Cirrus Logic Inc (CRUS) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic first-quarter of FY15 financial results Q&A session.

(Operator Instructions)

As a reminder, this conference call is being recorded. 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 team.

Today we announced our financial results for the first quarter FY15 at approximately 4 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 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 email at investor.relations@Cirrus.com. Please note that during this session we 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, revive, 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 10K 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 make a few comments. For a detailed account of our financial results, please read the Shareholder Letter posted on our Investor Relations website.

Our financial results for the June quarter were at the high end of guidance as we delivered GAAP EPS of $0.16 and non-GAAP EPS of $0.37 per share on a revenue of $152.6 million. Sales of our portable audio products accelerated in Q1 as we continue to experience robust demand for higher performance audio solutions across our customer base. Sales in our energy division remained relatively unchanged from the prior order.

During the quarter,Cirrus Logic announced its intention to acquire Wolfson Microelectronics for an enterprise value of approximately $467 million. This acquisition will augment the Company's core audio signal processing portfolio, provides differentiated software capabilities particularly in the Android ecosystem and adds new product categories, such as MEMS microphones.

Further, the additional resources will enable the Company to better address the substantial opportunities driving future revenue growth in the portable audio market. We are excited to welcome Wolfson to the Cirrus Logic family and expect the acquisition to close sometime this quarter.

Please note, as we do not have an exact close date, guidance for the second quarter does not include any potential contribution or expenses associated with the Wolfson acquisition. We are pleased with the progress we've made in portable audio as we continue to experience strong demand for our custom and general market Codecs, VSPs and amplifiers. In fact, we are now shipping general market products in the multiple handsets on seven unique customer platforms.

During the quarter we ramped shipments of our boosted amplifier with speaker protection and sound quality enhancement software to support the product launch of a recently added top-tier Smartphone customer. Although, as we've mentioned in the past, the amplifier market is highly competitive, we are encouraged by our success with these products and expect to see year-over-year unit growth in FY15. Additionally we are excited to be sampling several of our new advanced geometry high-performance products and are actively engaged with customers on future designs.

Before we begin the Q&A, I would also like to note that while we understand there is 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)

Tore Svanberg, Stifel.

Thank you. My first question, I just wanted to clarify a statement you made, Jason, about year-over-year unit growth in FY15. Did that refer to that amplifier business or is that for the total business?

The comment I made was specific to the amplifier business.

Okay. Just wanted to clarify that. The second question I had is on R&D. So it looks like you're guiding it to be up sequentially, obviously based on new product tapeouts. I'm just trying to understand, beyond that are we going to continue to see these types of increases or is it still lumpy where you have a heavier increases in the September and December quarters?

The September quarter is expected to be consistent with the guidance which has significantly flattened out certainly relative to the increase we saw in the June quarter. The tapeouts that we do now and 55 nanometer are pretty expensive. They can move the needle around definitely, so there is an element underlying the total that is lumpy. But we certainly don't expect to see the same kind of growth that we've seen in the past in OpEx.

Just to circle back on your previous question, I would estimate that we'll see overall unit growth in total as well. But the comment that I made was specific to amplifiers just because there's been a fair amount of rumor and speculation on that front.

Very good. Just one last question. I'm just trying to understand directionally where the R&D is headed. Is it safe to say that we'll see a smaller percentage of custom revenue going forward? It just seems like, based on all these new products you've come out with that they are targeted at potentially more than one customer.

It's hard to call. We'd like to see the total dollar amount of custom revenue go up and the percentage go down. I don't know that there's a bad way to grow. So we'll just see how it is. But it is certainly the case that we are taping out more general market product than we have done over the past few years.

We went through a period where we grew so quickly that it was very difficult for us to bring in enough resources to keep up with all the new developments that we wanted to do. And the fact that we've had a little bit of a flat spot here has enabled us to bring in the people to scale the development resources of the Company in a way that's proportional to the new revenue levels. And that's got our ability to crank out new products increased in a pretty big way.

That's very helpful. Thank you very much, guys.

Andrew Huang, Synergy

Just a follow-up on Tore's question. If general market products kind of increase as a percentage of your revenue, would that kind of put some kind of pressure on gross margins, like kind of maintain comparable level operating margins?

Generally speaking, the general market products are significantly higher in margin than most of the custom stuff that we do. I mean, even within the custom stuff there's some variability depending on the volume. I think just to be clear, I think everybody -- when we say custom everybody assumes there's only one customer there. We've done custom products for quite a range of different companies. But generally speaking, the general market products are higher in margin.

Just to clarify that, is it higher in gross or operating or both?

Well, we don't break individual products down to operating margin but the gross margin would certainly be -- is higher on average.

Okay, thank you. And then the follow-up question I had was if you look at your audio products, excluding your biggest customer, it looks like there was a pretty nice sequential move there. Do you expect that momentum to kind of continue over the next couple quarters?

Well we're seeing a pretty strong environment in the general audio market, both in general and then specifically in portable where we've ramped with a number of customers that do move the needle. It's a continuation of the trends that we've seen where people are looking for new ways to differentiate their products, whether it's louder speakers or tricky voice algorithms or noise-type processing things that are right up our alley.

So as I alluded to in the opening comments, we're shipping on a number of new platforms with products that range from amplifiers to pretty complicated Codecs and we think that that trend is something that over the next couple years continues to grow. And that's a big part of the motivation for why we allocated more of the Company's resources onto audio as well as pursue the Wolfson transaction.

If you don't mind me asking, is it fair to say that you're kind of -- these seven new customer platforms, would you consider those more emerging market type OEMs or like tier one OEMs?

It's a mix.

Okay, thanks very much.

There's definitely some tier one names in there and there's a broad variety of the -- I guess what you termed emerging folks.

Perfect.

Vernon Essi with Needham & Company

Thank you very much and congrats on the seven unique customers. Just to follow on the previous questions there from Andrew, in terms of the -- [Inowe] I think, asked this of you, Thurman, but if we look at the audio bucket outside of your largest customer, can you give us a sense of where the non-portable audio has been over the last year? Maybe roughly on a year-over-year basis because I'm just trying to gauge just how much the portable side has grown outside of your largest customer. And any color on that would be appreciated.

The non-portable audio has been relatively flat down over the last year, year-over-year. So we don't really break out the total percentage of that in terms of overall revenue, but it has (inaudible).

And just to follow up on that, I think that's reflective of where the Company's focus has been over the last handful of years. The best opportunities that we've got are in portable and it's really neat to see the number of customers that are interested in what we are doing in the portable space.

That said, that's largely been a matter of prioritization because we've been unable to do everything we would of like to have done over the past couple of years. Both the reallocation resources within Cirrus itself and then the addition of the Wolfson folks, I think will give the combined Company a significantly better ability to go target some of these opportunities outside of portable audio in addition to doing what we want to do in portable.

In your letter you discussed mix shift in ASP declines, and you've discussed this in the past year-over-year. I was wondering if you could elaborate a little bit more -- and as specific as you want to be, I think would be more generic, but in terms of how we should be looking at that going forward. And then also I'm bringing in the fold here as it relates to your embedded software efforts.

You've got some competitors out there, at least in the context of [where] side that are investing pretty heavily in algorithms and whatnot. Do you see this as being a way for you to reinforce a certain level of ASP or dollar content? Or is this a scenario where we're going to see a continued trend of price pressure that we (technical difficulty) normally see in the industry.

Sure. So on the ASP side, for the last year there's a mix of issues that related to it. I would say the previous year we had seen a huge increase in the ASP and then we had to do some cost reductions, et cetera, to help our customers be successful which is part of the process in this business.

Then additionally some -- a mix of products that went with maybe less complex products than they might have for us, so that also contributed to the ASP, but the important thing is the unit volume. We maintained our position in those sockets and the unit volume continued to increase.

Generally speaking, that's not something that we would expect to have continue going forward. Obviously our goal is to continue to add more and more functionality to the products, which historically for us has been largely focused on hardware. But I think you pointed out exactly the right thing, which is that in a lot of the markets that we serve, significant value can be added in software from our algorithms.

And that was the motivation for the Acoustic Tech acquisition last fall. That -- as you know, we're pretty -- we look real long and hard before we do an acquisition. That one looked like it was going to be a good one and those guys have just knocked the cover off the ball for us. It's shipping in a bunch of different products. In some cases where it's shipping as an algorithm alone, we're making good money for shipping code.

Obviously the longer term goal is to derive more revenue from our chips that contain that code. And, again, you're right, that that's a great way for us to add value and hopefully keep our ASPs high in these markets.

Further on from that, is a big element of the Wolfson acquisition again. They've been serving the android market for longer than we have and that has pushed them to be a bigger part of the android ecosystem than we have been to date. It's a little bit of the nature of the beast with the customers that are in that space that they maybe aren't as able to look out three or four years on the hardware side and tell us what they're going to want so that we can do custom devices for them and really make the hardware exactly what they want.

But it is the case that they can work on a software timeframe. So if we've got a general platform that will be applicable to whatever model of phone they might be developing, we can then add on and customize that in terms of software and firmware and the abilities the Wolfson guys have got on that front are a significant augmentation to our own.

That's a great answer. Thanks a lot for delving into that. I appreciate it.

Sure, thanks, Vern. Good question.

(Operator Instructions)

Jeff Schreiner, Feltl & Company

Yes, gentlemen. Thank you very much for taking my question. Jason, I wanted to ask you more of a technical question while we have you on the line to get your input. Just wondering what your thoughts are over the next 12 to 24 months in terms of where audio processing will be done. Is it going to be done in the MEMS microphone, as many in that industry are talking about? Is it going to move to the application processor or does it still need a Codec in between the two? How are you looking at that and what are your thoughts on that?

That's a good question, Jeff. I think it's going to be a mix of all the above depending on the exact application. There are some algorithms that if there is -- if it's in an application where there is an applications processor, those are the smallest geometry transistors and it makes a lot of sense to do things there.

The caveat to that is that if you got to boot the whole thing up and enable the OS to make it fly, you're incurring a pretty significant power penalty for doing that. So in a device were there is an applications processor, then there is definitely a class of algorithms -- some folks refer to them as always- on type algorithms, where having a sidecar device, you can imbed it in an audio Codec and that's certainly the angle that we're pursuing and we think benefits us.

Having a sidecar DSP that's able to sit and be on at a very, very low quiescent power level respond to somebody's command, say, on a microphone or some other sensor's activity and then wake up the apps processor as appropriate, we think that's a great systems partition. And then further, as you mentioned, in the microphone context, we think there's definitely an opportunity for smarter microphones out there.

That was, again, another nontrivial aspect of why we wanted to pursue the Wolfson acquisition. They've got some great technology around microphones. They're shipping in some good platforms in tier one account, and we think that being able to invest in that product line and further differentiate our product offerings there gives us another arrow in the quiver as we go after these emerging classes of applications where potentially there is no apps processor.

Okay, thank you. One thing I just wanted to wonder or ponder on -- and either Jason or Thurman, maybe you can answer this. It's been over a year now since the Barclays conference, well beyond a year. Where you provided this mid-40s gross margin guidance but continued to kind of deliver in the low 50s for a while and now were moving to the high 40s.

Is there some shoe that's going to drop that investors need to be worried about or what is driving the guidance to suggest that over the longer term margins are going to move to the mid-40s?

Well, the reason we said that at the time and the reason we continue to put that in our Shareholder Letter is we think that's what the business will support in the long term. And so from a shoe- dropping perspective, we think you should keep that in mind for the long-term perspective. That's where we expect it to be.

But that's -- obviously our goal is for margins to be as high as possible and our supply chain team does a great job. There's a variety of angles that they pursue to try to improve upon that. They've done a great job so far. There's a lot of moving parts. In a quarter like this past one, which is a lower quarter for the year than the mix of things like royalties from software algorithms or higher-margin general market products contribute a higher margin. So you see us come in at the upper end of our guidance.

So I don't think there's anything real mysterious going on. It's just our folks doing a good job and we're doing a typically conservative job of putting out guidance and making sure that we are able to deliver on what we say.

My final question is that I'm not sure if you guys know but there's this device that's coming out that's going to save the world and world hunger, cure all diseases and bring about world peace. And there's supposed to be a lot of magnitude in terms of volume, potentially surrounding these types of products. And I'm just trying to reconcile the magnitude expected by many in the industry versus what looks like a potentially down year-over-year revenue run rate.

And I'm also, in the context, trying to do that with what it seems like is some commentary suggesting that maybe concerns about amplifier losses may be overdone. Can you in broad strokes help reconcile some of those things?

No, not really. I don't really have any comment about world hunger devices. Send me one if you happen to get in the queue when they're launched. We've said, relative to our business, that we expect it to be a flattish year.

The first two quarters of the fiscal year, at least based on the guidance that we are putting out for Q2, are down a little bit. We still feel good about that flattish for the year guidance which would imply the second half of the year could potentially see some year-over-year growth. We do see some potential for upside to that as we head into what we think is going to be a very strong FY16 on the strength of a number of new product introductions from us. But do your own guesswork as far as what customers might launch what when.

I would say, relative to new categories, we have said on the last couple of calls that while we are really excited about wearables in the long term, we don't expect that to be a meaningful contributor to our revenue in the short term.

Thank you very much for your time, gentlemen.

Sure. And then just to follow up on the amplifier thing, I don't know where the rumors and innuendo comes from, but that's why we put in the letter and in the opening remarks that whatever it may be, this is a brand-new product line for us, less than a couple years old. We've grown it to be a big and profitable and growing business in a few short years.

We are extremely proud of that and, as we said, we expect that to grow in units year-over-year. So our team has just done an exceptionally good job of building a new from-scratch product line and shipping that into a number of different customers.

Thank you.

Chris Hemmelgarn

Thanks very much for taking my questions. First, I really appreciated the cover you guys provided, particularly on the amp front and additionally the color that you're reiterating your flat year-in-year guidance. I guess when I put those two bits together, that you expect to sell more amps and more units overall, and you expect revenue to be kind of flat. And it certainly looks like your largest customer, by all expectations, is going to ship quite a few more advices this year than last year. That would indicate some additional content wall. Is that the right conclusion to draw?

No. So we put a fair amount of color last year on eroding ASPs that will move to a lower margin structure, which certainly indicates that. This has not been a big year of new product introductions for us. So I think most people that follow the semiconductor industry recognize that there is a year-over-year -- if you're selling the same parts to the same customers, they're probably going to expect price decreases, so that factors into it as well.

As I say, there's a lot of moving parts and amplifiers is one of the more competitive areas. We don't expect to have a monopoly there; we're going to win some, we're going to lose some. Overall I'm very happy with how that product line has shaken out. We expect the units there to grow, so -- and, as I said, we do see some potential for upside in the second half of the year, but we've only had the current quarter, so --

You are holding to your original flat year-on-year revenue guidance, correct?

It's flattish.

Flattish, okay.

Flattish, and then the first couple quarters have been down year-over-year, so that would tell you the second half of the year was stronger.

So that's helpful. So nothing -- no major issues other than normal semiconductor price declines that we're familiar with. That makes a lot of sense.

We feel really good about the year we are having. This is a huge year of new product tapeouts and developments for us. We're moving a lot of what we've historically done, which has been simpler products in older geometries, such as 180 nanometer. A lot of our new tapeouts are in advanced geometries, 65 nanometers, 55 nanometers. The only reason you do that in our space is if you're adding a lot more functionality. Took the same part and moved it from 180 to 55. All that you do is make it more expensive.

So it's a great year of new product development for us and, as we said before, we still see revenue contributions from some of those new products kicking in as early as first calendar quarter next year. So it's very helpful.

One quick other follow up. Just the ever-popular tax situation. Inversions and other sorts of tax shenanigans have been a hot subject in news these days. And your Wolfson acquisition certainly looks like it might offer the possibility of alleviating some of the coming tax burden you have. Just any comment on your plans there and what your tax expectations are for calendar 2015?

Well, with the Wolfson acquisition, one of the positive things and one of the advantages to that acquisition is that we are acquiring an entity that -- overseas that happens to be in a jurisdiction with a lower tax rate, around 20% in the UK.

Given that, that will provide advantages to us and we do believe that as we look at our Corporate structure going forward and we begin to formulate our longer-term plans that the acquisition will provide us opportunities to reduce our overall Corporate effective tax rate.

Thanks very much, Thurman, and thanks, gentlemen.

Thank you.

(Operator Instructions)

Christopher Longiaru, Sidoti & Company.

Thanks for taking my question. So you talked about this for a while, the trend towards the mid-40s gross margin. I was just wondering if -- because this was before the Wolfson acquisition -- if that comment changes at all with the Wolfson acquisition. Does that speed up the movement because it's more audio and obviously some -- the margins there are a little lower than your overall Corporate average. Can you just give a little color on that?

Well, they're developing the same kinds of products that we are. They're serving the same market that we are, so we would expect it to be a similar margin profile to us. If you look at their most recently released results back in, I think, the March time frame as well as the guidance they gave at that time, that was for margins, I think in the 47% range. So that's actually pretty supportive of where we think we need to be long-term. That's before we start looking at whatever advantages we might bring to bear on their smaller business with our much larger supply chain. We feel really good about the acquisition from a profitability point of view in the long run.

That's helpful. Just on the regulatory hurdles that you're facing there, can you just give a little more color to those and how you expect to update the street as those go or is there just going to be an announcement that the deal is closed? Can you give a little color on how that should play out in your head?

That's pretty much how it'll play out in our head. Were going through all the minutia of the regulatory stuff and it's expected to close this quarter. We haven't seen -- there's lots of things and lawyers and accountants and whatnot that are involved. But we're just working through the process. Don't expect any huge surprises, but we're just going through the process and we'll update you once the deal is closed. Hopefully sometime this quarter.

Just the last thing is typically you have a big jump for obvious reasons in your inventories between June and September. Should we be thinking about kind of a similar move up from a percentage basis as last year? Can you comment on that?

We put some specific guidance on that in the letter. Thurman, I don't know if you want to --

Inventory moves around quarter to quarter, particularly when we do see ramps -- customer ramps. And, as you noted, we saw in the June quarter over a 20 million increase. Although we don't typically talk about specific inventory numbers because of that movement we do expect inventory to increase again in the September quarter.

That's helpful. Thank you. I appreciate it.

Sure, thank you.

(Operator Instructions)

John Vinh, Pacific Crest

Hello. Thanks for taking my question. Question I had -- follow-up question on the wearables market. I was wondering if you could talk about the content opportunity for wearable devices versus Smartphones? Obviously most wearable devices on the market today don't have a speaker. I'm just trying to understand if there's a comparable content opportunity or if it's more or less.

It's probably all over the map. I think that market is in such an infancy stage that it -- while we're all excited about what it might be, it isn't really anything yet. But generally speaking a lot of these devices are going to be pretty small. They're either -- whether it's a wristband that might not have a screen on it at all for fitness kinds of stuff. We see voice as a really attractive interface. We think that the technology that we've got in the SoundClear family from Acoustic Tech as well as some that we're acquiring along with Wolfson is really applicable in that market, something we're really excited about.

I think there's opportunities in things such as sensor hubs where we can incorporate audio into some of that as well and throw some of our audio signal processing at it. I think in terms of traditional audio, the needs in that-- in such a small phone [fact] are pretty low. Obviously, it's a pretty good opportunity for microphones and as one of the earlier questions alluded to, there's a lot of folks talking about putting more and more smarts in microphones, which I think makes a lot of sense, in a wearable application.

So I think on the whole -- I guess if I had to benchmark it relative to a phone, I would say there's, on average, in the long run, probably less audio in a wearable type thing than in a phone.

But it's still an entirely new category. And I think it is synergistic with phones rather than cannibalistic. So it's an exciting, neat new category. It's still definitely the Wild West, so we'll have to see how it unfolds but it's definitely a good incremental opportunity for a number of our products.

Great. And my follow-up question is on Wolfson. I was wondering if you could update us with your thoughts in terms of how you're thinking about cost synergies. I think you previously talked about $12 million in cost synergies. Given that you've had time to obviously take a closer look, is that how we should be thinking about the synergies there?

I think we're real consistent at this point with what we've said at the time and that's filed in the 2.7 document in association with the acquisition.

Great, thank you.

Thank you.

I'm showing no further questions at this time. I'd like to turn the call back to Chelsea Heffernan for further remarks.

Thank you, Operator. We will conclude the call with questions that we've received via email this afternoon. The majority of the questions were addressed in the Q&A session. However there were several that were not asked. Can you provide color on the change in headcount in the June quarter?

Sure. As we indicated a while back, we did a rebalance of the resources from our energy development in the audio in order to more rapidly staff up and make sure that we're able to capitalize on our larger opportunities within audio. Then obviously once we announced the Wolfson deal, that kind of put us in a little bit of a mode where we felt like we needed to take a little bit of a pause and reassess once we're integrated into one Company.

Obviously were still hiring but once we did that reallocation resources between energy and audio there was a little bit of rebalancing there within the team. And then, of course, on top of that you've got a normal -- fairly low but normal attrition rate as well. The net of all that ended up with being a small decrease in headcount during the current quarter.

Thanks. The final question is, Can you provide an update on your share repurchase program?

Sure. We've still got a fair amount of authorization remaining. It's something that we consider from time to time. We view that as a good use of cash. However obviously with the Wolfson acquisition, we've taken on -- we will be taking on a fair amount of debt. You can imagine that we will be prioritizing paying down that debt as we go forward. But certainly share repurchases is something in that context. Obviously we will still consider in the long run.

Thank you. That was the last question.

In summary we are pleased with our progress in Q1 as we delivered strong financial results and gain momentum across our portable audio products. We believe the portable audio is in the initial stages of the next wave of growth, driven by the desire to differentiate products through the audio and voice experience.

With a strong pipeline of compelling products and the pending acquisition of Wolfson, and we are strengthening the Company's position as a market leader in audio with a comprehensive custom and general market product portfolio, differentiated software capabilities, and a top tier customer base.

I would also like to note that we be holding a virtual annual shareholders meeting on Monday, July 28 at 11 AM central time. If you have any questions that were not addressed, you can submit them to us at via the Ask The CEO section of our investor website. I'd like to thank everyone for participating today. Goodbye.

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