Cirrus Logic's CEO Discusses Opportunities Ahead
This is the second part of a chat I recently conducted with Cirrus Logic (NAS: CRUS) CEO Jason Rhode. If you missed it, here's Part One, in which Jason talks more about the audio side of the business.
Cirrus Logic is most familiar to investors because of its audio business and placement as one of the best pure-play suppliers on Apple's (NAS: AAPL) growth. In the most recent quarter, Apple accounted for about 70% of Cirrus' revenues.
However, that outsized share of revenues to Apple hides the fact that Cirrus has used the cash spun off from its relationship with Apple to go back and rework its energy segment for next generation opportunities. In our following discussion, you'll find plenty of talk about Cirrus' energy efforts, with a particular focus on the LED controller market, a fragmented market where giant Texas Instruments (NYS: TXN) is the leader, but Cirrus still sees plenty of opportunity.
The following conversation has been lightly edited for clarity.
Eric Bleeker: Moving on to the energy segment. I have in my mind that you guys used to kind of target a 50-50 mix. Would that be correct?
Jason Rhode: Well, I think that's a good, long-term target. I think there's a lot of value and a lot of synergy between those two businesses in terms of the type of signal processing that we employ and being able to leverage some of our investments across multiple markets. But at the moment, audio is growing much more quickly, but we are now starting to see the signs of success in the energy investments we have been making, and I continue to think that the energy investments we are making are our best opportunity for diversifying our revenue over the long term.
Bleeker: Sure. Then would you say that's a fair assessment to say that you have utilized strength in audio to go back and kind of refocus your energy product portfolio? Is that the strategy? Because that's kind of how I read it.
Rhode: Yeah, well, we have definitely invested in energy in a way that is disproportionate to the revenue, and in particular ... some of the products in the energy category are in the very, very old category. Those are things that are more like an annuity than a business, if you think about the things that we are really investing in today. We are definitely investing in them in a way that is significantly disproportionate to the revenue. These kinds of investments take a good, long while to pay off. We are not in an overnight kind of a business.
Bleeker: And you had mentioned one of those huge investments is the LED lighting controller.
Bleeker: And you had mentioned on your last earnings call that you were at a production backlog on that.
Rhode: Yeah, we are really pleased to see that. You always think you are on the right track, but nothing makes you smile more than finally getting that first production order.
Bleeker: And so you are moving on to the second generation of that?
Rhode: Yeah, we have our second generation of product back. We are out promoting it to customers, and that's getting a lot of interest as well. Both of those products offer what we believe is by far the best compatibility with dimmers that are installed in people's homes, and the second generation brings some additional functionality on top of that, in terms of being able to get the color right and the brightness right all at the same time.
Bleeker: Sure. Looking at the LED segment, audio you have mentioned, and you've got a big customer on the smartphone side, but the appeal of your high-end products hasn't been met by everyone. Likewise, the LED market is huge in terms of units, but I want to see what the broader appeal is. What would be a total market share that you are targeting with your lighting controllers? Because we know it's also incredibly fragmented as well.
Rhode: Right, it is. The biggest names that are out there, which are the kinds of customers that we really want to target primarily, typically have hundreds of different sockets rather than a handful, which, there's nice things about that, but it does take a longer time to penetrate a broad array of their products. But I think any time you are targeting a new market, you need to have in mind that you can get the interest of the opinion leaders, the largest customers in that space, and then win a meaningful amount of that share. Otherwise, what's the point? And we need to do that in a way that enables us to lower their bill of materials so that we can actually justify a reasonable gross margin for our product.
So in terms of market share, it's difficult to call in a meaningful way today, just because I don't know that anyone knows how that market will shake out. The compact-fluorescent market, for example -- the first products that came out in compact fluorescent were so bad that I think largely people just gave up on providing good dimmer performance. It's perfectly possible to dim a compact fluorescent lightbulb and do so in a really good fashion, but the first products were so bad, I think everybody just put it in a category in their mind that CFLs aren't dimmable, and therefore if you have a dimmer, don't buy one.
So that market ended up with a stratification that is not what we expect to see currently in LED. We see LED coming in in a way where the folks we talked to, in an ideal world, would have all of their bulbs be dimmable so that you can get back to a much simpler situation on the retail shelves. And if that scenario unfolds, then I think targeting a third of the dimmer-compatible market is a pretty good target for us. The question, really, I guess, is, What fraction of the LED lightbulb market is itself dimmer-compatible?
Bleeker: What would be an ideal scenario for you that's reasonable in dimmer compatibility five years from now?
Rhode: I would like to see; I think there's no reason that as consumers we should have to continue to put up with what's out there today. I think that once people realize there is a very good solution out there for being compatible with just about every dimmer on Earth, that there's no reason that every lightbulb shouldn't be dimmer-compatible. When you think about 10 years ago, when it was all incandescent, the lighting shelf at your local hardware store was 10 feet long and it didn't take you 20 minutes to figure out what lightbulb you were trying to buy. It's a frustrating experience now to go to the hardware store and figure out what it is you are even looking for.
Bleeker: Sure. Moving on to another energy segment, maybe I am reading the tea leaves wrong here, but I don't see you guys mentioning metering. It seems like the LED lighting controller gets a disproportionate focus relative to some of the smart metering projects, and I look at some of the publicly traded smart metering companies, and it's a technology that hasn't taken off in a way that I think a lot of people hoped for or expected. What's your current read of that market and you guys' focus there?
Rhode: I guess I wouldn't characterize [it that way]. Power meters are kind of the automotive market of the industrial segment. I think it's a great business. I think it's a good business for us. It's an area where our technology is very directly relevant and we have got some good customers in that space. I think maybe a couple of years ago, when the president was really beating on us -- the smart-grid drum -- probably the hype got a little ahead of the industry. There's just maybe a little bit of a misunderstanding of how fast it's even possible for that industry to move.
If you figure utilities have got to spend a long time designing, well, a meter company has got to spend a fair amount of time designing a meter to make certain that it lives up to some pretty exacting standards. Then they have got to go convince the utility, which, by the way, is not the most nimble of enterprise. They have got to go convince them of all those facts and to really commit to their whole back-office solution and their data-gathering telemetry, all of that. Then that utility has got to go out and pick a metropolitan area where they are going to deploy these things en masse -- typically going to run a trial period in a small neighborhood and then expand from there and there. So you can imagine you start stacking a lot of steps where there could be six months or a year to each step, and it takes a long time.
So that is, again, a blessing and a curse. We have a very long-term focus for the way we manage the business, and I expect power meters are going to be a good business for us for a long time. But it is a slower growth opportunity, and it's not as big as LED. I think relative to the opportunity, it would be hard to talk about LED in a way that was disproportionate. LED, the opportunity there is just huge.
Bleeker: In your letter to shareholders, you actually took time to break out [that] your corporate culture is one of a big differentiating factor for you. Could you maybe describe a little bit of the things that you guys do to really differentiate yourselves, maybe some plans you have for the future to continue to do so?
Rhode: Sure. We put a lot of value on whether people really like their jobs, and in making this a great place to work. Not because we want to get on somebody's list, although we are on a lot of lists at this point about best place to work or whatnot. We do it because we think that people who love their jobs work harder, more creatively, and they don't tend to leave their jobs, which is really critical in this industry.
I think a lot of people -- like any business -- I think a lot of folks in the semiconductor industry treat cost as something that you have just go to minimize across the board, and the reality is the people you employ are a huge asset and a meaningful investment, and like most investments, it takes time to pay off, so you had best not lose them. If you think about it, we hire a master's-degree student right out of school -- they can do meaningful things for us on day one, but it takes a couple of years before they are really an autonomous contributor to the team.
So if you are in a Silicon Valley kind of a culture where you are losing people all the time and hiring new ones all the time, it's really hard to get to a point in our kind of a business where people really are able to contribute at their fullest. So we want to run a company where people love to work. We have gone through a few years where maybe the job market wasn't so red hot, and we have treated people very well and run ourselves as a company where we think it's a pretty attractive place to work, and now I think that pays dividends because we are coming into an era where, or into a period where, it appears that recruiting pressures are a little higher. ... Other companies are hiring, and I think that's where we get to where the dividends really kick in for some of the investments that we have made in making this great place to work.
Bleeker: It's interesting that you say recruiting would be kicking up, because we are coming out of a year in the semiconductor industry where you had, 2% growth, was it? Here you guys are growing at 20%-plus, so how does having a growth rate so ahead of the industry and still managing to move ahead -- how does that affect your recruiting in times like this, in a very cyclical industry?
Rhode: Well, it helps; it does help a lot. People want to work at a company where they are going to feel like they are winning or they are working on stuff that they think matters, and so certainly when we can point to a couple years in a row of outgrowing the industry by a pretty good clip and being able to state with conviction we think we are going to be able to keep that up, that's a big deal from a recruiting point of view.
Interestingly, I don't think job security is anywhere near as high on the list for people as it would have been 20 or 30 years ago, where it was the only thing that mattered, but it still matters a great deal. People want to work for a company where at least the business prospects are going to support the notion that it's going to be a good, stable job. So the growth has helped a lot.
Bleeker: A final question here would be that if you could have had three priorities that you would think investors should be looking at in the company -- three areas that might be kind of overlooked, that you wish kind of would get a little more attention -- what would they be in the year ahead?
Rhode: I guess the No. 1 thing is really looking at the details of what we have been doing in terms of the investments we are making. We have hired a lot of folks. We are building a headquarters. We are lining up capacity agreements with folks. I think that at that point, when you have wrapped your head around those kinds of details, step one is a check of either you think we are insane or dishonest or we must be thinking that some pretty good things are going to happen. So that's kind of level one.
I think people had a lot of fears [that] we might lose a whole bunch of business overnight, and just kind of walking mentally through the timeline that's involved in developing custom products, and the visibility and the commitment that that implies from a customer, is another area that matters a lot.
Then paying attention to whether we actually are achieving the commitments that we are able to talk about, it's a challenge, because as you have been kind enough to tap-dance around, we do have one customer that doesn't like it when people talk about them much. A lot of what we do involves that area, and so we can't talk about a whole lot of the details in a lot of our business. But what we do try to lay out is a number of milestones. ... We have talked about it over the last little while that ... we engaged with a big customer and now we are doing protosamples for that big customer and now we are shipping production quantity backlog to that big customer, and ultimately that will come out with products on the shelves, LED lighting products on the shelves, later this year.
So I think when people pay attention to the company for a long enough period where we do give you some pretty good indications of where we are going, and when we say what we are doing, we mean it. We are not in this sort of thing for the short term, so we do tend to give you much longer-term kinds of goals and metrics and talk really more about our strategy so much rather than individual opportunities that may happen this quarter or next quarter. It's a very long-term business, and that's where our focus is, and I think that's appropriate. Most of the questions we get are a lot more short-term in nature.
Rhode: And that's really where it gets difficult.
Bleeker: Yeah, and that's kind of why I wanted to ask that. You guys don't give guidance in the year ahead, which we at the Fool actually love, and we think that's often a sign of a great business, where you're managing long-term. But sometimes it's nice hearing from an executive what they would like; maybe they think people aren't properly focused on their business.
Rhode: For us, I would love to give guidance for a year out, but I don't have a crystal ball, and once you start talking about four quarters away, you are talking as much about the economy as you are your own business. There's just so much jeopardy in it that we are pretty pleased if we are accurate for the coming quarter. And frankly, our focus as a management team is not so much on the minutiae of exactly what it is in any particular quarter, but just making sure we are winning the designs that are the things under our control. We can't control how successful our customers are; we can just make sure that we decide to bet on the right ones and make sure that we successfully enable them to get off the ground, and then it's kind of up to them.
That's it for our interview with Cirrus Logic. Make sure to add the company to our free My Watchlist feature. And if you're looking for more mobile plays beyond Cirrus Logic, make sure to check out our newest free report on mobile named "The Next Trillion-Dollar Revolution," which details another component play that's seeing huge growth from the smartphone revolution. Fool on!
At the time this article was published Eric Bleeker owns shares of Cirrus Logic. The Motley Fool owns shares of Apple, Texas Instruments, and Cirrus Logic.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.