as I said, our current outlook is that Q3 is probably a little stronger. So back of the napkin, my guess would be inventory would be up coming out of this quarter.

Okay. And then would trail off kind of after that?

We'll see what we see. It's getting pretty far out there.

Okay. And just on the industrial side, with boats going back in the water in terms of seismic there and I think most of these cannibalizing their existing inventories right now, would you expect kind of a big lumpy order sometime in the out-year based on that? Just in terms of what your visibility is in seismic, could you give a little bit of insight into that?

Well, I mean that is kind of the way that it works. They got to get their boats back in the water and then they have to decide to upgrade the electronics. And that business is lumpy just because there's on the order of 50 boats worldwide. If somebody decides to do new electronics for one boat, it's on the order of $1 million to $2 million worth of our chips per system. So, a great quarter for us. The best quarter ever would maybe be an order for -- on the order of four boats and a bad quarter would be zero. So, I mean, it's quantized like that. We don't have a lot of visibility and it is very hard to connect to any kind of easily externally visible activity. So, it's certainly possible that we can get some pops. Like I say, we don't -- we've got it factored in at a pretty low level and then we'll be positively surprised if it does come in.

Got it. That's all have I for now. Thank you, guys.

Sure.

Thank you. And our next question comes from the line of Rick Schafer with Oppenheimer and Company. Please go ahead.

Yes, guys. I just had a couple of questions. I guess first, just on the portable audio business, can you talk just briefly about lead times there in that business and sort of how much of your September quarter revenues do you expect are actually going to come in the last month typically -- typical September quarter for guys?

Well, like I say, it's -- I don't have a real great percentage for you but it's certainly disproportionately weighted on the back half of the quarter. So it is -- and then -- and that's true in the case of existing products, in the case that's something new that's ramping up, it just sort of depends on timing of when the customers production launch is and all that. But, yes, it can be -- there can be some pretty steep ramps in general in that timeframe. So it's a little -- like we said when I was talking to Vern, it's a little bit difficult sometimes to call exactly what part of the revenue is going to fall this quarter or next quarter. Because customers can move around their backlog with really no significant penalty in a lot of cases.

That's kind of what I was getting at -- just curious if lead times are sort of four weeks or something for portable audio and here we are, not quite out of July yet. I mean, what kind of visibility do you have on that month of September, you know?

Well, we've got very good visibility in general. At this point, it's just a matter if something -- things can go bump in the night when you're developing new products, or people can have some other issue that causes them to push their deliveries off for a few weeks, and has no real bearing on the overall business for us but it impacts our numbers one way or the other. Anyway, I think at this point we've got pretty good visibility in that. We try to be pretty conservative with our guidance on that front. And so that's kind of how we came up with the guidance we've put up.

Okay, good. And then just -- I know we talked about the production issues being behind us post this quarter. Assuming we're back 100% business as usual exiting September quarter, sort of what are your expectations for gross margins as we look at the December quarter or beyond? Should we assume we're back above 55%, sort of exiting the calendar year?

I'd model -- I mean I would model it at our target, which is 55%.

Okay.

All the data we've got says that should be fine. The only -- like I say, the only thing that drug us away from that is this margin issue that we had with the one product.

Well, with that and of course your mix, right? Because this was -- this time last year wasn't seismic still kind of on fire for you guys?

Right. This time last year we were above our model.

Yes. Okay. And then last question is just any update on any portable audio traction outside your biggest customer? I know you talked about the tablet stuff, but I'm more interested in smartphones, sort of where we might start to see some announcements there.

Yes. Not any time soon. The reality is, there's just not that many people making a phone that's differentiated on audio quality. Unless you've got a dock connector on the bottom of the phone, it's really hard to make a case that traditional measures of audio quality actually matter and there's only one phone that has a dock that matters. And we're in that one. So the other problem is, just in terms of our approach to the market where we really like to partner up with people to make sure that we're getting a good return on our R&D dollars, there's plenty of you people that say, well, there's so much volume in android but android's an operating system. It's not a piece of hardware and we don't develop codecs for operating systems. We develop them for pieces of hardware. So it's extraordinarily difficult to figure out which one -- which one you ought to go really try to target. There's certainly tablets that I'd have been very disappointed if we had developed a $3 million codec and then had the results show up that appear to be the case in the marketplace. So you really have to have general market parts to go after that. Now, longer term, the thing that's interesting is this DSP we've got. The differentiation that it brings to the party is in functions like noise cancellation, active cancellation, noise suppression, as well as a whole host of other kind of DSP algorithms that we can support. Now, those are functions -- or those are features that everybody making a phone can differentiate on and there seems to be quite a bit of interest in doing so, as well as tablets and headsets and all manner of other things. It happens that the first wins we've got with that DSP are in applications other than handsets. But longer term, it is possible that that can be something that's of interest to handset guys, because again, they don't need a dock connector to differentiate meaningfully on those types of features.

So we could start seeing maybe some of that stuff show up maybe next year? Is that fair to say?

That's probably early. I mean, it's really, again, you've got to think about the amount of time that goes by in the cycles. We'll -- you'll see it in other portable applications because those are already well under way. But hand sets will probably be up there a ways.

Okay, great. Thanks.

Sure.

And we have a follow-up question from the line of Jeff Schreiner with Capstone Investments. Please go ahead.

Hi, Jason. Just thought I'd throw another one out there real quick at you. You talked about noise cancellation, some of the noise features that you're adding into the DSP. And it seems that what you're doing is trying to create a larger integrated solution that might be able to capture some stand-alone type solutions that are seeing some success out in the market doing a lot of those same things. Would that be correct that you're able now to position this against a private company that's out there doing a lot of the noise cancellation, the noise quality type stuff and it's a stand-alone now interfacing with the codec? At this point, is this DSP solution then -- start to attack that directly and giving you kind of more of the share, getting the codec and that chip out and offering a more integrated solution to a future customer?

Yes, that's exactly what that codec is targeted to do, in addition to -- the cool thing about this -- this is a tiny little low power DSP. So there's actually a video of some Q&A that we did on our website that kind of gives you a little more visibility into just how small this thing is and the power that it brings and what all you can do with. But the cool thing about it is, it's a pretty inexpensive device as these things go. It is a programmable DSP, so we can customize it pretty late in the game. We've got some pretty cool technology for doing some of these noise and echo cancel type functions. But in addition to that, with our device, you get all these other algorithms, Dolby D codes and whatever all else that we've been supplying for years in the home theater market, because it's all based on our -- it's our same DSP core that we've been selling for years with our tools and support and everything else. It's just this one's in an ultra low power form factor. The thing is really, really small. So it's actually dwarf -- it's dwarfed by the codec sitting next to it. So, yes, it's a great opportunity for us to add additional value. I mean, that's the cool thing about the new tablet we're in, is the content. If you think about those three devices, it's quite a bit higher than what we've provided in the past.

Okay. Well that was very helpful. Thank you.

Sure. Thanks, Jeff.

And gentlemen, there are no further questions at this time. Please continue.

Alright. Let's see, we did have one investor write in asking if we could provide an update on our PFC products. We did launch a new -- another new product in the PFC family not too long ago. That's a fairly -- I would characterize that as a fairly minor derivative of the one we had out there to address some specific feature issues with the existing product. And we're working on building a business there. It's something that takes a long-term. The interesting thing is, of course, to note is that at least some form of power factor correction is essentially required in the LED lighting products as well, which is originally why we developed the PFC in the first place. The stand-alone PFC business -- we're not 100% sold on how big of a business that will be for us in the long run, but as a meaningful building block to other things that we're doing, it's pretty important. That said, we are seeing -- in some markets we're seeing some pretty good interest in the PFC product line and we'll continue to see how that goes. But it is kind of a longer term thing there for us. And to some extent, our focus has been unfortunately taken away off of the PFC space and put on the LED lighting, simply because the echo we were getting off of that in the market place was much, much bigger. So it's kind of a blessing in disguise there. We think that's, at the moment, a better return on our investment.

So before we -- yes, before we sign off, I'd like to mention that we have an updated -- we have update the Investor Relations section of the Cirrus website today with the new investor relations presentation. If you have questions that were not addressed today, you can submit them via our investor website. Thank you for joining us on the call today.

That concludes our call today, ladies and gentlemen. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 and enter the access code of 4455476. Thank you very much for your participation. You may now disconnect.