Jason Rhode - President and CEO Thurman Case - CFO Chelsea Heffernan - Manager, IR

Chris Hemmelgarn - Barclays Erik Rasmussen - Stifel Christopher Longiaru - Sidoti & Company Tom Sepenzis - Northland Capital Management Tore Svanberg - Stifel

Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Third Quarter Fiscal Year 2015 Financial Results Q&A Session. At this time, all participants are in a listen-only mode. After a brief statement, we will open-up the call for questions from analysts. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I’d 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, our Manager of Investor Relations. Today, we announced our financial results for the third quarter fiscal year 2015 at approximately 4 p.m. Eastern Time. 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 Web site 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 Web site in the latest Form 10-K and 10-Q, as well as other corporate filings made with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectations. Now, I'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 Web site. We are very pleased with Cirrus Logic’s financial results for the December quarter as we delivered year-over-year and sequential revenue growth. Revenue for the quarter exceeded our expectations at $298.6 million due to the increased sales of our portable audio products. Operating profit for the quarter was 15% GAAP and 23% non-GAAP. Earnings per share were $0.35 GAAP and $0.97 non-GAAP. The Company has invested a significant amount of R&D dollars in engineering resources over the past several years to target opportunities in the rapidly emerging audio and voice markets. We began a multi-year process to transition a large portion of our product portfolio to 55 nanometer including the fundamental redesign of some of our intellectual property. These products have been well received by customers and we expect volume shipments to begin in FY16. We believe the additional functionality, the decrease in power consumption, and a sizable increase in memory and digital signal processing capability enabled by our smart CODECs will allow the Company to command higher ASPs for these next generation products versus their 180 nanometer counterparts. Despite the rapid growth of our engineering teams, the opportunities for our innovative technology have outpaced our ability to pursue them organically. Through the acquisition of Acoustic Technologies in 2013 and Wolfson Microelectronics in 2014, the Company accelerated our strategic roadmap and strengthened our product portfolio with additional smart CODECs as well as MEMS microphones and best-in-class software. We are very excited about the prospects of Cirrus Logic going forward. The introduction of new products targeting the audio and voice market that have been developed by both Cirrus Logic and Wolfson are driving the Company's expectation for growth in FY16. We expect to benefit in FY17 and beyond from further product introductions based on the combined Company’s 55 nanometer platform and the cross sale of component such as our highly advanced amplifiers and MEMS microphones into existing smart CODEC customers. Before we begin the Q&A, I’d 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’re now ready to take questions.

[Operator Instructions] Your first question comes from the line of Blayne Curtis from Barclays. Your line is open.

Hi. This is Chris Hemmelgarn on for Blayne. Thanks very much for taking the question and congrats on the strong quarter and guidance.

Thanks, Chris.

Given that things seem to be going pretty well with your largest customer, I guess I will take a look at the android ecosystem instead. I believe you got a 65 nanometer smart CODEC shipping there. I was hoping you could talk a little bit about opportunities in android with that part and whether or not you expect to see any traction in that ecosystem with the 55 nanometer part you guys have upcoming?

Well, so the -- so we’ve got some color on that in the shareholder letter and then also just to highlight the Wolfson team hadn’t migrated their products down the process curve significantly before Cirrus did. So they actually targeted 65 instead of 55, because 55 wasn’t ready yet. As it happens, 55 is just an optical shrink of 65, so they’re pretty closely related. So the Wolfson team had done a great job of landing their first smart CODEC socket last year. We expect to continue that progress this year. There is new product introductions first in 65 and then a little bit further, not a whole lot further, but a little bit further out in the year in 55 nanometer from the products that are, I guess, with the Wolfson DNA. So we expect very good things there. We expect to grow our share in android meaningfully this year and that's part of what's contributing to the upside this quarter as well.

That’s great. Thank you very much. Just a quick follow-up, I guess kind of more broadly and longer term, with -- in the advent of always on voice, a lot of the features you talked about adding, what type of roadmap do you see beyond this year for -- a further advances in processing power, the mics you’re developing and just some of the other general feature supporting always on voice?

Sure. It’s always on voices actually is the kind of the neat best case convergence of really everything that we are very good at. So very low power combines analog and digital signal processing capabilities now with the opportunity that incorporate the Wolfson microphones and potentially optimize those over the coming years, optimize those -- over the coming years optimize those in tandem with the CODEC. We think it allows us to provide an even better performing, better power consumption, better experience for the user overall. So we’re very excited about continuing the press on always on voice and supporting that in a variety of different ways, lots of -- it means lots of different things to different customers, it means different things in devices that for example don't have an applications processor. So the ecosystem in the homes gets a little more interesting. Lots of companies are targeting that space. It’s a very good opportunity for us. So always on voice, the neat thing about it is there is no such thing as low enough power. No matter how well we get it; customers are asking is to cut it in half. And on top of that, ideally there is lots of customers that have gone from talking about doing it with one microphone to one that have several microphones for example for beamforming. So there is a lot of dimensions left to innovate on in that -- in the AOV space itself. But further -- the whole suite of software capabilities that you can find in the investor presentation on the Web site highlighting everything from noise suppression, wind noise to record specific features, audio zoom, all manner different things that people want to support all in parallel on the same device really increases the case to be made for smart CODECs in general and we think sets up to just create a number of years worth of really good opportunities for us that are right in the sweet spot of what we’re good at.

Thanks very much for the color there and congrats again on the quarter.

Thanks. Appreciate it.

Your next question comes from the line of Erik Rasmussen from Stifel. Your line is open.

Yes, guys very nice results and guide. I just wanted to follow-up on some of the comments you made in the shareholder letter and the past question as it relates to Wolfson, it appears that this business did about $120 million in revenues last year and that's down from the prior two years, I think that you did -- they did about a $180 million, but you had indicated in your outlook that this business will be up significantly in the March quarter. I just wanted to get your thoughts, your expectations for calendar ’15. Do you think you can reach that prior revenue number or close to it again? Obviously, this was probably the low order mark this year for that business?

I think our -- no matter how you look at our, it looks like our timing was pretty remarkable in pulling that off. Rumors of our business acumen might have been a little bit down last quarter. We are very excited about the outlook, but they have got this year. They had a tough perfect storm of things that hit them last year in terms of market share and as well the success of some of their customers, we don’t get to control the second aspect, but we certainly have an opportunity to improve our share in their existing customers. The team have done a great job developing products. So we did see a great outlook for the current quarter. We don’t -- we try not to get real specific beyond the current quarter, but we expect growth -- significant growth from them for FY16 as well. So we’re as pleased as could possibly be with that acquisition. The team has done fantastic things that we expected to have happen in 2015 and FY16 are happening. In a lot of way I look better at its better than what I was thinking strategically would actually happen. They’re certainly in the tenure of having that deal done. So we’re very pleased with it.

Thanks for the color on that. The IOT space continues to gain a lot of momentum. I know coming at CES again this year wearables segment was very strong and I think you indicated a little bit in your shareholder letter, how do you see the wearable segment, the opportunity for Cirrus? What sort of content or technology targeting, how big of an opportunity could this be for you guys, maybe just some thoughts there?

Well, we view meaningful dollars as being a ways of way in that space. But it is -- as you said, it is clearly a very growing, very interesting market. It is not a big part of our -- we had actually -- we shipped in that space either algorithms through the Acoustic Tech deal in a number of Bluetooth accessories, as well as devices into kind of these first forays that our customers have made in that space. We don’t expect that to do anything real meaningful in the short-term, but it’s a great home as we said in the letter for a lot of the technologies that we’ve developed in phones and tablets for example that people want all those same functions and features in long run in wearables. Now as to content, the point that is important to make there is it really can vary a lot. In some applications, it can easily be nothing other than a digital microphone connected to a processor. It could be microphone or small amplifier, it could be a whole one of our smart CODECs where that device is the only processor in the system and provides the brand. So it really varies. We are seeing customers innovate in lots of different ways. I think it will be a while before we figure out what that market really wants to be, but it is really neat as now a lot of the things that we’ve all kind of grown up thinking about are becoming real either because of the technology that's available or because some customers that actually have that wherewith all the do so are defragmenting the infrastructure in the home or at least have goals to do that. So that it opens the door for a lot of innovation in individual products to take place in the home. We should be able to talk to a lot more of our staff than it is currently done today. It is a very good opportunity for us to deploy our technology in these devices typically, if they’re battery powered have very, very small batteries, the battery life matters a lot, power consumption matters a lot, as well as us providing a voice interface, potentially music playback et cetera. So we see it unfolding slowly over the next couple of years, but it’s a great, great showcase for where our technology can go.

Okay, thank you. That make -- it's a good explanation. And then, just finally may be one for Thurman. On the tax rate I know you run at your DTAs and credits possibly the March quarter, and then for fiscal ’16 you talked about a blended rate of 30%. And in the lower in fiscal ’17 I just want to get your thoughts so on how much lower are we talking, is there a certain range that you’re targeting for fiscal ’17 on the tax line? Thanks so much.

From a tax perspective, I don't think we actually target ranges. It's a process that we go through and we do expect the tax rate to continue to decrease in FY17 and beyond that. I would note though that in U.K. the tax rate in U.K. is 20% and a significant amount of our revenue will be moving outside of the U.S as we go into ’17 and ’18.

Thank you very much.

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

Hey, guys. I will echo my congratulations. Great quarter.

Thanks. We appreciate it.

So my questions to it, can you talk about the relative unseasonal improvement in the android business going into the March guide. Can you give us a little more color? Is that in terms of the strength, is that more additional content with existing customers or is that some of the new designs that you had been working on, coming to fruition in terms of shipments? Can you give us a little bit of color there?

Well, it’s a combination new product introduction as well as we expect to grow our share. So it's a good combination of things there.

And then, just in terms of the integration of Wolfson, how much of that is left how far along? Are you -- is there anything left that you intend to strip out? How do you see that going forward?

Well, I mean, we’re still working through the, what I guess I would call the plumbing of the integration. I mean we have -- the management and organizational structures are done, the roadmaps are consolidated, engineers are working on what we expect them to be working on. So the things that remain really are related to for example SAP merging to various different systems et cetera. So there are some productions that can happen as those things are completed, but given our revenue outlook, the hiring that we expect to do on the R&D side, we’d not -- we'd certainly not expect our overall OpEx to go down at this point. I think we will be very challenged to have our R&D resources to be able to keep up with our revenue growth this year.

Okay. And the last thing I have is, you pay down a good chunk of the debt. Is there a goal for what you -- how you expect to pay down that debt over time? Can you give us a little bit of an idea of how you’re thinking about that?

Well, from a quarter-to-quarter basis, we look at the way we utilized cash and certainly paying down the debt I think we noted this last quarter, it is a high priority for us. Again, I wouldn't say that we going to quarter with a goal. We look at the amount that you pay down can have an effect on certain covenants and how those affect your interest rate and we will manage that accordingly on a quarter-to-quarter basis.

Okay. Thank you. I appreciate it. I’ll jump out. Thanks, guys.

Thanks, Chris. I appreciate it.

[Operator Instructions] Your next question comes from the line of Tom Sepenzis from Northland Capital Market. Your line is open.

Hi and I will also echo my congratulations on the quarter and the guide. I was just wondering if you see any further synergies in terms of [technical difficulty] operating expense, now that you’ve had Wolfson in-house for a little while?

Well, I mean, I think that as I said on -- an answer to the previous question there is certainly as the systems et cetera and things get merged in and we’ve -- we get rid of those redundancies there as costs that come out there, but they’re probably more than offset by the growth that we’d expect in our R&D resources as we try to scale those to keep up with the revenue. So --and additionally the outlook -- I’d say that our outlook as a total company and that has helped certainly by the success that we're having on the former Wolfson side of things. The outlook for the total company is better than we were expecting at the time of the acquisition and so that’s got a different set of plans in place at this point for how we are going to support that and how we are going to grow different set of circumstances, so we adapt and improvise and go from there.

Thank you. And your inventories, you took down quite a bit here in the December quarter. Is that the level that to you think will continue or is it just because the seasonal, I guess, not really weak this March, but typical weakness?

Yes, we’re also learning obviously we -- obviously our revenue came in significantly higher than expected in that, goes on in the phase of strong demand and that's what caused our inventory levels to go down. We don't think we will be in a position to get those back to where we really target within the next quarter. We are working very closely with our customers and suppliers to make sure we are doing a good job there, but now we done it. We do not expect inventory to go back at this quarter. We would like to build more than -- build more inventory up and it causes us a good kind of challenge. I have to spend a lot of time on this type of problem.

Excellent. And then lastly, just in terms of gross margin, looking ahead do you see any major threats there or is that something that we should be modeling incrementally higher as revenue goes up?

Well, I mean, we give you the guide for the quarter and we maintain our model still in the mid 40s and we think that as our size in the market that we’re targeting that that’s a reasonable level and some products are higher, some products are lower, but on the mix, obviously our target is as high as possible, but we feel comfortable, the mid 40 is a reasonable range for us to expect.

Excellent. Thank you very much. I appreciate it. Congratulations.

Thank you.

Your next question comes from the line of Tore Svanberg from Stifel. Your line is open.

Yes, thank you. Just some follow-ups and very nice quarter by the way. I guess the first question or the first follow-up here is really on the sort of landing. What I mean by that and I know you don't typically give guidance more than a quarter out, but obviously you're tied to some strong product cycles. So just looking at the June quarter should be assumed the landing there to be relatively soft this year or will it be a little bit harder because of the March quarter being better? I’m just trying to understand a little bit how the product cycle eventually lands?

Yes, qualitatively there is definitely dynamics in play this year that Cirrus doesn’t had in the past just due to the inclusion of Wolfson and the fact that some of their businesses on a different cycle, different product introduction et cetera. So hopefully that should be a good compliment to the cyclicality that Cirrus has typically had.

Very good. And then on the inventory question, you mentioned you would like to build a little bit more and I was hoping you could just add a little bit more color there. We are talking about front-end, back-end, is there a bottleneck everywhere that could potentially open-up for you in the March quarter?

Well, I mean, one thing that is dynamic, it's obviously a mix of products that make up our total inventory. As we transition more to 55 and 65, obviously we expect the volume of our devices to remain high and grow, but the volume of wafers we need to support that decreases a lot, because it's number one in 12 inch wafer and obviously the feature side of the devices are smaller. They’re more expensive, but they’re smaller. So that gives us, as we ramp these various different 55 and 65 nanometer products we’re talking about this year, that -- we will certainly expect that component of the inventory to grow significantly. So -- but that’s not in this quarter statement.

Okay. Just one last question, Jason. You’ve always talked about new opportunities being in voice, but then also on MEMS microphone. If you look at those two, which one should we think of is coming first meaning, being at potentially a higher percentage of your revenue?

Voice in general is certainly going to drive near-term growth more rapidly. Microphones are an investment. I am very thankful that we have now in our portfolio as part of the Wolfson deal and part of also frankly what we’re working on Cirrus prior to the deal. But we’re able to combine those efforts and move forward a little more quickly; still it's a ways out from being a meaningful contributor to revenue for us. We see that being a good business. We are in the process of establishing ourselves and start -- and really kind of ramping the volume there. But the long-term for us is in being the provider of the audio signal chain all the way from the microphone to the speaker, speaker driver and optimizing that all together. We think there is great opportunities to optimize the CODEC and the microphone in together in ways that deliver better performance and better cost structure for customers overall that should be very favorable to us, given our position in the handsets and particularly that they’re kind of the highest volume things that are out of there. So the MEMS thing is significant, but it's further out, the voice is here and now and just that every customer we talked to is jumping up and down about it.

That’s very helpful. Again, nice quarter.

Thanks. I appreciate it.

[Operator Instructions] Your next question comes from the line of Blayne Curtis from Barclays. Your line is open.

Given it looked like there was some space in the Q&A, I thought I would jump back in and get a quick follow-up. Just hoping that you could talk a little bit about some of the opportunities you have in non-portable. It seems portable is going extremely well, but I was just curious, I mean, with all the new features you’re developing, do you think that’s going to be applicable to the non-portable space and is that a business you think you can grow this year?

Yes, it’s obviously -- we’ve got a number of new investments in that area, given that we got the existing portfolio from Cirrus and from Wolfson. That’s something that is definitely an area where having put the two companies together, we’ve got more critical mass in that space. There is a -- I kind of indicated earlier there is -- there has been long period where there hasn't been a ton of innovation in the home and we see a lot of companies that are really targeting that space now. And voices are pretty good interface for a lot of different devices whether its remote controls or any number of different things. So we see that as a god opportunity in the longer term for a stuff that can be with our same existing smart CODECs. They have -- they are incredibly high performance even though they’re low powered, so certainly high enough performance for any of the home applications that we would typically target. Same is true for automotive. There is a lot happening in automotive, electronics, so as not only -- the car market itself is quite large, but a lot of the features that are -- would have historically been reserved for kind of higher end models, been really permeating down different manufacturers line ups, certainly android and some of the other folks have got some initiatives that should drive interest in automotive audio. The automotive cabins are good environment for voice interaction as well. So its not as -- its not nearly as big as portable audio was for us in handsets in particular, but it’s a great place for us to redeploy a lot of the very same technology we’ve already developed and we’re continuing to see opportunities for that, for the existing products in the short-term and then over time, new products as well.

That’s excellent. Would you say that’s an opportunity that could drive revenue in calendar ’15 or just given the life cycle of those products then more of a ’16 and beyond timeframe?

I mean it’s already a non-trivial part of our business. It’s a slower growth. I think it’s a slower growth space in general. And so it will take place over time. There is not any one single socket that you can go win that its going to really move the needle overall either, so you’re aggregating a bunch of smaller design win. But that is for the most part, that’s the nature of the business we’re in. We just happen to have a couple of outliers to that -- that model.

Thank you very much.

You bet. Thank you. End of Q&A

[Operator Instructions] I'll now turn the call back over to Chelsea Heffernan.

Thank you, Operator. The questions submitted via e-mail this afternoon were answered during the Q&A. I’ll now turn the call back to Jason.

In summary, Q3 was an outstanding quarter for Cirrus Logic as strength in portable audio fueled revenue growth and operating profit expansion with an exceptional customer base and a broad range of industry leading products we are very excited about the prospects for Cirrus Logic going forward. We expect to deliver year-over-year growth in Q4 and FY16, driven by continued strong market for our innovative audio and voice products. A compelling line up of new product introductions and significantly improve contributions from the Wolfson acquisition. I’d also note that we will be presenting at the Stifel conference on February 10th at 10.20 AM Pacific Time. We will also be presenting at the Morgan Stanley conference on March 5th. A live webcast of these events will be available at investor.cirrus.com. If you have any questions that were not addressed, you can submit them to us via the Ask the CEO section of our investor Web site. I’d like to thank everyone for participating today. Good bye.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.