Management Comment 11/7/2012: The market reaction to our financial results and outlook reported on October 31 has been surprising to us. We came in above guidance for the September quarter and guided well above consensus expectations for the December quarter. Despite this exceptional news, our stock has experienced a decline over the last few days and we have received a number of questions from our shareholders that we would like to address.
Question 11/7/2012: Can you please clarify what is meant by the pricing pressure referred to in the shareholder letter?
We have experienced a slight step down from our historical margin profile driven by the remarkable growth in our portable audio business, which includes certain products with margin profiles slightly lower than other audio products. Achieving approximately double the revenue with only a few points of margin erosion is a tradeoff most semiconductor companies would happily make in light of the huge growth in operating profit that this drives. Overall, we are very pleased with this result.
Question 11/7/2012: Given the large revenue growth you are currently experiencing, what is the potential for continued growth in the future?
The products and innovation we provide in portable audio are becoming more and more important, and our technology is becoming increasingly relevant to more customers. As such, design activity is high with both new and existing customers and we currently see more growth opportunities than ever in portable audio. Outside of portable audio, we are excited about the momentum in our LED lighting business. Design activity is strong with multiple tier-1 lighting players and we expect to have more bulbs on the shelf with our products inside shortly. While currently in its infancy, this market represents a tremendous opportunity over the next few years.
Question 11/7/2012: Can you offer any further information on the deferred tax asset and what tax strategies you are reviewing to lower your effective tax rate?
At the end of the September quarter (Q2/FY13) we had $125M remaining in deferred tax assets, which in simple terms equates to $125M in taxes we do not have to pay.
We are reviewing a number of potential options for reducing our ongoing corporate tax liability. We are in the process of evaluating the complex tradeoffs involved with these various options with the goal of achieving a lower effective tax rate that does not compromise our ability to manage the company effectively for the long term. Conservatively, it would be reasonable to model 35% once we have exhausted the deferred tax asset, and then any improvement we are able to gain will provide upside.
Question 11/7/2012: I read that you are closing your Tucson facility. Does this mean you are abandoning the motor control initiative?
Quite the contrary. We have some outstanding people in Tucson, and we believe that our motor control technology has significant potential. But, developing new technology for new markets is difficult under the best of circumstances, and small design centers have certain inefficiencies that make this even more difficult. In order to maximize the probability of success in motor control and other high voltage areas, we decided to move the majority of the product development team to Austin and close the Tucson facility. We believe that this enables the team to be more effective, and also lowers our ongoing operating expense; however, this does not change our current Q3 FY13 R&D and SG&A guidance.
Question 11/7/2012: You sold stock last week. What's up with that?
As indicated on the Form 4 filing, my sale was pursuant to a 10b5-1 plan that was put in place some time ago, and it was not expected to coincide with our earnings call at that time. This sale represents a fairly small percentage of the equity the company has granted to me over the 17 years I have worked here. For more information on 10b5-1 plans see our previous post, or Google 10b5-1.
Question 2/9/2012: You seem to be hiring a lot of people and operating expenses have been rising pretty steadily. Can you put more color on this trend, and address if you think there is still leverage in the business model?
We believe we're well positioned to grow revenue faster than operating expenses in FY13, so yes there is still leverage in the model. We have some extraordinary opportunities in front of us in both audio and energy markets, and in order to continue to execute on them, we're hiring product development talent as fast as we can find people that are both fun to work with and who meet our standards.
Question 12/1/2011: I see that there has been some recent CRUS stock purchases made by yourself and a few others on the board and management team. Can you provide any insights into the company's insider trading policies, i.e., the timing of purchases, trading windows, etc.?
It turns out that there are quite a lot of rules and restrictions on when insiders can and can't buy or sell the Company's stock, or exercise options for that matter. Most of these restrictions are spelled out in our Insider Trading Policy, which is posted on our Investor Relations website in the Corporate Governance Principles section.
In addition, there is also a restriction referred to as the "short swing profit rule," which provides that an insider is required to turn over to the Company any "profit" if the insider sells the company's stock within six months of a purchase at a lower price or if the insider purchases within six months of a sale at a higher price, even if the transactions don't result in an actual profit for the insider. The actual rule is more complicated than this, but this is in effect means that insiders will not likely sell the company's stock within six months of a purchase, and will not likely purchase the company's stock within six months of a sale.
Finally, there is another SEC rule referred to as 10b5-1 (the fact that they need numbers, letters, and dashes gives some idea about how many rules there are). This rule provides an "affirmative defense" for insiders against allegations of insider trading when the insider sets up a trading plan for stock or options they own (a "10b5-1 plan"). These plans may only be enacted at a time when the individual is allowed to trade in the stock as I've outlined above (i.e., when we are currently in an open trading window, and the insider is not in possession of any material non-public information). As you've highlighted, I purchased shares of Cirrus Logic stock a few weeks ago. So, if there was some reason I wanted to, I could have enacted a 10b5-1 plan that called for the same day exercise and sale of 1000 options under some certain conditions (like a limit order for example) and on some specific date or range of dates, provided of course that the sale does not result in a short-swing profit. The reason I bring this up is that under a 10b5-1 plan, the actual trades can occur at times when our trading window described in our Insider Trading Policy is closed. So, if you see a filing that an insider at Cirrus has a transaction when you thought our window should be closed, it was probably part of a 10b5-1 plan that was enacted when the window was open.
Confused yet? I know – I didn't write the rules. At the end of the day, the intent of all of this is to prevent insider trading while still permitting insiders to invest in the company, and to do so consistent with all applicable laws.
Hope that is helpful.
Question 12/2/2011: As a fabless company, what quality control measures are in place to ensure that any chips not manufactured to our expected design specifications be prevented from reaching customers and their end markets?
When we develop a new product, we also develop a customized test for that product to ensure that it meets specifications. When the device hits production, we run this test on every single device that is shipped and discard the devices that do not meet spec. Additionally there are a host of tests we run during the qualification phase of a new device development to ensure that it will continue to run for many years and to help ensure that it is not especially sensitive to damage from electrostatic discharge that may occur during our customers' assembly process or in use by the end consumer. In addition, the test we've designed helps to ensure that the device will be robust when used across a range of voltages, temperatures, etc.
Question 10/31/2011: I currently own shares of CRUS and I find it very frustrating that I just took a financial hit while you announce execs are being rewarded stock options for subpar performance. Options should be a reward as shareholders are rewarded, period. I don't generally agree with these Wall Street protests , but I think this behavior is one of many reasons they're out there.
I'm not certain how to best address your concerns because I'm not clear what you're referring to by subpar performance. The combination of revenue growth and operating profit that we have delivered puts us near the top of an impressive list of peer companies. There is quite a lot of information in the investor section of cirrus.com about our performance to date, and also the initiatives we're engaged in today to help drive our performance in the future. I suspect you're talking about the stock performance, and it is worth noting that we don't control the stock market. We focus our efforts on growing our revenue and operating profit, and we believe that our stock price should be reflective of the business results of the company on a long term basis. That said, the stock market appears to be very volatile these days, and on a day in day out basis, lots of things happen to any stock that management has little control over – the mess in Europe, rumors on the internet, expectations that are out of line from the company's guidance, etc. These things can all have an impact on our share price, especially at the day to day level, so you have to be aware of those risks. Regarding the option grants, I think our practice exactly corresponds to your comment. Options are inherently worthless to the recipient if the stock price stays the same or goes down. The intent is to provide the recipient a strong incentive to drive the company in a direction that will cause shareholder value to increase over time. We may succeed or fail in these efforts, but our interests are aligned with our long term shareholders. By the way, these options also vest over a period of four years, again with the intent to focus our team on driving improvements in the company that will benefit our shareholders over the long term. If we fail to do so, then we will not make any money from the options. Regarding the Occupy Wall Street comment, over the past few years we've more than doubled the revenue of the company, increased the stock price, significantly improved our profitability, deployed a very large amount of those profits to buy back the company's stock (and thus reduce the share count) for the benefit of our long term shareholders, created hundreds of high paying jobs in America, and been voted by our employees as one of the best places to work in the country. While the Occupy folks' goals are unclear to me, this seems to be something they could get behind.
Question 10/28/2011: Have you seen any impact to your channel inventory related to sell thru or channel reductions?
Our channel inventory is and has been at perfectly reasonable levels. We do not have much visibility into our customers' channel inventory.
Question 10/28/2011: During your most recent conference call you had touched on the fact that your biggest customer's guidance can be significantly different from your own due to the different timing of when revenue can be booked. Can you shed some light on when you can actually book revenue specifically related to your biggest customer?
We recognize revenue with our direct customers when they take delivery of the product. The delay I was referring to on the call was the time that passes between when we recognize revenue, and the time our customers recognize revenue on their end products. In the case of end products without inventory issues, this can be as little as a few weeks or as long as a quarter. On average with most customers the delay is probably on the order of half a quarter but we don't have perfect visibility into this.
Question 10/6/2011: Does Cirrus typically update guidance or pre-announce quarterly earnings results for any particular reasons?
At the time of providing guidance, we state that we do not undertake any obligation to update or revise guidance, whether as a result of new developments or otherwise. However, historically, we have generally pre-announced results whenever we've believed that we were materially outside of the guidance range that the company has previously provided. This is certainly not a guarantee that we would always do so going forward as it is difficult to foresee every possible circumstance, but we take very seriously our responsibility to keep shareholders informed in a timely manner. Regarding revising guidance within the quarter, during my tenure as CEO we've only revised guidance once - during the economic meltdown in the December quarter of 2008, and we did so as soon as practical once we believed the previous range was no longer valid.
So, we try hard to issue guidance that is accurate and useful to shareholders, and we intend to keep you informed if things change materially. Therefore, I'd like to point out that if your investment thesis is based on us beating or missing our current quarter guidance based on something you've read on the Internet, you are likely to be wrong much more often than you are right.
Question 9/20/2011: Is there anything new to report in the LED lighting area of your business?
Our chip is back from the foundry and working very well. It is in the hands of a tier 1 customer, and our expectation is for production revenue within this fiscal year. I recognize that there are already a bunch of LED lighting controllers on the market, but ours works with more dimmers than anything we've seen on the market and this view is consistent with feedback from the marketplace. We are very passionate about enabling manufacturers to create lighting products that offer a similar user experience to incandescent lights, with a fraction of the energy consumption. This first device is a major milestone towards that goal.
Question 9/20/2011: Who is the tier 1 lighting provider you are working with in regards to the LED lighting area of your business and is Cirrus the exclusive provider of dimmable IC related components?
This isn't something we can disclose until the end product is shipping.
Question 9/20/2011: I was recently in Austin and have always enjoyed the atmosphere there. I drove past your new headquarters there on the way to eat at one of my favorite pizza restaurants. I was wondering if you were more of a Hut's Hamburgers person or if you favored Frank & Angie's?
I like both Hut's and Frank & Angie's, though when I eat at Hut's I always get the meatloaf. Combined with a side of mashed potatoes, this size-of-your-head portion of meatloaf is sufficient to render a small European unconscious. This may explain the lack of success I've had with my diet. I should note that Cirrus has a small team of people who have dedicated several years worth of lunch hours to test every hamburger in Austin. The result of a blind vote following their testing was that Hopdoddy's on South Congress was the winner, narrowly beating out Casino El Camino on 6th due to the fact that convenience and general non-dodgy atmosphere were also factors. Personally I'd have given Casino the nod, but I do agree that Hopdoddy's is exceptional. Hut's also placed quite well of course.
I suppose I should point out that we decided to build our own headquarters after a survey of the market highlighted that the financial community had done such a fine job of fixing up commercial real estate that it has become far less expensive to build your own building than it is to simply take a lease (at least in Austin), provided of course that one has cash.
We believe that being located in Austin is a huge advantage, and when our new headquarters is complete I am confident that Cirrus Logic will be the finest semiconductor company on 6th Street.
Question 9/20/2011: Can you give investors anything new with regards to your motor control products or your PFC products?
Both products are in the hands of customers and we expect revenue next year.
Question 11/15/2010: Should we expect to see revenue from the LED lighting products in the following quarter?
We expect to ship production volumes by the end of the fiscal year. While this is a tremendous milestone and a great indicator that we are on the right track, it is important to note that this business will take time to develop. Our controller device is priced in the $0.50 range, and today the total market is on the order of 50 million units. That said, this market is expected to grow by several billion units over the next 5 years or so, and if we are able to take a meaningful share this could become quite significant over time.
Question 06/24/2011: You seem very optimistic about the long term outlook for Cirrus, and yet the share price has dropped quite a bit since February. What do you think is the biggest misunderstanding about the company that has caused this disconnect?
We develop custom chips for some of our customers, and I think there is a general misunderstanding around the process and timelines associated with this part of our business, and what this means for our visibility into next generation design engagements. The general perception seems to be that a customer develops a thick document fully specifying the device they'd like to buy, sends that document out to a handful of interested companies, and whichever company comes back with the best response wins, or some variation on that theme. While there are some customers that manage the process that way, it is not typically the case for a variety of reasons.
We target customers who wish to differentiate their products in part by the technology that we provide. This means that we typically bring a lot of our own IP to bear on solving complex problems for them. Most of the time, customers know a great deal about their own system and the features they are trying to enable, but we add value by helping arrive at the most efficient way to implement the portion of the system that resides in our chip. So, the process of arriving at a truly elegant system spec involves a lot of iteration between us and our customers - many conference calls, engineering visits in both directions, spec reviews, architecture reviews, etc., and it is frequently the case that the specification itself is revised several times during the development. This is very time consuming for everyone involved, and so it is rare for a customer to have enough spare bandwidth to waste time going through the process with multiple suppliers. It takes us roughly a year from start to finish to develop a new chip, and it takes our customers roughly a year to design a product that uses our chip (we do not make devices that are drop-in compatible with those from other suppliers). Now of course in a custom product situation with an existing customer, there can be an overlap to some degree of these two years, i.e., they can start developing their product before we are finished designing our chip, but it is still quite a long development process overall. The devices we are just starting to work on with our customers today will probably not be in full production before the end of 2012.
The implication of all of this is that we have very good visibility into our long term prospects with a customer whenever we are engaged in developing custom products for them, and I think that is probably the thing that is not especially well understood about our business.
Question 06/23/2011: The company has repurchased roughly 3.5 million shares at $15.80 according to the 10K. There's roughly $25 million left to purchase. Has the company exhausted this? Will the company ask the BOD for another increase in a new stock purchase plan?
For the period between March 27, 2011 and May 24, 2011, the company repurchased approximately 3.5 million shares at an approximate total cost of $55.3 million. That's the status as of the filing of the 10K and additional updates will be made as required. Additional repurchase authorizations will be considered by the Board as it deems appropriate and announced if and when they have been approved.
Question 06/23/2011: Will you purchase shares on the open market to give the street confidence in the company after the recent stock price decrease?
All of the shares repurchased under the existing authorization have been made on the open market. While a repurchase may sometimes "give the street confidence," our purpose in buying back stock is to provide long term shareholder value. We believe investor confidence should really come from a thorough understanding of the company, our technology, our strategy, and the markets we are pursuing. This is why we make an abundance of material of interest to investors available on investor.cirrus.com.
Question 06/23/2011: Can you provide anymore guidance regarding your #1 customer?
Nope. Our relationship remains outstanding, and the information contained in the IR presentation on this website is about as much detail as I'm willing to go into at this point. We believe it is in the company's interest, as well as the interests of our long term shareholders, to respect our customers' wishes when it comes to publicity.
Question 06/23/2011: Will the new DSP make it into any of your largest customers or is this a chip aimed at new customers?
We generally do not talk about the custom products that we develop for our largest customer. The new low power audio DSP that I referred to on the last earnings call is intended for the general market, and it has definitely opened doors with a variety of customers. We are very pleased to be shipping the device this soon, and though it will take a while for the device to deliver meaningful amounts of revenue, the early indications are very good.
Question 5/6/2011: I have purchased a number of the commercially available LED lamps that are
We feel your pain. We are also unsatisfied with the bulbs that are out there today, and we are working on fixing the problem for ourselves and you as well. Our goal is to help companies make light bulbs that any of us would actually ever want to buy, which is not currently the case. What that entails is first and foremost working with any installed dimmer out in the market. As near as I can tell, the bulbs that are on the market today that say dimmer compatible mean there exists one dimmer in the world somewhere where it will in fact work the way you want.
The reality is that we've uncovered hundreds and hundreds of different sorts of dimmers. We have a collection of a hundred different types in our lab and they all operate differently. They're all very non-linear devices and making a solid state bulb work gracefully with those dimmers is the hardest challenge one of our technical fellows has ever worked on, and this is coming from a guy with a couple hundred patents to his name. So it's hard thing to do. As for our solution, the device is back and it's working really, really well; and we think has the best dimmer performance out there.
Longer term we also think the color temperature matters a lot. I think a lot of the bulbs that are out there have a light quality that is maybe better suited to an operating room than a living room and that's also something that we're working on addressing with some of our potential customers.
Question 5/6/2011: Given the high price point of LED light bulbs currently available in the market, when will these bulbs reach the $12 to $15 per lamp price point?
We think that's a few years away. We think longer-term where that market really hits its stride is when they get below $10 and then you start to see subsidies that take them down to $5 and that really makes them available to a lot more folks.
Question 4/15/2011: Do you believe this production issue has damaged your relationship with the affected customer?
Question 4/14/2011: Can you explain more about the production yield issue Cirrus experienced on a new audio product in March?
Over the past few years, we've become accustomed to very rapid production ramps on new devices – often from very few shipments to millions of units within less than a month. This is very hard to do with many complex activities occurring simultaneously. Generally speaking I think we are extremely good at navigating these ramps. In this case, we recently determined that our production test designed to test a particular function of the audio product was insufficient to guarantee that all products met a particular specification. Once a more rigorous test was released, we experienced a much greater yield loss during the production ramp than we had previously expected. While this is unfortunate, our highest priority was ensuring that we did not prevent a successful launch for our customer, and we believe that we have been successful in that regard. Additionally, a new revision of the device that eliminates this yield issue has been released to our fab partner, and we continue to work to improve the yield of the existing revision.
The accounting charge is composed of inventory that had already been tested before we implemented the more rigorous screen, and thus had the potential not to meet our quality standards, and lower yields on material tested with the more rigorous screen. Going forward, we expect that there will most likely be a small residual impact to the company's gross margins until the issue can fully be resolved.
The semiconductor industry is inherently an extraordinarily complicated business, and while we strive at all times to have zero issues, from time to time, and despite everyone's best efforts, "stuff happens." When it does, I believe the best measures of any company are how rapidly and effectively it responds, how successfully it keeps the customer happy in the process, and how well the organization learns from the event in order to be stronger in the future. In this case, I believe Cirrus earns high marks in that regard.
Question 01/27/2011:Can you give more information about your LED lighting solution, specifically related to your competitive standing, where your chip will reside, dollar content and timing.
Please see the IR Presentation on the Investor section of our website for more information on what we are doing in LED lighting
Question 01/27/2011: Several years ago Cirrus developed an award-winning ARM processor for handheld industrial devices. Are there any plans to develop an ultra-low powered ARM processor for use with the new DSP and the new industry-leading low-power mixed-signal devices?
The short answer would be no. A few years ago when we looked at our product roadmap and wanted to focus on what we could add value to and where we could really differentiate on technology, we decided we weren't going to be able to do that on other people's IP, such as ARM. While we continue to support our existing ARM processors we don't intend to do new ones.
Question 01/27/2011: From my understanding, you currently have a relationship with Ford. Can you give investors some guidance as to the timeframe you think this relationship will begin to bring in some meaningful revenues? Also, can you give us an idea as to any new developments and/or relationships/prospects that you have in this space since the last conference call? Can you give any ideas as to the content and pricing structure in this area?
It's public knowledge that we're in the Ford SYNC, and have been in that program since it debuted. I don't want to get into dollar content with this product because it's a general market product.
The new chipset that we recently developed is an amplifier product for a different customer, and is expected to ramp into production later this year, with a total dollar content of more than $10 per auto.
Question 01/27/2011: Have there been any further discussions internally about announcing a stock dividend?
The Board certainly discusses uses of cash and what's the best way to deliver shareholder value with our cash asset. As I've stated before, our cash is not burning a hole in our pocket. We've discussed dividends, and as you saw last quarter, occasionally, if the opportunity is right, we're certainly amenable to doing buybacks. We would love to do an acquisition if we found one that was a great fit for us and didn't distract us from the organic opportunities we already have in front of us. So it's one of the things we've discussed but nothing to announce at this point