Cirrus Logic Inc (CRUS) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Cirrus Logic fourth-quarter and full FY14 financial results Q&A session.

(Operator Instructions)

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 Chelsea Heffernan from our Investor Relations organization.

Today we announced our financial results for the fourth quarter and full FY14 at approximately 4:00 PM Eastern. The shareholder letter discussing our 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 with this Q&A session, are all available at the Company's Investor Relations website at investor.cirrus.com. This call will feature questions from analysts covering our Company, as well as questions submitted to us via email 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 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. Jason?

Thank you, Thurman.

Before we begin taking questions, I'd like to make a few comments. For a detailed account of our financial results, please read the shareholder's letter posted on our Investor Relations website. We believe Cirrus Logic is uniquely positioned to be a leader in the portable audio market, given our expertise in analog and mixed signal processing, extensive intellectual property portfolio, and ultra-low-power components.

Further, the Company's ability to deliver innovative products and effectively manage its supply chain has helped build and maintain excellent relationships with some of the best companies in the world. With cutting edge hardware and our embedded Sound Clear software, we are leveraging our engineering expertise to develop custom and general market audio subsystems that intelligently solve system design issues, resulting in a reliable and compelling user experience.

This past year the Company expanded its footprint in portable audio with the addition of several leading international smartphone OEMS. With an extensive pipeline of advanced node products focused on audio and voice applications, and strong customer relationships across the portable audio market, we are poised to capitalize on these exciting opportunities over the next 12 to 18 months.

I would also like to note that, while we understand there is intense interest related to our largest customer, in accordance with our policies we do not discuss specifics about our business relationship.

Operator, we're now ready to take questions.

(Operator Instructions)

Vernon Essi, Needham and Company.

I wanted to just switch gears a little bit off of portable audio, and Jason, obviously a lot of development work taking place there. In the past, you've discussed other opportunities for voices and interface, and you always brought up the Jetsons-like style and whatnot. And there have been a couple high-profile products that have been launched in the last couple of months, particularly -- well, one specifically out of Amazon.

And wondering, seeing some other competitive technologies in those products and wondering, from your perspective, are these designs that you are actively pursuing, or how should we think about your success rate in that market going forward and if there's any milestones we can look to in the next couple of years in that market?

Yes, well, we'll certainly try to talk about anything that we've got going on that's real exciting in that space. Of course we acquired the Acoustic Technologies folks last fall, which has just been a great acquisition for us, they fit right in with what we're doing, they've helped us differentiate our products via software, and they've really expanded our relationships with our customers to kind of a higher-level feature relationship which is quite cool.

So they came along with business that was already in the works with a number of different products, a lot of the things that they were shipping in today are kind of Bluetooth speakers et cetera. The things that they've got in the works today that we're actively promoting heavily are things that are more like noise suppression for phones, you saw some products we launched not that long ago, so that's fairly new.

And then some of the technology that we're really shopping around and in development with today is sort of the noise suppression that's specifically designed for speech recognition. So in contrast with noise suppression, where the people on both end of the phones are, in fact, people, this would be more geared towards when somebody's speaking to their phone and there's speech recognition on the other end. The things that you want to do to a noise suppression algorithm in that environment are pretty different than the intelligibility and a subjective view of intelligibility that humans have; it's a different beast.

So that's kind of the stuff that we've got in the works. I don't have any comment on specific design wins and whatnot that are in the market, but the product line has continued to exceed our expectations, plus the acquisition, and the integration efforts with the rest of the company have, I would say, have done the same thing as well.

It's also a real nice benefit to us as a company to have an outfit that is inside the Company that is effectively a customer within the Company for both our chips and our tools that I would say has really sharpened our skills and they've been able to hold us accountable as an overall company to provide better tools, provide better suites of software and libraries and things like that. So I would say that that one's been a big win all the way around.

I appreciate the answer. Looking at the market, though, and how you see that channel develop in terms of the living room -- let's just call it that -- are you under the impression that perhaps the smartphone still is your ultimate interface there, or do you -- is there a thought process to how that might evolve thinking to other products like Sonos, which uses a smartphone now, basically, to operate their own network at home.

I'm just curious if, behind the scenes, that's the thought process where this might be heading, or will there literally be, to use your analogy, a microphone in a toaster, so to speak, or will it be sort of a gateway approach? Or do you have any thoughts on this or am I just --

Yes, I think it's going to take just about every form imaginable. Certainly there's a lot of things out there to which the right interface is going to be somehow via the smartphone, but at the same time there's going to be things out there that are the interface to the smartphone so you don't have to pull it out of your pocket or whatnot.

And then there's a whole category of things that may have some connection with smartphone but it's awfully nice -- I don't know if you've installed any of these light bulbs that are connected either via ZigBee or Z-Wave or whatnot, and then you can turn your light bulb on and off with your smartphone. Well that's great, it sounds cool, and then you play with it for a little while and you realize it's a complete gimmick, and there's no way you're going to convince everyone in your household to go find their phone to turn the light off when they're standing right next to what used to be the light switch.

So I think there's a real fusion of applications where these technologies come together, and it provides a great opportunity for a lot of the kind of voice signal processing that we think we're very good at, whether it's in a phone, in a device, or in something bigger like a car. The automotive audio and voice experience, even on very expensive automobiles today, is really not all that satisfactory, so we think that's something that we can play a role in ironing out over time.

And you stepped into my second question. By the way, I can't even get my family members to turn off the light switch when it's right in front of them. So I'll never succeed.

But automotive, and that was my next question, what does that channel look like from your perspective and how that's going to develop? I mean obviously, some big announcements out of your major customer in that area with an ecosystem around that. Is that a sell that goes in both directions there, or are you still approaching the traditional vendors to get your technology into the automotive platforms?

I don't have any specific comment on that announcement. I mean, generally speaking our customers are folks like Bose and Harman and people -- Continental or example -- people that make these audio subsystems that go in the car. The type of technology that we provide, you know, is really not an OS-level design in, I guess I would say in most cases.

(Multiple speakers) traditional channel that we usually use with our automotive business, which for many years, we felt like is a good opportunity for us. So we're really excited to see electronics -- enhanced audio electronics push down further into pretty much every automaker's product lines.

Andrew Huang, Sterne, Agee & Leach, Inc.

This is John Shen in for Andrew. Can you talk about the opportunities within the wearables market for your product portfolio?

Sure. I think that market's still in its infancy. I think it's a lot of things that don't have much of an interface at all like Vern suggested.

Most everybody, seems like, is wearing a fitness band and, hey, this is probably a perfectly good -- it's probably sufficient to have it connect up with an app on your phone and control it that way. But over time I think that a lot of these applications are going to have a need or an opportunity for voice-based interaction, either in the device itself or where the device is a gateway to something else, like a phone or a Wi-Fi router or what not.

So it's a new market. It's in its infancy, but certainly people are talking about how all the various different ways that one might interface to it as a person, and I think that's a good opportunity for us in the long run.

But to be specific, for us the meaningful impact is still, we expect it to be quite a ways out there. That market hasn't developed yet.

And for LED lighting -- switching gears a bit. It seems like on the shareholder letter you're deemphasizing it a bit. I was wondering if you can provide more color on market traction, and if there had been any changes in strategic direction?

In a sense. I mean I think the real takeaway is that we felt the need that we needed to overemphasize or increase our emphasis on the audio products. We go through a process, kind of quarterly and annually, where we really like to have divisions that have got their individual missions and we try not to mess with them too much because I think it is the most productive way to manage a group of people to go achieve a goal, but at the same time we have to have an overlay on top of that what ensures that we're staffing our best opportunities as a company and not the best opportunities within a division.

It was pretty clear to most of us inside the Company as we went through the most recent round of strategic reviews that our biggest opportunities in our audio division -- or even some of our smaller opportunities in our audio product lines -- were significantly bigger than some of the opportunities we were pursuing in lighting, and so we felt like we needed to take the step to move some folks over to fully staff those efforts. We have felt like, as a company, one of the most important things we've done over the past five or seven years is maintain a real rigorous process of ensuring that whatever we decide to do, we're going to focus on it with enough resources that we can do it extremely well, do it quickly, and drive success from that.

So this was really more of a recognition of the fact that audio -- we've just really got our hands full with a number of opportunities, really, across the board, so it's a great thing from that perspective. On LED, we've come out with some good products. The product line is experiencing some good growth.

So from a business perspective, this year we certainly see some positive traction on the financial side so we'll continue to promote the products there and the team is always actively investigating what do we do next. Certainly one of the backdrops in that market, though, is it's a challenging, inch-deep, mile-wide market even though to the extent the market is growing really quickly, it is a lot of individual design wins that you have to aggregate up to make a meaningful dent in the revenue, which again, is one of the reasons that some of our opportunities in audio appear to be more meaningful.

So the net of all that is kind of what you read in the letter and -- like I say, we're still very interested in the LED lighting market and we still have people that are busy working on it, but we had to allocate some of the folks that were doing that previously over to bigger opportunities in audio.

(Operator Instructions)

Blayne Curtis, Barclays.

This is Chris Hemmelgarn on for Blayne. Congrats on the good quarter. Nice to see some strong results and guide. I guess just kind of a long-term strategic question. You talked about a few of those in your comments already.

You've been pursuing LED and other interaction outside of your largest customer for a while. You've had some success, but nothing that's really moved the dial overall for the Company. Could you just talk a bit about the challenges you face thus far and what changes you're making going forward to try to drive greater success in those other areas?

Well our goal as a company is to grow and be really profitable. So we've done a pretty good job of both of those things by staffing our best opportunities. And as it happened there was a good long period where the bulk of those were pretty concentrated in one area, and internally I've remarked a number of times that it wasn't so much that we were successful over those years as it was that we survived them because there's not a lot of companies that have experienced the kind of growth that we were able to achieve during that period, and certainly you've seen examples of companies that grew so fast and then collapsed under their weight.

So we were pretty rigorous and careful to make sure that that didn't happen to us, and that we maintained our focus on the customers that got us where we are today. We don't -- we take that obligation very seriously.

So the great news, though, is over the past year or so where that growth has let up a little bit has allowed our resources and our hiring to catch up with where our revenue is, which wasn't the case previously. And that's allowed us to staff a lot more broad market, general market kind of products and go explore other new initiatives with new customers.

So at this point we've more new products going for the broad market than ever, and I think if you look back over the past couple of years if you're playing close attention to the Company, you'll recognize there's a fairly sparse population of new products that have been out there that are on the general market. So I think you'll see a lot more of that, especially in audio, over the next couple of years as these additional resources we've brought on really get traction.

It's worth noting that this industry, as much as the financial community would like to believe it's a quarter-on-quarter kind of a thing -- it's not. It's a very long-term endeavor. It takes years to build anything meaningful and we're just now kind of getting into the sweet spot of where some of those development efforts are likely to really start paying off.

Were really excited about the opportunities that the advanced geometry, the 55 nanometer processes, brings us. Taking our product line and moving, say, a stereo CODEC from 180 nanometer to 55 nanometer doesn't do anything other than make it more expensive.

So the reason for us to move into advanced nodes like 55 is that we've found things that we can add to our products that make them massively more valuable and more -- add more value for our customers, differentiate them further. It's a really exciting time for us because what we know how to do well, we've now got processes that line up really well to enable us to do them.

So on the one hand I hear you, but on the other hand, I feel pretty comfortable with the track record of what we've done overall and the fact that we've been massively successful in one area and less so everywhere else is really a reflection of the fact that we're always resource-constrained and we have to staff our best opportunity. So at this point we've got enough resources that we're staffing a much wider array of opportunities and I think that will bear fruit for us in the future.

A quick follow-up. You've talked about in the past about -- at least on the amp side, how the value you really bring to bear is often most visible in smaller devices, whereas larger devices are -- maybe, don't require quite the same level of quality or the amplification that you guys can deliver.

There's been a lot of rumors that your largest customer is moving to a larger form factor handset this year. Does that pose a risk at all to that socket in your mind? I'm just interested in your general thoughts.

I'm not going to talk about that socket at all. Generally speaking, amps are not a huge business for us but they are important. There's sockets where we can add more value than others when we're able to throw meaningful amounts of signal processing at it.

What I've said in the past is that, in general, smaller form factors give us more opportunity in specific because the air cavity that one of our customers is able to provide for the speaker oftentimes gets compressed and that gives us more opportunity to throw some signal processing horsepower at it. But there's a ton of different factors that hinge into this sort of thing, and again, without commenting on any specific opportunities, overall we feel very good about our opportunities to do pretty well this year. We're certainly not forecasting any doom and gloom despite any rumor-mongering that might be out there.

Thomas Sepenzis, Northland Securities, Inc.

Hi, congratulations on the good quarter and the guidance. I was wondering if there was going to be any major changes with the move to 55 nanometer that we should be expecting in OpEx later this year.

Like we said on the last call, certainly tape-outs in 55 are significantly more expensive than they are in 180, and that is going to add some bumpiness to the expense profile. We've got a number of tape-outs this quarter. Overall that's been a meaningful reason that our overall OpEx has increased on a run rate basis.

The tools to develop this stuff with are much more expensive. You need a much more sophisticated back in team, which we have. And then the individual quarter-by-quarter stuff will move around a bit and we'll let you know about that when we give guidance for each quarter, but we've got a number of them baked into this quarter and we would expect to have a number baked in next quarter.

I will, on the OpEx, add a little bit of color just in that it's kind of like everything else in life. It would be neat if everything came all paced out nice and steadily over time, but nothing in my life works that way anyway. It feels like a whole bunch of developments all came together all at the same time so we do have a lot of product development expenses in this current quarter that we would expect to see ease up towards the end of the year. So I certainly wouldn't, as you're making your model, I wouldn't look at last quarter's OpEx and this quarter's OpEx and I wouldn't draw a straight line up and to the right on that and conclude that's what the rest of the year is going to look like.

We think we've got an opportunity to keep that pretty well enhanced through the course of the year as our business stands today. Obviously with G&A we're keeping a pretty tight hand on the reins.

And then just in terms of the LED business. It almost sounded like you were walking away but then at the end, you kind of changed that and said you've made the investments, now you're just kind of waiting for the market to develop.

There's been a number of comments in the last few weeks with some of the smaller Asian manufacturers thinking they're going to have very good growth, actually, in that business starting in June. I'm wondering if you've seen anything over the last three to six months that maybe makes you feel that that market is actually starting to come into its own.

Well, I think as the prices have come down, I think that that market has definitely started to grow but it is absolutely the case that it is very fragmented across a lot of different models, so as a chip supplier, you got to limit -- no matter what the market's doing you got to win a lot of models to have it aggregate up into a total reasonable amount of revenue.

These are fairly inexpensive devices and despite how much of a role they play in defining the overall system and the performance and the experience the customers have -- it doesn't just naturally line up that the people that design our stuff necessarily want to pay us a whole lot for that. So we have to aggregate up a lot of volume across a lot of models and that takes time.

I certainly think there could be individual folks that manufacture actual light bulbs. We've seen a number of examples over the past couple of years where somebody gets a hot model that's at a relatively low, attractive price and it shows up on the right shelf space at a retailer and it goes through the roof. But that doesn't necessarily translate into success as one of their suppliers.

(Multiple speakers) again, to address part of your question, we're definitely not saying we're walking away from that market.

But it looks like it's more of a 2015, 2016 before its 10% or more of the overall revenue mix.

Yes, I mean, I'm not going to prognosticate about when we cross that line. But we do see some good growth on the revenue side, and really, the only change we're making and the only reason we're making it is simply that the opportunities that we're looking at in audio are bigger and sooner and more certain.

Vernon Essi, Needham & Company.

Just wanted to revisit a point in the shareholder letter. You talked about shipping into another tier 1 smartphone customer and I just wanted to go back and ask the obvious question. Is this now the second or third win you've had outside of your major customer just for the housekeeping stats?

I would say it's at least the third. And like we said on the last couple of calls, the neat thing that's really transpired over the last few years, obviously you've got the number one and number two guy in the smartphone market, and I think everybody knows where the lay of the land is there. Obviously both driving a ton of volume and both represent really attractive opportunities.

The rest of the smartphone market is quite a long list to have 4% and 5% market share. And whereas a few years ago, it seemed like those customers couldn't really do anything other than wrap plastic around a reference design. More and more of those customers are able to do meaningful design on their own and in particular they're all looking for ways to differentiate from one another's products and a lot of them have started to do that via audio features, some of which wouldn't make any sense in the US at all, some of which are kind of perfectly normal from our perspective.

But either way we've got -- it's an area where our broadened product line becomes a benefit again and we've got a good team to support customers like that as they design in catalog components in that scenario where, as I mentioned on the previous question or two ago, that scenario where we're seeing increased opportunity for us to broaden our catalog of products and have a meaningful opportunity for it. Obviously winning one of those, the 4% or 5% of market share guys, doesn't diversify our revenue base overnight, but still, 4% or 5% of the cell phone market's a big number so it's something that, especially if we can provide a product that has got a higher level of integration, it could be up a meaningful opportunity for us.

Sure. And dovetailing that into another point in the letter about -- I don't know if it's necessarily guidance but at least the indication that revenue could be flat year-over-year in FY15. It's more to put Thurman on the spot, but how do you come about that number and without -- you can be as vague as possible; I realize you're kind of tied into what you can say here, but how should we think about the way you built up to that flat year-over-year estimate?

We've got an elaborate process of doing forecasts internally, taking everything our customers are telling us which moves around quite a lot, knowing what we know about design wins and everything else. And then overall, what I get from the industry, broadly, is that our broad product line should probably see the same thing as everybody else, which is that 2014 looks like a pretty solid year all the way around.

That's -- we're seeing that from all of our suppliers and various folks that we check with. We've got a pretty rigorous process of rolling up forecasts and we feel quite good about the opportunity to at least stay flat through this year.

It's a complicated process. It certainly can change and we definitely don't like to be in the position of trying to guide things that are as far out as Q4 but just where our internal model is right now says roughly flattish.

(Operator Instructions)

At this time I'm not showing any further questions. I'd like to turn the call back over to management for any further remarks.

Thank you, Operator. The questions submitted via email this afternoon were answered during the Q&A. I will now turn the call back to Jason.

In summary, Cirrus Logic is exiting FY14 with a robust road map, pairing our best in class hardware with embedded SoundClear software. This past year we strengthened existing customer relationships and established new relationships with key players in the markets we serve, all of which are vital for future growth. As we move into FY15, we are excited to introduce new custom and catalog products that are expected to broaden our footprint in the audio market and fuel long-term growth.

I'd also like to note that we will be attending the Jefferies conference on May 6 in Miami. 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 ask everyone for participating today. Good bye.

Thank you Mr. Rhode. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.