Cirrus Logic Inc (CRUS) 2012 Q2 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 Q&A session. At this time, all participants are in a listen-only mode. After a brief statement, we will open the call for questions from analysts. Instructions for queuing up will be provided at that time. As a reminder, this conference 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 afternoon. Joining me on today's call is Jason Rhode, Cirrus Logic's President and Chief Executive Officer and Jeremy Allen, our Director of Investor Relations. Today, we announced our financial results for the second quarter at approximately 4.00 PM Eastern. The shareholder letter with the Q2 financial results and the webcasts of this Q&A session are all available at the Company's Investor Relations website at investor.Cirrus.com. This call will feature questions from the analysts covering our Company, as well as questions submitted to us via e-mail at investor.relations@cirrus.com.

During this session, we may make projections and other forward-looking statements 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 Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectations.

Operator? We are now ready to take questions.

Thank you, sir. (Operator Instructions) Our first question comes from the line of Vernon Essi with Needham & Company. Please go ahead.

Thank you very much. I was wondering if you could just give us some color, I guess, on the business that's not being generated from obviously your largest customer, and how you see the split there sort of migrating into the end of the year, between energy and audio among those 2 buckets.

Sure, we've had a couple quarters in a row where, or a period where energy has been down sequentially and/or year-over-year. We see that flattening out a little bit, going into Q3. The -- probably the section where we're seeing a bit of weakness is really in home audio, primarily that's partially due to macroeconomics, where we're just seeing a little bit of softness here and there, a couple folks revising the forecasts and what not but also it's worth keeping in mind that in the home audio space, anything in a larger box, anything that comes in a larger box, typically is going to see a bigger Q2 quarter than the fiscal Q3 quarter, so we see the seasonality in home audio typically is going to be down in the December quarter from September, so that's the color on that.

Okay, and also just 2 follow-on questions here in your prepared write-up here, or shareholder letter rather. You have a discussion here talking about custom audio ICs and having 6 in development whereas in prior time frames you've only been working on 2. Could you just elaborate on that and what exactly that implies? Are these going to different customers, the same customer, any further details on that?

That's a good question. Yes, actually, historically its been 2 at most. As you know, that's a really central part of our strategy is find customers that matter, partner up with them to the greatest extent possible, and then figure out what we can do to really help them differentiate their products with our technology, so at this point, we've got more new custom or semi custom products in development than any time I can remember, as we said in the shareholder letters, currently 6. These are all either Rev A for silicon devices and/or other devices that are expected to hit high volume production in calendar 2012, so that's a pretty exciting thing.

Our track record, when we develop a custom product for somebody that the probability that it will actually hit meaningful amounts of revenue in a shortish amount of time is -- our track record there is a lot better than we do general market products, and I think that's probably true of anybody in the industry, so for us, that's a really key item that says we're on the right track, and that things look real good for the future. That is for, if I haven't said it already, that's for a combination of new and existing customers, so obviously I don't want to put too much detail into which chips are for who.

Okay, that's understood, and then lastly, just on the audio DSP front, you talk about a new camcorder win there, and in the past, you'd discussed Vizio on the last quarter. How is that progressing relative to your expectations, and just to give us the framework maybe, I don't know if you want to get in the habit of talking about design wins or numbers or any other certain information that would help us understand how that's progressing in the market?

Sure. Well, we don't typically handout a lot of design win numbers, just because there seems to be a pretty loose understanding of exactly what that means out in the market, but the DSPs being extremely well received, we've gotten a lot of design activity from different applications, tablets, headsets, all sorts of different things, and this is a great platform to drive signal processing capabilities like noise cancellation, echo cancellation, noise suppression, so the camcorder is kind of, we think the next 1 that hits volume production.

You mentioned the Vizio Tablet. What we said on the last call we really didn't know how to gauge expectations for how that thing was going to do, because of the incumbent in that market is obviously extremely strong. So as it happens, I guess I would say briefly that I'm really glad we're shipping in the incumbent product.

Well, I can appreciate that and I guess just as a follow-on, to your point here, you've mentioned the camcorder. Was that just to sort of give a random flavor in the past, you have mentioned headsets. I'm trying to understand where you may be seeing most volume in these different verticals for the audio DSP?

The surprising thing I think to us has been the breadth of applications where people are seeing the value. There has historically been so much focus on functions like these, noise suppression, noise cancellation, echo cancellation type of signal processing algorithms, not to mention, of course, the whole other library of other stuff that we've been shipping for years in our home audio line of DSPs, which is also of interest to some of these same sockets, but the signal processing things like the various different noise functions have been kind of the holy grail items for a long time for many different applications, and the camcorder for example, wind noise reduction and some of them, especially the noise cancellation items really are only starting to be practical today, with the heavy amounts of signal processing you can bring to bear at very low power consumption figures, so I think that's why we're getting the breadth of interest.

You're right. The camcorder is a little bit of a random example but it just happened to be kind of the next 1 that we think goes to production, and probably the most interesting thing that will start shipping between now and Christmas, as it relates to that particular audio DSP, so that's why we single that 1 out, but still a fair amount of interest from headset folks, as well as other applications, it continues to get interest in the tablet market as well, the question is again just whether any of those folks have a strategy that enables them to take a meaningful amount of market share.

Okay, thanks a lot, Jason, appreciate it.

Sure.

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

Yes, thank you gentlemen for taking my questions.

Sure.

My first question, Jason, maybe for you, is just, you talked a little bit about the slowdown in kind of the non-audio energy markets, and we've gotten down to a level of almost maybe 15% or so of revenues from when they were in the mid 20% around a year ago. Just wondering, maybe how core is this non-audio kind of energy segment market for Cirrus as you look out 12 to 24 months from now?

Well, there's a compound answer that I'll give you for that. 1, is if you look in the shareholder letter at what we call a vintage chart, where it's broken out by the age of the products, what you'll see is this quarter last year we had literally an all-time record shipment of our Seismic products, we had a bunch of other products, communication devices that are old businesses for us, they're all in the category that we call vintage, meaning the devices are more than 7 years old so it was a little bit, just for whatever reason last Summer I don't know whether it was restocking from following up from the recession, or what I don't know, but we saw a couple very strong quarters for those products.

Obviously that's not new design wins. People don't typically design in 7 or 10 or in some cases 15 year old products and so that's created a pretty significant headwind in terms of the year-over-year comparison for those devices this year, so the things that are going away in the energy segment kind of what you should expect and we've put a lot of color on this and actually in the shareholder letter, should kind of gratefully fade away down to the right kind of slowly. Now, life is not a linear world out there, so it won't be perfect, but you should see those kind of slowly fade away.

They are not core. They are not areas that we're investing in. They're not things that we expected to grow. The money is obviously nice, and we appreciate people that buy the products and we want to support them well, but they aren't areas that we're investing in primarily going forward.

The areas we invest in, the areas of energy that we are investing in, are really primarily centered on our energy control initiative, which is -- the bulk of which is LED lighting but also motor control, for example, and other areas where our signal processing technology can bring a lot of value in a power application. So, and then the other area of energy of course is power meter, which is a little bit more of kind of a steady business and occasionally when 1 of our customers wins a significant new market, then we can see meaningful share gains there.

We've also done a good job, as we pointed out, also in the shareholder letter, with Itron, of starting to expand into some of their international business, which is great, and they're 1 of the biggest power meter companies in the world and the bulk of our business with them historically has been in North America.

Okay. Just as a follow-up kind of to that, Jason, could you provide any color maybe Thurman has got it, in terms of what the Seismic communication kind of revenue was a year ago and what it was this last quarter in Q2, just to maybe give some color about the magnitude of impact?

Well, we don't break it out at any finer detail than energy, but you can definitely get an idea of that from the vintage chart, which plots these older, older products by quarter, so it gives you at least a sense of it.

How seasonal are we going to be looking at March being now where historically, there was a little seasonality there. What's a typical seasonality now for the Company, and maybe starting with March, how are you guys looking at things now?

I'd say it's hard to call the seasonality for March at this point. Certainly, there is some seasonality to a lot of our business but there is also a pretty heavy product cycle involved. The past couple years it has been down maybe 5%-ish or something like that, but in this, in particular in this kind of an environment, we don't like to get too far ahead of ourselves.

Okay, and just going back to the earlier question about the 6 custom designs, without commenting on any 1, could you talk about maybe the percentage for new and the percentage for existing of the 6?

I'd rather not get into it, but it's a few of each, and then we're excited about the opportunities there. The products that we're developing in audio, there really is an incredible opportunity for us to continue to add value and provide additional functionality in the sockets we're already in, so we feel like we've got some pretty extraordinary opportunities in front of us and we're just focused on getting those devices ticked out and cleanly into the hands of the customers that are waiting on them.

Last question, quickly and I'll wrap up. Thank you for your time, gentlemen and thank you, Jason. Was just wondering, we heard Thurman comment either off-line or online last quarter about the visibility within your lead customer had never been better or something to that effect, please correct me if I'm putting the wrong words out there, but just kind of wondering if you could give us some type of statement where you think the visibility is right now with your lead customers, that's gained so much a share of your revenue on a quarterly basis?

Well, it's a big blessing to do business with customers that are well-run and manage their business well. We, as we've commented a couple of times, it takes us a year to develop a new product. It typically takes a customer a year to design it into 1 of their products, and so when you are developing custom devices for people, you get pretty good visibility about what your status is, and what the situation looks like, and as I say, we're working on a lot of new devices for multiple customers that are in that custom and semi-custom category and we feel really, really good about the opportunities for those.

Thank you very much, gentlemen.

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

Hi guys, thanks. This is Erik calling in for Tore. Maybe just start off with a few questions. First is guidance, it seems a little light. Is that entirely related to the weaker macro, given the expectations in your prepared, or letter to shareholders that you'd see some solid portable audio contribution in the upcoming quarter or is there some other dynamic here at work?

Well, we do see continued growth in our portable audio business and we feel very good about that. Certainly, the thing that is down sequentially primarily is in the home audio category, energy is flat, maybe down a little bit, but not as significant a drop by any stretch as what we've seen in the past couple quarters, so home audio is a pretty good piece of that, and then the thing that you're probably trying to be nice and not ask, I'll at least give you a little bit of color on is, I think when you try to correlate our guidance to maybe 1 of our customers, you really have to factor in the time between when we ship something for revenue and when 1 of our customers might ship it for revenue. These devices spend at least a few weeks and maybe 6 weeks if they're going to be on a boat coming across an ocean, and then if a customer typically holds a month or 2 months worth of inventory in their retail channel, there's a pretty significant delay between our revenue and 1 of our customers, so that kind of tends to de-correlate the story a little bit and it kind of makes it a little more complicated to connect the dots, I'd say.

I understand. With that then, are there any capacity constraints or supply shortages that you've seen that might make it difficult to meet that demand?

No, not in the short-term. We're working hard to make certain that we've got enough capacity for some of the things that we see on the horizon, because we worked real hard to build up some great opportunities for ourselves and it is something we're paying a lot of attention to going forward, but it's not a short-term issue.

Got you, thanks and LED lighting control, it seems like that's now shipping in pre-production. What are the revenue assumptions from that new product, and then you'd also mentioned that you taped out a second gen part. Maybe if you can just talk about some of the features for that new product?

Yes, that's a great question. I appreciate it. We don't expect a terribly significant contribution of revenue, maybe until kind of the next summer timeframe and again, it's as these things go, a brand new product and a new product of its kind is unlikely to suddenly dominate the Company's earnings or anything like that, but certainly by next summer we should expect to see numbers that put some smiles on our faces and make us feel like we're really heading in the right direction. So anyway, so that's kind of it for the device that we're shipping in pre-production today, which by the way, is in and of itself a huge highlight for us to get that device back really pretty cleanly from the engineering team and into pre-production with the customer is just incredibly exciting.

It's 1 of the bigger initiatives that we have going and it's going quite well, so now we've also as you mentioned, we've taped out the second device LED lighting Controller that is, actually now, that we had taped that out within Q2, that's actually back from fab now and working extremely well also. The differing, there's a few features in the 2 devices that are a little bit different. The newer device supports some additional functionality, such as for example, 2 LED strings enable us to do a more efficient job of producing a light bulb, for example, that would be a color that you or I might actually ever want to have in our homes.

A lot of these LED light bulbs, I don't know how many you've tried buying, but most don't put out a light color that is terribly pleasing, and 1 of the more efficient ways to solve that problem is by having a dual string, so 1 bright white string and 1 that is say amber in color, and blending gracefully between those 2 and that opens up a lot of opportunities to put out both more light and a light color that is more pleasant. Obviously, you have to be able to do that while being driven from the same dimmer, and we've got some IP that relates to how to do that very well within our digital EXL core. Anyway, so we feel like this is a really good direction for the Company, the progress is excellent, customer reception is excellent, we're dealing with some big players and some influential people in that market, so we feel real good about that.

Great, thank you. 1 final if I can. In the competitive landscape, are you seeing anybody else right now, that's kind of moving in on some of these new opportunities that you're talking about, and then also, if you could just address integration, I think that certainly starts to come up in conversations that we see, thanks.

New opportunities meaning for the LED stuff or across-the-board or what was the point you're trying to get at?

I guess just in general. It doesn't necessarily need to be tied to anything in particular but just you seeing anybody popping up, especially maybe on the portable audio side or even on the energy side, with the LED lighting controller because you mentioned some solid product innovation there, but are you seeing anybody that you really are going up against? Thanks.

No, I think in portable audio, we have some great opportunities in front of us and our job is just to execute. We think we've, it's never over until it's over, but we think that our job is just executing well and get the advice out and support them cleanly in their production and everything else will take care of itself. So no real concerns there on the competitive environment. Obviously, we keep an eye on everything but we're not too worried about that.

On the energy side, in particular for LED lighting, LED lighting is 1 of the most interesting opportunities in semis right now, pretty much everybody that can spell LED is trying to come up with an LED controller that will work well with dimmers, et cetera. We think we've got some IP that really differentiates our digital approach from the more traditional analog approach, but that market is going to be a fist fight, no question about it, so it will be an interesting thing to watch unfold. We've never participated in a market that grew from tens of millions of units to North of a billion units over 4 or 5 years, so that will be an exciting thing to be a part of.

Thank you. (Operator Instructions) Our next question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Hi, guys.

Hi, Chris.

Can you hear me?

Yes.

I have a couple questions. First 1 is really for Thurman. Thurman, could you give us an idea of how much of the operating expense guidance is due to tape out costs?

Well, I won't give a percentage of it, but there was a significant amount of tape outs this quarter, which is driving a piece of the growth that you're seeing. I mean, it was probably, I guess close to a third of the increase, but that's a guesstimate.

Okay. That's helpful.

On what the total is. It's in that area.

Okay, great. The second is, you guys are still planning on moving your location in the middle of next year. Can you just give us an idea of what your expectation is for operating cost savings, once that move is complete?

From a P&L standpoint, we'll be looking at something in the range of maybe a $0.25 million, but again, you got to finish you're talking about rent versus amortization and depreciation, so when we finally get into the building, we'll let you know what it's going to be, but it should be in that general range on a quarterly basis.

Got it, and the other thing was, you said in the letter that there were some designs ramping that you thought would happen in September and December that were pushed out a little bit. What are your expectations for those, and can you give us an idea for how your thoughts have changed there?

Well, so it's a number of things, 1, just due to either customers changing their plans or lowering their expectations for whatever reasons, some of them are a little more muted than they might have otherwise been, some of them frankly are tablets, and well, let's just say I'm glad we're shipping in the incumbent.

Okay, that's helpful. Thank you, guys, I appreciate it.

I just wanted to circle back on 1 thing that Thurman touched on. On an apples-to-apples basis, relative to the new headquarters, probably going in, we're thinking it would be a bigger cost savings than what it might end up being, I think Thurman's number he tossed out is probably about right at this point, but the thing to note is, our headcount has grown pretty substantially so we're having to scramble around, and make sure we're going to have enough places for everybody to sit, so--.

What I'm hearing is that your design activity is better than its pretty much ever been, essentially you've got some tape out costs and some growing pains but as we look 12 months out, we should see some of these starting to ramp. Some of them are already starting to ramp and your cost structure should probably stay at this level, or come down slightly over the course of the next 12 months?

Our operational expense you mean?

Operational cost structure, yes.

As a percentage, yes, probably so, but keep in mind, our model, things are not, it's not a nice and linear world, right? So our revenue, we more than doubled our revenue in the past couple of years and you can't lay in new headcount in a nice quarterly linear fashion relative to revenue growth, so that shot our operating profit frankly, substantially above our model, and it's just now that we've been able to catch back up to that, and we've got some extraordinary opportunities in front of us that we need to absolutely staff, and we're going to do what we need to do to make sure that happens.

Got it, and the last question I just have is just about the progression of the motor controller on the LED side. How long does it usually take from pre-production to production to see a normalized revenue ramp?

Well, we've never built an LED controller before so I'm not certain, but the expectation we've got is that device, the production from our customer, full production from our customer should happen kind of early spring timeframe and the thing about LED that's really interesting is it is just such a wild and wooly frontier that you can get as many opinions as you're willing to ask people, about what it's going to look like and what fraction of the market is going to need to be dimmable, what fraction of the market is going to care about color temperature, and everything else so it's an interesting area.

Are these in line with your typical gross margin profile, a little bit higher, a little bit lower? Can you give us a little bit of color on that?

Yes, we don't target getting into anything new that isn't going to be in line, at least with our overall margin target, so just our model is pretty simple and I think it makes sense for a North American semiconductor Company, we're going to need to have reasonable margins or it just doesn't make sense for us to get into that space, so we think we've got real good opportunities in LED, or motor control both, to do new devices that are supportive of the margin structure that we aspire to.

Got you, all right, thank you very much guys. I really appreciate the time.

You bet, thanks.

Thank you. There are no further questions in the queue. At this time I'd like to turn the call back to our presenters. Please continue.

Thank you, Operator. We're going to conclude the call today with questions that we've received via e-mail this afternoon. We've received several questions today, some of which I believe we've already covered in this session, so we're going to skip over those. That said, the first question we are going to address asks us about the change in format as far as our reporting of results this quarter. Specifically, what brought about this change?

Sure, yes, as a reminder, if you tuned in expecting to hear Thurman wax philosophic about the GAAP to non-GAAP reconciliation that we normally read you, we've posted things like that in a more efficient format in tables, et cetera, in the shareholder letter that you can find on our website. We really wanted to come up with a single document, where we can include charts and grafts and a lot of information that is helpful to our shareholders, and normally, we come up with prepared remarks, we read them into the phone, somebody off in the ether somewhere transcribes them into a transcript and then people read that, so we just decided to short circuit that whole process and put out the document directly.

Additionally, to be honest, we are really trying to drive some additional traffic to our investor web page, we've put a lot of energy into making sure that we have a lot of interesting information about where the Company is going, what's our strategy, what's the direction and what's our progress. You can find a lot of stuff out for yourself right on the website and we just kind of wanted to have a good vehicle to make sure that people take a look at that. So that in a nutshell is kind of the reason for the change.

Right, thanks. Moving to the P&L, Jason, or Thurman, can you discuss gross margin, in particular, we've seen some improvements since the March quarter when we had the production issue. Can you discuss where we are and maybe where do you go from here? What do you see going forward?

Sure. The big thing was the margin issue on a particular product this Spring as we said at the time, we expected incremental improvements in the June quarter and the September quarter which we've achieved and then essentially, the December quarter we're back to business as usual on margins. Our target is in the mid 50s that's going to move around a point or 2 quarter-over-quarter due to mix and a variety of factors but we feel good about being able to keep ourselves in that range.

Perfect. Looking towards Product Development, you stated earlier in the letter today that the Company is well positioned to capitalize on some extraordinary growth opportunities. You answered questions earlier about LED and motor control. If we look at some of these other opportunities, are you able to provide any color on those, and kind of put in the context of how it might diversify our revenue, or what your expectations are there?

Well, the diversification of revenue, frankly speaking, is likely going to primarily come from the energy product lines. We actually have quite a good customer diversity on the audio side but it so happens that 1 of those customers is just really on an unbelievable run and so I'm very, very thankful that they are our largest customer, and we'll work real hard to make sure that remains the case but obviously, we would like to have a well diversified revenue base as much as anyone, so we're heavily focused on making sure our energy investments are successful. We think LED lighting has got a great opportunity to drive that kind of diversification for us as that market grows to unit counts that are in the billions, and we think our technology provides a real meaningful advantage to folks that use it.

Great. A follow-up question to 1 earlier from the analyst on the expenses. Obviously seeing a ramp in R&D related expenses and you've gone to great lengths to highlight that. Could you just elaborate, are these focused on specific projects and where do you see heavily investing? Is it energy, is it a mix between audio and energy?

Well, obviously, we are investing in the energy area, and in particular energy control in a way that is disproportionate relative to revenue because we are trying to diversify that revenue base. The bulk of the additional investment over the past quarter or so really is audio and it is just trying to catch up with the extraordinary growth that we've had already as well as position ourselves to support the opportunities that we've got in front of us, and in all sincerity, my hat is absolutely off to the people that in our audio area that have driven this success.

They worked very, very long hours and made an incredibly difficult product line very successful, and ramping all sorts of new products with -- and done a really remarkably good job of doing so, so we need to make sure that not everybody is working until midnight every day of the week, and so that's kind of why we've put so much focus on the hiring and making sure that we're able to get new engineers in to staff the efforts that we want to see go forward.

Changing gears a little bit, got a quick question about the tax rate investors should be using when they're modeling our P&L statement, and the non-GAAP when they're trying to back out that non-GAAP tax expense.

The non-GAAP tax expense is at our federal rate, which is about 35%. The GAAP is 35%. The effective rate total is 37%, so there's a 2% GAAP, non-GAAP number.

Okay, thank you. Moving to the balance sheet, cash obviously down in the September quarter. Can you elaborate a little bit on where you're deploying the cash, and maybe just discuss expectations going forward, buybacks, investments, that type of thing?

Well, cash flow from operations this quarter was about $26 million. You saw that our tax, our actual cash number was down about $4 million or $5 million so $20 million went towards the buyback that we have not totally completed, but completed the majority of that, and there was another $10 million or that, $9 million or $10 million of that was associated with our building expense on the new headquarters.

Going forward, I think you'll see a similar pattern without, we have no buybacks, that we have additional buybacks that are approved, so taking that out of the equation, you could see a similar pattern. In addition, we can see ourselves investing in some capital equipment and other capital expenditures in order to help us improve our capacity access if that is needed and we will do so as necessary.

Perfect. Great. I think that's all the questions we have today, Jason and Thurman.

Okay, great. I'd like to thank everyone for your questions today. If you have any questions that were not addressed, you can submit them to us via our investor website. As always, I'd like to encourage you to keep track of things that are on our investor website, in particular, you're welcome to use the ask the CEO feature. We really do answer all of the questions that get posted on there, so I'd encourage you to use that. Thank you for joining us on the call today.

Thank you. Ladies and gentlemen, this concludes the Cirrus Logic second quarter fiscal year 2012 financial results Q&A session. We thank you for your participation. You may now disconnect.