Cirrus Logic Inc (CRUS) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic third 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 up the call for questions from analysts. 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 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 third quarter fiscal year 2012 at approximately 4 PM Eastern.

The shareholder letter discussing our Q3 financial results, the earnings press release, including a reconciliation of non-GAAP financial information to the most directly comparable GAAP information, along with the webcast 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.

Please note that 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.

Now, I would like to turn the call over to Jason Rhode, our President and Chief Executive Officer. Jason?

Thank you, Thurman. Before we begin taking questions, I would like to highlight a few of the things we discussed in our shareholder letter. First, Q3 was a great quarter for Cirrus Logic. Revenue exceeded the high end of our initial expectations by 13%, as the last few weeks of the quarter were much stronger than we had anticipated. We have strong backlog heading into Q4, which has allowed us to raise our expectations from $105 million, to a range between $108 million and $112 million.

Second, I'm pleased with our operating profit performance. While we're continuing to hire engineers to staff new R&D products, we remain focused on prudently managing our operating expense and driving operating margin performance. Finally, we are excited to enter the March quarter with production quantity backlog for our new digital LED lighting controller. We are working on second generation devices, and are promoting these products to several additional lighting companies.

Operator, we're now ready to take questions.

(Operator Instructions) Tore Svanberg, Stifel Nicolaus.

Yes, thank you and congratulations on the results. First question, you mentioned the strong backlog led you to up your guidance for the March quarter. Could you talk a little bit about where that additional strength came from?

I would say it is across the board. Normally, we don't give guidance out as early as the timeframe that we pre-announce. And that happens to be a portion of the quarter when we do lay in a fair amount of backlog. So it just amounts to us going through business as usual and us getting a lot more data. And that gives us a little more confidence to be able to up that number. There were a couple of specific items in there but not at the level that I want to break out.

Sounds good. And you probably don't want to give us the numerical backlog. But just qualitatively speaking, can you talk a little bit to that backlog? Maybe how that stands relative to last year and maybe the year before?

It's very strong. It's very supportive of the numbers that we put out there. It's consistent with levels we've seen in the past. The one challenge that I will give you is that the levels of business that we are doing, and you can imagine what our customers go through as they try to figure out their guidance. It's hard to figure out when the average guy on the street is going to walk in to the department store and buy a new stereo or whatever. We frequently see revisions. Customers can pretty easily push backlog out or pull more backlog in towards the end of the quarter. It's one of the reasons that we don't like to completely hang our hat on exactly what the backlog is because there is a lot of nuance that goes into that, as well. But anyway, nonetheless, it's very strong backlog for what we're looking at, at this point.

Very good. And on operating expenses, as you've been saying for a while now, you're really trying to up the R&D and hire more engineers. Based on your March quarter guidance, is this going to be the run rate going forward? Or should we expect any more step functions either way?

I would expect it to continue to go up, at least for a while. We're not anticipating slowing down on the hiring. In fact, we're still in a mode where I can't imagine us catching up on the engineering functions to where we'd really like to be.

Very good. And could you talk a little bit -- maybe a question for Thurman -- what your inventory plans are for this quarter? Obviously it was up nicely in the December quarter to support the growth. But just what your plans are here for March.

Yes, and as a note, I think we expected inventory to be a little bit higher leaving this quarter. But because we saw some strong activity towards the end of the quarter, it was actually a little lower than we expected. We would say that next quarter is going to be generally in that same general range that we ended this quarter.

Okay. Last question. The LED controller that is in production this quarter, how should I think about that for the rest of the year? Is this going to be testing the waters and seeing how successful you are? Or should we actually see some meaningful revenues this year from that business?

I guess it always depends on what you expect by meaningful. For us, we really think the value of what we are doing this year in LED is really validating that we're on the right track, we're engaged with the right customers, the market is really going to take off. So, in terms of meaningfully differentiating our revenue, I don't think that's a 2012 statement. But, still, forecast-wise, our guys are looking at shipping somewhere in the five million to 10 million unit range this year, which I think would be just a stunning start in that business. And I think, if I look back at history, I think that's a faster start than we got even in our portable audio business.

Yes, that's meaningful in my book. I'll go back in queue, thanks.

Vernon Essi, Needham & Company.

Congrats on the results and strong guide here. Certainly one thing that stands out here is the gross margin guide seems unusually strong. And in your prepared letter to the shareholders, not too much detail as to what's driving that. Just wondering if you can elaborate a little bit on that front?

Yes. First and foremost, a shout out to all of our people that work on that. It's a lot of energy and effort that goes into maintaining those kinds of margins, whether it's through test time reductions or negotiation with our vendors. Or from the engineering team point of view, probably most importantly, coming out with new products that expand our value to the customers that we serve. If you continue selling the same old part year after year, it's not especially good for your margins or your ASP. So all of those functions have gone pretty well, and hopefully, they will continue to do that. Specific to this quarter, though, we do have a couple of items in there. We've got a couple of specific orders on some of the older industrial products that give us a little bit of a lift there. But as we've said, we expect our margins to remain in the mid-50%ish range. Again, they can move up or down 1 point, or 2 points even, as quarters go on, just based on mix, but we feel pretty good about that range. And again, that's due to a lot of hard work by a lot of folks, and then a couple of specific orders falling in this quarter.

Okay. And then in terms of talking about the mix a little bit, you did provide some color on the audio business declining, of course, the March quarter, which is typically seasonal. Is there any color you can give us on the portable side versus the rest of audio and how that may look on a sequential basis?

Certainly within audio, portable, we would expect to see a little bit of a sequential decline, as well.

Okay. And then just another small point here. But I noticed this investment agreement with [Seth Chepek] on the production side. If you can give any more details on that and what that entails and how that might fit into your strategy this year?

Yes. We've been hard at work developing a lot of opportunities. We think we've got some extraordinary things in front of us. And at this point, Cirrus is probably one of the highest volume suppliers of devices in a wafer level chip scale form factor. And at that phase with some of the things that we're looking at coming down the pike, we really wanted to make sure that we had sufficient capacity to support what we see coming during this year. So, that was why we went through that. It is a little bit abnormal for us to do that. We felt like it was necessary at this time.

Obviously an encouraging sign.

Ought to be, yes.

And then finally, this is a question on virtually any company in your space. And even a larger analog company this evening had the same sort of issue with the distribution channel being incredibly lean. And I've noticed your largest customer there is dropping rapidly. What's your take on this behind-the-scenes, your discussion and dialogue with your end customers? And also the distribution level? How long is this going to go on? Do you see any signs that things could actually turn here? Or do you expect this to be a flattish environment on that front?

I'm sorry, I'm not 100% sure I understand -- I maybe missed a part of that. You're talking about when we would expect distis to start being a little more optimistic? Maybe carrying a little more inventory and that kind of thing?

Absolutely. Your revenue into your largest distribution there dropped significantly. And it seems to be operating at a very low level relative to historical norms.

Certainly, more and more of our business is going direct, either with our largest customer or specific to our strategy of targeting strategic accounts and partnering with them. It's not true that that larger, strategic customers would never go through a distribution, but generally speaking they don't. Specific to our largest distributor, which is Avnet, frankly it's not a material concern for us from a revenue point of view due to the fact that we recognize the bulk of the revenue with Avnet on a sell-through basis. So even if they do manage to get real high on inventory, it doesn't impact our earnings. I've certainly seen a lot of chatter about disti inventory of late, and I don't usually pay too much attention to it because it doesn't have a huge impact on us. Unless they don't have enough of it, in which case it makes for a lot of headaches for us as we scramble around trying to fill orders at the last minute. But generally speaking, it doesn't seem to me like it's going to be all that bad of a year from a broad environment point of view. And then, of course, we're obviously a lot more specifically focused on our own situation. And much like we've done in the last two years, I think we're pretty well-positioned to continue to outgrow the industry by a pretty good clip.

Okay. If I could just follow on here quickly on at least the energy/industrial side. It sounds like you've seen some more direct business come in. But the general tone of that business that you usually get just through the channel has been relatively static, is how you would probably describe that?

Yes. I would say from a broad point of view. We've got a number of unique product lines, whether it is seismic or whatever all else, that can come in, in pretty discrete lumps. And sometimes that is either outside of the distribution channel or it's arranged through a distribution channel. But the distributor touches it for a few days and it's really more of a logistics issue than it is a holding inventory issue. In particular, in the older energy lines, we really don't want to have a lot of inventory sitting in the distributor channel. It just tends to confuse things.

Okay. All right. I will go back in the queue, thanks.

Jeff Schreiner, Capstone Investments.

Jason, or Thurman maybe, how should we classify this LED ramp? And are we looking at a ramp where this calendar year it's actually ramping and steadily going? Or is this thing going to gain in terms of its overall contribution fairly quickly in the overall business? Or at least in the overall non-audio business?

Yes. I think like we mentioned earlier, the guys are shooting at a number that is in the five million to 10 million unit range. Which I think would be a huge indicator that we are on the right track and our products are really pretty remarkably superior to what else is out there. But, that's, I think, I hope, certainly the reason we are investing in it as heavily as we are, is we hope that that is the tip of the iceberg as far as the LED lighting market is concerned. To me that would be a great sign of success if we can ship units in that type of volume right out of the gate. And then capitalize on a very large and growing market over the next couple of years. I continue to think that that's our best opportunity to differentiate our revenue in the long run.

Okay, thank you for that. And what's normal seasonality coming into the March quarter? And relative to guidance, maybe if it's weaker, is it really weaker due to the non-audio business still struggling around? Or is there maybe the non-portable business in audio has also obviously seen some seasonal corrections. But are those two greater than normal? Or where are we relative to seasonality with the current guidance?

I don't even know what normal is anymore. It's been so long since anybody in this space had a normal year. And then on top of that when you lay in, really for us it's much more of a product cycle story, and a new product introduction story. So seasonality is certainly an interesting little wrinkle that makes it even harder to forecast. From a seasonality point of view, we typically see the bulk of the audio product lines experience a pretty good hit. Sometimes that is offset with new product introductions. Some of the energy products, semi-cap equipment is not expected to go into a great strong streak right now. That's some of their products from our Apex Precision Power line are -- sell into that space. So that's an area down a little bit. But, that's the color. I would expect automotive to continue to slowly climb its way out of the hole that it's dug itself into a few years back. We've invested in that space and we think we are taking some share there. So, again, that's more of a product cycle story than it is a seasonality thing.

Okay. And final question from me. You talked about how you felt possibly gross margins could, if I understood correctly, Jason, that gross margins could stay relatively in the mid-50%s or so because there may be some industrial benefits down the road from new products. I would assume maybe LED or the brushless motor. But is the March quarter, in terms of gross margin improvement, that you're forecasting, is that happening on a non-audio basis that the benefit is coming from?

I would say that's probably a fair statement. One of the bigger items in there is definitely a favorable mix of some of our higher-margin energy products. And certainly, we do hope -- we're spending a lot of money and effort to develop this LED lighting business. And I think there's good opportunities there that some of that business can be supportive of the margins that we'd like to see. So hopefully, that business grows, that helps us a little bit. I think we've done a very good job in portable audio but portable does tend to remain below our corporate average a bit.

Okay, thank you very much, gentlemen for taking my questions.

Rick Schafer, Oppenheimer & Co.

This is Shawn Simmons calling in for Rick. Just a couple questions focusing on the uptick in a couple of the orders on the energy side. Is that coming from your seismic business? And if so, how material is that going to be? And I know it is tough to forecast going out a quarter, but would you expect that business to fall off in the June quarter? Possibly cause some slight headwind? Or, how do you see that?

Yes. A couple of things that we've seen in there are specific to Q4. So, we'll call it Q1 of next fiscal year when we see it. I gave up forecasting that business. There is some seismic in there, a couple of other little things. From an ongoing business point of view, it's neither here nor there.

Okay, great. And then I just want to clarify, on the LED ramp, the five million to 10 million shipments that you guys expect to ramp over the next year. Is that with one customer, or is that with multiple customers?

There's one in there that could hit that range. There's a couple other ones in there that might start to phase in, in that timeframe. So that's why. Five million to 10 million is a pretty broad range. So it really depends on people's ramp timing, does it launch one quarter or the next quarter or whatnot. The lighting market is really pretty remarkably fragmented. Any one manufacturer of light bulbs has got a really large array of different models. So, even when the customer is really enthusiastic about designing us in, our expectation is it takes quite a while to penetrate a broad range of their light bulbs.

Okay. And then what sort of ASP do you guys get on that product?

It's ballpark of $0.50, depends. One of the newer products that we are putting the finishing touches on right now is a two-string controller that's got some interesting properties for being able to make a light that is both bright, as bright as you would want it, and a pleasant light color. Which seems like a novel idea. As well as being compatible with the dimmers that are out there. And that function is a little more valuable so hopefully we can see a little higher ASP on that one.

Okay, great. And then switching gears to the audio side of the house. Have you guys started to see any traction outside of your largest customer for Tier 1 handsets for smartphones?

It depends on what you mean by traction. We're having more interesting discussions now with the development of -- we've got the DSP that we've had there for a while. We've talked to a number of folks about enabled functions like echo cancellation, noise suppression, things like that. And then we're working on some other new stuff that we think might broaden our appeal out. The trick is, that historically, the bulk of the audio performance value that we provide is things like noise performance and dynamic range, THD, things like that. And in order for one of our customers to get a lot of value out of those functions, they need to really be targeting differentiating on audio quality, making a premium audio product. And, really, to do that, you've got to have a dock connector on the bottom of your phone. And frankly, there's really only one of those out there that matters, and that happens to be the one we're in. So for us to really provide the kind of value that we like to provide, we need to broaden our appeal out past traditional measures of audio quality. And so that's why the focus on things like noise suppression, echo cancellation, noise cancellation, make good speakers louder and whatnot. So, we've got some new products in the works we think that will give us further opportunities outside of the handset we're in today. But that's a little further down the road still. That said, the DSP that we talked about, we've talked about in the last couple of calls, has definitely continued to get traction. Various different tablet folks, the Visio guys launched a tablet last summer. It's been an interesting thing to have conversations around other product lines, as well, headsets. And then it launched in a line of camcorders from Japan last quarter. So that's an exciting thing to see as well.

Okay, great. Thanks, guys. Congrats on a good quarter.

(Operator Instructions) Christopher Longiaru, Sidoti & Company.

I'll add my congratulations on the quarter and the guidance. So, first off, can you comment on just the ASP situation? It seems like you haven't had much pressure at all. Can you make a relative commentary about any pressure? And also, as it's tied to the inventory levels that you're seeing, both in-house and outside?

I would characterize it a little differently. I can see why it would maybe look like that from the outside. No, I would say that the bulk of our customers, especially the Tier 1 accounts, typically have a very fine stable of purchasing folks who I would say do a very thorough job of making sure they add value for their employers. And making sure our prices are fair and whatnot. Hi, if you're listening. But the real thing for us is making sure, like I said earlier, that we're introducing new products that continue to add value. We don't want to be in a position of having to sell our customers the same products year after year after year. There is aspects of that that are nice. But, in particular, in a growing business where there's a lot of new value to add, portable audio is really nice because we're able to revise the products pretty frequently. Add new features, new functionality, help our customers drive their bill of materials down. And in the process, in some cases, drive our ASPs up. So, while looking from the outside, really enough visibility to see what happens there. Certainly there is price pressure. And I think our supply-chain folks have done a very good job of responding and passing some of that along to our suppliers. But that is a challenge, for sure. But the largest way that we're able to offset that is by introducing new products that continue to add more value. Then everybody wins.

Got it. That makes a lot of sense. And this one is for Thurman. On the tax rate, it's been a little bit higher the last couple quarters than we had modeled. Can you give us some guidance on what we should model going forward?

From a general standpoint it runs right around 2%.

So that's what we should be modeling going forward?

I would say going forward between 2% and 3%, yes.

Great, that's all I've got for now. Thank you guys. Congratulations again.

Tore Svanberg, Stifel Nicolaus.

Yes, I just have two follow ups. First of all, you said you're going to get some mix benefit this quarter from industrial. I was just wondering if that's related to LED? Or is actually your seismic business coming back?

No. These products are more in the geriatric category. Once LED starts to ramp, we wouldn't expect that to be in a one-time lumpy fashion. Fortunately, unlike some of our older industrial businesses, LED lighting is more of a design-in and razor blade, hopefully, model where people are ordering more and more, that goes on.

Sounds good. And just to clarify, when you talked about the DSP, did you say that it's actually ramping with more than one customer?

Yes, we have multiple customers that have shipped it in production. Probably the most notable to date from a volume point of view has been the Sony camcorder design, we talked about in the shareholder letter.

Great, thank you very much.

And since you mentioned it, that is a perfect example, textbook example, of our strategy, the way we like to see it unfold. Our marketing team uncovered an opportunity in Japan years ago, using a standard audio codec that we already had with that account. Showed it to them, they liked it a lot, asked us to do a custom version of that for them that incorporated some of their IP. We did that a few years ago, that shipped in media player devices. And that's really broadened out our relationship there and given us new opportunities. When you do a good job of taking care of a big customer like that, you start to get more of an advantage in terms of getting a good look at new opportunities. So, something we had as a catalog product grew into an opportunity to do a custom product. And that grew into an opportunity for a whole other product line, which is our DSP. So, everybody involved on the Cirrus side, from the sales team to marketing to engineering and supply chain, all really executed well enough to make that one happen.

And I'm showing there are no further audio questions at this time. I will now turn the call back to management for any remarks you may have.

Great, thank you, Operator. We've got one question from a shareholder that was submitted online. We had a number of other ones that were submitted, but I think we've addressed all of those in the call already. This question comes from a shareholder in St. Louis. Asking if you could address the difference in lead times for producing our audio products and our energy products. Specifically asking how quickly can you turn an order around, book it, ship it, and recognize revenue.

It depends on a number of things. Package, in particular, and then also wafer process. So, if it's an older product with 0.35 micron or something like that, it turns out the wafer processing is very quick. And then, as well, the packaging. If it's in an older leaded package, that can be as short as a couple of weeks for the package and six or eight weeks for the wafer fab. Whereas a more advanced product, it's maybe flip chipped onto a substrate or something like that, could be as long as 16 weeks. So it really depends more on the technology involved than it does the product line. But at the end of the day, we try pretty hard not to be -- we're fortunate we have the asset of a fair amount of cash and we've been in business for a long time so we don't have to play that card too close to the vest. We like to keep a reasonable inventory so that our customers can capitalize on whatever upside they might see. But, so does that feel like the right thing you were going for?

I think that's all the questions that we have.

Great. I would like to thank everybody for the questions today. If you have any questions that were not addressed on the call, you can submit them to us via the Ask the CEO section of our investor website, as well as by e-mail. And I would just like to thank you for joining us on the call today.

Ladies and gentlemen, that does conclude our conference call for today. We would like to thank all of you for your participation and you may now disconnect.