Cirrus Logic Inc (CRUS) 2014 Q2 法說會逐字稿

Operator. Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic second quarter fiscal year 2014 financial results Q&A session.

(Operator Instructions)

I would now like to turn the 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 Chelsea Hefernan, our Investor Relations manager.

Today we announced our financial results for the second quarter fiscal year 2014 at approximately 4 p.m. eastern. The shareholder letter discussing our financial results, the earnings press release including a reconciliation of non-GAAP financial 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 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'd like to turn the call over to Jason Rhode, our President and Chief Executive Officer.

Thank you, Thurman.

Before we begin taking questions, I'd like to highlight a few of the things we discussed in our shareholder letter. Strong demand for our portable audio products drove revenue in Q2 above our expectations at $190.7 million, resulting in an operating profit of 27% GAAP and 30% non-GAAP. Design activity with our custom, semi-custom and catalog products gained momentum as we added additional customers and skews across several of our product segments. We continued to generate cash in Q2, exiting the quarter with approximately $309 million in cash or $4.57 per share.

Cirrus Logic's strategy of providing innovative products to leading OEMs has driven significant revenue and earnings growth over the past five years. To accelerate our strategy in portable audio, on October 1 we acquired Acoustic Technologies, a leader in embedded firmware voice processing technology. With a strong technology portfolio and a team of approximately 30 highly qualified audio and acoustic engineers, the acquisition increases our value proposition by combining our best-in-class audio components with sophisticated voice processing technology including noise reduction, echo cancellation and voice enhancement.

I would like to take a moment to recognize for the third year in a row, Cirrus Logic was named by the Great Place to Work Institute as one of the best 50 small and medium workplaces in America. We've worked hard over the years to develop and maintain a strong corporate culture and we believe this unique culture is a fundamental component of our success and contributes to our ability to recruit and retain talented engineers. I'd like to note that while we understand there's intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationship.

Operator, we are now ready to take questions.

(Operator Instructions)

Our first question comes from Tore Svanberg with Stifel. Your line is open.

Yes, thank you. I was hoping you could talk a little bit about your current visibility. I know you can't talk about your largest customer in a meaningful way. If you could just give some parameters so we can feel comfortable with your current guidance and also if you have any thoughts about the upcoming March quarter?

Well, relative to the current quarter, I would say that visibility is quite the same as normal. We typically come into the quarter with a good deal of backlog. That's one factor that we consider. Obviously, we get forecasts and outlooks and dialogue with our various customers about what things are looking like, supply constraints, et cetera. And so our guidance is reflective of our best estimate of what that might be.

We certainly don't have a crystal ball in this industry, especially that extends out from the December quarter into the March quarter just because there are so many variables that can be in play, holiday, inventory, who knows. So our job is to make sure we're well-positioned with inventory and everything else to be able to take care of our customers regardless of what the January quarter brings. In regards to the current quarter, I would say nothing unusual there in terms of our visibility and as it relates to our guidance.

Very good. And as a follow-up question, and I'm not asking for any near-term guidance here. As we look at the transition from audio to voice, could you maybe talk about where we are in that process? Do you have any meaningful exposure to voice today or is this something more to come in future years?

We certainly have meaningful exposure to voice in some of the products that we don't talk about so much. Really in a phone all of the voice in any phone that uses our stuff, typically the voice and audio all go through our products in some fashion or another. Obviously, we're trying to add additional capabilities to that as we've done over the past couple of years in the form of, for example, noise cancellation, which we ship in high volume. That is actually one of the most difficult problems in all of audio signal processing is acoustic noise cancellation so we're very proud to have that one under our belts. And then the Acoustic Tech guys -- one of the neat things about their technology is they're already shipping it with a number of customers.

Now, it's to date been a firmware algorithm that they're licensing to folks. And we think the combination of that technology with our world class IC design and components that we provide can make a combination that can cause that business to be meaningfully larger in the long run. In a number of different forms we're already shipping voice processing today and it's a vector that is very important to us as we go forward.

Very good. Last question, maybe for Thurman. Thurman, can you talk a little bit about what your inventory plans are for the December quarter?

Well, we're really expecting that inventory -- we ended at around $91 million for this quarter and that was down a bit. We're really see our inventory staying either flat or slightly down from where we were at the end of this quarter in December.

Very good. Great quarter, thank you.

Next question from Jeff Schreiner with Feltl and Company. Your line is open.

Thanks for taking my question. Jason, could you help us understand the difference between a semi-custom and a custom design win that you've referenced in the shareholder letter?

Sure. That's a good question. We put that in there as a little bit -- there is typically a fair amount of nuance when we develop a custom product for somebody. It's maybe shades of gray from an investor perspective. For example, we do a number of different arrangements. When we do a custom product for somebody it could be 100% custom for somebody, either maybe they pay us in (inaudible) or the customer is big enough that we're happy to have the opportunity to do it for them. But we also sometimes entertain other options, for example, a customer that is smaller but has some key insights into the market.

They want a product that's exactly the way that they want it and only what they want. And then that information exchange of hey, here's what we want is traded off where we can sell the device to other customers as well. That would be an example of something that we would call semi-custom. One customer specified it in detail and we certainly hope to sell that to them and then we additionally sell it to other customers as well. A fair amount of our automotive business, for example, has been developed that way.

And then can you talk about -- you referenced in the shareholder letter as well a customer win, but also you seem to be referencing around that commentary in different paragraphs some expansion into China. Can you talk a little bit about the expansion into China and maybe what the opportunity could be if that is in fact where the design win occurred?

Well, so -- trying to recast it for you a little bit. We have seen over the past year, I would say, an emergence of opportunity in a number of the portable audio and cell phone, in particular, guys in China as their business has grown and their product lines have diversified out to include higher end offerings. We've knocked down a number of design wins in that area that we're excited about. The opportunities are not as large in the near term as some of the existing design wins that we've got, obviously. But the neat thing about them is the expense to support them scales commensurately as well because they're typically with devices that we've already got in our catalog that you can see on the website, for example.

So it's really -- to date I don't believe to date we've done semi-custom or custom work for anyone in China. Typically, that for us requires a customer that's willing to work multiple years out in the future and think really, really long-term where, thus far the businesses in China that have referred in mobile phones has been more supported with the devices in our catalog. But nonetheless in other product lines, automotive for example, power meter is another area we've done custom and semi-custom devices in the past. Those are areas that we continue to invest in and see progress with our products in the marketplace.

Final question for me. When will Acoustic be accretive and how will it contribute to revenues? Can you give us a final purchase price?

We really haven't disclosed any of the financials associated with that. Obviously, it's baked into our guidance. It's not a huge acquisition. I would think of it much more as a technology acquisition. But nonetheless it did come with some revenue and more importantly came with the technology and the technologists that make it fly. It was not an expensive shop and you know, I think of it more as a technology acquisition.

Thank you for your time.

You bet.

Our next question comes from Vernon Essi with Needham & Company. Your line is open.

Thank you very much for taking my question. Wondering just to go back to I think, Tore's earlier question. Thurman, housekeeping point here, if we were to look at that inventory reserve and back that out for the quarter, would your gross margin have been in the original guided range pretty much more or less?

Yes. They would have been within the guidance that we originally gave.

Okay. Thank you. And then judy moving into bigger picture questions, switching gears to you, Jason. Congrats on the Acoustic Technologies acquisition. Obviously a lot of activity going on in the noise cancellation area as well as the microphone side of things. And of course, recently, ADI is planning, at least, to spin out that business or sell it too (inaudible). I was wondering if you can go through the differences there. Obviously, your solution is tied closely to the microphone. Do you see there being a domain expertise advantage one way or the other, and walk us through kind of the pros and cons of trying to go towards an integrated solution?

I guess I'm not 100% sure what you're asking there.

Let me explain it this way. If you look at where ADI was, the idea was they had this [Mins] microphone solution and of course there's other ones that are out there on the market. We're going to hear more about them probably next year. There is the thought process that the analog front end could be sort of incorporated to be more closely mated to that. And your solutions, I think you've proven, at least on the audio amp front, that you don't need to necessarily, you can take that signal and process it on your own very effectively. And I'm just wondering if that, at the customer level, has really made any difference in how people are looking at these solutions?

Well, it's certainly a technology trend over the long-term to keep our eyes on, that being digital mics. The bulk of the mics that are shipped out there today are analog. We work with both. And the way we see it, a key part of the value proposition in the long run is really more the signal processing that goes with that whole audio chain starting at the microphone and ending at the speaker, but there's a lot of opportunities in between those two things. And that's really where the sweet spot of the value we add is.

In some, that's the nature of the game in any sort of analog or mixed signal market is that at any given year some fraction of what you do goes into a different device. And some fraction of the IP that used to be provided by others comes back out onto the analog domain. So we see it as -- overall, we see it as an expanding opportunity for the technology that we ship and we work with everybody out there that makes microphones. But typically, we see them, historically have been a little bit more of a commodity type of product rather than a real design-in-type device. It's something we've certainly got our eye on. If it provides a good opportunity for us to look at that later, we'll do that.

And then just moving over to LED, congrats on the incremental customer there. I think it might be an understatement to say it's probably a missionary sell, so to speak, to get newer customers on board. Should we look at this as being, perhaps will the next one be a quicker timeline between first and second wins, from second to third, or is it still kind of a long process behind the scenes?

I think LED provides a tremendous opportunity. It's a great opportunity for our technology. We've got good products. We feel like we've got the best performance in the industry. That market remains very traditional, inch deep, mile wide type business because it's so fragmented. There's a small number of players that ship a ton of light bulbs.

But each one of those -- it's really more a space where a big name brand -- their volume is made up of a shipment of a really large number of skews and each one of those are design wins we have to go get individually. For us, it's an exercise in having the best product, having it be easy to design in, having great collateral that goes with it, having a team that knows how to promote it so that we can go after that market efficiently. Because it is quite different than the portable audio market where there's a small number of design wins that make up the bulk of the revenue. I think our progress there is good. I think there's a lot of new products going to market over the next while, that we've done a good job of getting designed into. But it is definitely a business of base hits and we're just trying to position ourselves to take advantage of the benefits that our technology brings.

And taking that one step further, you had characterized the market, as you said, fragmented. The long tail is still very much alive and well. It's been a parade of head developing with a lot of high volume runners that you feel are taking the market by storm. It's still very much of an inch deep, mile wide as you characterized it?

Yes, I think it's still very much an inch deep, mile wide. There are, obviously, some opportunities that are bigger than others, and we think we're well positioned over the long-term to do well on those accounts. But, you know, it's a relatively low ASP kind of a product. It is a business where we need to aggregate up a bunch of volume from a lot of design wins to really have it turn into the business we want to see.

Thanks for taking my questions.

(Operator Instructions)

Our next question comes from Christopher Longiaru with Sidoti & Company. Your line is open.

Hey, guys. Congrats on the results.

Thanks, Chris.

My question has to do with these new customers. Typically with your larger customers, you have an ongoing engineering relationship and your visibility tends to be pretty good, relatively. With these new customers and these catalog parts, can you talk a little bit about how your visibility is different and how you're managing that business differently?

I think it's more typical of the semi-conductor industry in general, or more typical at least of the analog mixed signal space, in general. Certainly, when we do a custom device for somebody, obviously we get a lot more visibility and a lot longer term kind of stability, I guess you would say, out of that, which is a great thing. But frankly, it's not the easiest thing to find customers that are big enough to warrant custom development all the time. So we have to maintain a portfolio of competitive catalog products so that we can go after some of these other guys.

Number one, it's good business. Number two, it's a good way to keep our eyes on the horizon and make sure there's not something coming out of nowhere that's going to surprise us down the road. In terms of support, we've been in that type of business for longer than I've been in the Company so there's nothing really new there. But it is new that there's more opportunities in portable audio that fall into that category that are worth chasing after.

And switching over, on the LED front, I'm sure you know there were some announcements from different entities. Walmart has a whole line of LED bulbs coming out, they're around $10. Do you have any expectations for how, the price coming down that much, is affecting you? Can you comment on relative expectations for the LED business going out into the next couple of quarters?

Yes, like I said earlier, our focus is on trying to unearth as many opportunities as we can find and try to win as many of them as possible. And then separately from that, the market opportunity, I think you're right in that I think that $10 is a pretty significant price threshold. We tend to think in black and white and it's definitely shades of gray, but there's no question that I think the notion of a consumer doing an ROI calculation to figure out if they should buy a $30 light bulb or not is kind of ridiculous. What are you going to do, make sure the light bulbs don't convey when you sell the house? The idea is silly. The prices need to get down in that $10 and $5 range.

The other interesting dynamic that we've seen is there's not a lot of point in a utility or a municipality, for example, subsidizing a $30 light bulb by $5 because it doesn't really make that big of a difference. But if you get down in the $15 and $10 range, then we do start to see subsidies kick in because they can move the needle on consumer behavior. It's interesting. It's certainly one of the most interesting market dynamics that I've ever gotten to participate in, in that we've got a lot of players that are well established in the lighting market, but suddenly they're faced with the marketing challenge of marketing a highly differentiated, very technical product that is anything but a committed commodity from a performance perspective. And that's mixed with new entrants and folks that come at it from a much higher tech point of view. It's been kind of a remarkable confluence of folks that might ultimately be our customers jockeying for a position in the marketplace and maneuvering it to where it will ultimately end up being.

So it's been an interesting thing to participate in. We've continued to see it as a good opportunity for Cirrus. We think, again, our technology is positioned extremely well. But as you can imagine, and as we had no illusions going in, in the first place, it will definitely be a price competitive industry on account of its sheer volume. We need to -- unlike a lot of markets that we participate in where our chip fits into a well-defined system. In a light bulb, typically the LED lighting chip defines the whole system.

It's often the only IC in the light bulb, coupled with a small number of power devices and some magnetics, et cetera. So in that, it's a very different marketing challenge because our chip essentially defines what a customer's bill of materials is, the electronic bill of materials for the components. It's definitely an area that is very involved from a product promotion to customers point of view, technical capabilities of the devices, what parts do they pair it with, how do those price out in different markets? There's a lot of really interesting market dynamics there. And again, we like our opportunities in the long run.

Great. I'll jump out. Thank you, guys.

Thanks, Chris.

Our next question comes from Blayne Curtis with Barclays. Your line is open.

Good afternoon, guys. Going back to the first question on seasonality -- last year your business was down about 30%. I think we've heard from other suppliers this seems like a fairly normal year. And I know you had some better visibility last year. I was wondering if you could just comment -- and I know it's hard, and it depends on sell-through, but given what you have today, if you had any more granular thoughts on Q1 seasonality?

I really don't, it depends on so many different things that I'm not going to get ahead of myself and try to prognosticate what consumers are going to do this Christmas, and what's going to launch and all of that good stuff. Given all the dynamics involved, I feel pretty good when we're able to be close in the existing quarter -- in the current quarter. This one in particular, there's so many variables in it and that's why we typically only give the current quarter's guidance. From a bigger picture point of view, we feel very good about where we're at. We're doing all the right things in terms of winning designs and maintaining our presence with the customers. Obviously, I get it that what any one particular quarter might be is of intense interest to the investment community, but it's not how we manage the business. We need to be doing the right stuff for the long run, because that's the part that we've got any control over. That's where our focus is.

Got you. And maybe one for Thurman. The benefit in the September quarter from the written off inventory -- is that all of the written off inventory has now been sold or is there still more reserves?

We're not breaking all of that out, but we still have inventory reserved. The numbers -- you can kind of do the numbers from what we originally talked about as being the reserve that we took in the beginning and back into the numbers where it is now. There's still some left. We don't expect a lot of that to move in the future but there is still some left on the books.

This may be a dumb question, but is there any benefit in the December quarter?

It's not going to be of any significance.

To put it a different way, everything that we know about is baked into the guidance.

Okay. And then just on the Acoustic acquisition, there is 30 employees and it's been around for a while. Is there any way that you can -- I know you don't want to give exact revenue number, but is it insignificant like a few million or is there a greater revenue base there? If you could just broad strokes, that would be helpful.

If it was a greater revenue base, there would probably be some regulation where we had to tell you about it.

You do several $100 million a year, so the materiality --.

Yes, I suppose that's a fair point. There's a variety of reasons we don't get into the details of it. It's not a giant number. I'll at least tell you that much. And the outlook for it is baked into the quarter. But again, I would think about it more as a technology thing. They do have good technology that's shipping with a number of people, but our goal is really to monetize that by combining it with our devices over the long run.

We're certainly going to monetize their existing business with existing customers to the best extent possible. Actually, one of the neat things about the acquisition was that there was really a perfect combination of our customer base in that they had customers that we don't currently have. We had customers that they don't currently have and then we had an overlap of customers that we're jointly doing business with which gave us good visibility and the kind of people they were and the technology that they had. We think that what they're doing can pull through some of our hardware, we think what we're doing hardware wise can pull through some of their software in new accounts, and we think we can grow the business that we're already jointly in over the long term. It really doesn't line up a whole lot better than that when you look at these things.

Okay. Thanks, Jason.

Sure. Thanks, Blayne.

(Operator Instructions)

Our next question comes from Erik Rasmussen with Stifel. Your line is open.

Great, thanks. Maybe if we can switch gears, automotive has been kind of a bright spot in an area of focus for you guys as you look to diversify your signal processing capabilities. Can you give us any color on where you're at with automotive and comment on where you are with some of the other areas such as home applications, set top box DVDs?

Automotive is just a fantastic market for audio in that automotive itself has grown, and the infotainment packages in automotive are getting more elaborate and propagating down the product line quite rapidly. It's not a huge percentage of our business today, but it is an area we've been investing in. Typically, in the past, what we have been a part of is really more of what's referred to as a DSP amp. For example, it might be an upgrade option from various different companies. You go buy the car and maybe you choose the upgrade package to get the fancy audio system and there's a box somewhere under the driver's seat or in the trunk that's got some of our devices in it.

That's a good business for us, we've invested in it, we'd like to see that grow. Longer term, I think, both in automotive and in the home, a lot of the technologies that we've developed and are continuing to develop for portable audio are going to become -- are going to find their maturity in the mobile space just because it's a nice self-contained system. But as they do, some of these technologies are very applicable to automotive and home. For example, the beam forming technology that we have got with Acoustic Tech. Because we boil that down into a simple hardware product that what they say in marketing is a whole product that is easy for a customer to design in without having to wrestle with a software provider, a hardware provider, et cetera.

As we boil that down to a simple hardware product, we would like to see, for example, beam forming echo cancellation and other kinds of voice technologies propagate their way into applications. Such as automotive or home audio where they can add a lot of value once they've really been wrung out in the mobile proving ground. That's some of the stuff that we see happening in automotive in the longer term. In the short term, it remains a great business for us and we're certainly investing in it.

Thank you for that. Maybe just one last one. On your DTAs, any update or progress in reducing your tax liability once those DTAs are fully depleted? I know you've talked about that in the past. I want to see if you have any update? Thanks.

We really don't. It's something we continue to investigate. We're looking at a lot of options. We would really like to get our tax exposure as low as possible, but at the same time, the key balance for us is making sure that we don't impact the abilities that we've developed as a company to be nimble and support our customers well. That's obviously the highest priority for us and a lot of the easier things, a lot of the lower hanging fruit that used to be available -- a lot of the countries that were havens for that sort of thing have changed their rules or made it more difficult or more restrictive to start that kind of operation. We're still looking at it. For now you should just model the basic tax rate and if we make any further progress on that, then that will be upside.

Thank you. We show no more questions at this time. I'll turn it back to Chelsea Hefernan.

Thank you, operator. We will conclude the call with questions that we've received via e-mail this afternoon. The majority of the questions were addressed in the Q&A session however several questions were not asked. The first question. In the June quarter, Cirrus did not repurchase shares due to certain restrictions. Can you provide more color as to what is considered meaningful enough to restrict share repurchases?

It's a good question and one we get a lot. I wish there were more of a bright line test for what was material and what wasn't. It ends up being a discussion between the board, Thurman, our legal counsel, as to are we aware of anything that we haven't disclosed on an earnings call that a shareholder would find material. And certainly at some threshold we just decide that there's enough information floating around out there that we haven't been able to put out and that causes us to decide to sit on the sidelines on the repurchase.

We were to get back in the market in August and repurchase some shares. We see that as a very good way to return cash to shareholders. We've taken off a pretty significant percentage of shares of the Company, just even in the past year, let alone if you rewind the clock back to say, 2008. We have another 100 million or so remaining on the existing operation and it's something that we continue to expect to execute on from time to time depending on the market conditions.

Great. The next question -- What is your long-term operating profit model and how should we think about it on a quarterly basis?

Our expectation, as we've highlighted in the investor presentation and other places -- our expectation is over the long-term, to be able to maintain an operating profit in the 20% range. Obviously, we're in a seasonal business, things vary quarter-on-quarter from a revenue perspective and it's not prudent to manage a company of this sort, manage the expenses, on a quarter-to-quarter basis just because it tends to be things like, say, people. And it takes a very long time to build up the expertise that we've built up and to serve the markets that we serve.

By nature we have to manage our expenses from long-term perspective. So you can certainly expect to see variations quarter by quarter, depending on what the revenue is doing. Some quarters, like for example, this past quarter, we expect to be well in advance of that model. And other quarters, just by nature of things, if we're averaging 20%, other ones will be lower than that. Our expectation, though, in long-term on average is right around 20%.

Thanks, Jason. The final question today. We had several investors submit questions regarding the class action lawsuits. Can you please provide an update?

Unfortunately, we can't comment on ongoing litigation but we are optimistic about the outcome of that lawsuit and we expect to continue to vigorously defend the Company.

Great.

In summary, we are pleased with our Q2 revenue, operating profit and earnings per share. During the quarter, we continued to ramp our custom and general market portable audio products, we added new customers and we expanded into more skews with existing customers in both audio and energy. In keeping with our business model, we will continue to make strategic R&D investments in markets such as voice processing and LED lighting, where our signal processing expertise and ability to deliver innovative, cutting edge products are expected to contribute to future growth opportunities. As many of you may have noticed, we revamped our investor website in late July. We recently added four new videos which I would like to encourage you to check out.

I would also like to note we will be attending the Goldman Sachs conference on November 14 in New York City and the NASDAQ conference in London on December 3 and 4. We hope to see some of you there. If you have any questions that were not addressed, you can submit them to us via the Ask the CEO section of our investor website. I'd like to thank everyone for participating today. Good bye.

Thanks for participating in today's program. This concludes the program. You may all disconnect.