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Recently, Rule Breakers analyst Sean Sun and I had the chance to talk with Cirrus Logic (Nasdaq: CRUS ) CEO Jason Rhode, whose company produces a wide range of audio and energy components. Below is the lightly edited second part of our chat, where we discuss how the company managed to build its relationship with Apple (Nasdaq: AAPL ) , which contributed 44% of last quarter's revenue. Also, we examine how the company differentiates itself to compete against a larger set of rivals, which include semiconductor giants like Texas Instruments (NYSE: TXN ) , STMicroelectronics (NYSE: STM ) and Maxim Integrated Products (NYSE: MXIM ) .
Miss the first part of our interview? Catch up here, then dive into part two:
Sean Sun: So you brought something up that is a broader topic, but is also very interesting. A large percentage of your revenue comes from your relationship with your largest customer [Apple]. Now, you've had this relationship with your largest customer for a very long time, and you were saying earlier that developing this technology took longer than most people expect. How much of the advantage comes from having that technology lead, and how much comes from some sort of business advantage -- some sort of operational or logistic or relationship advantage?
Jason Rhode: I would say that generally speaking, in our business, all of the advantage on the winning side comes from technology, and [our ability] to deliver. For example, a lot of these things move on a pretty crisp time schedule, so being able to say, yeah, we have new technology that got the customer interested, but now they need a version of it that makes it work in their system better. OK, we are going to need that on July 1. Having a team that can actually take that technology and deliver it on July 1 is huge. There are not many companies that do that well. I think that delivering silicon on time is something that we are especially good at. And I mean developing it in time, I don't mean like from a logistics point of view. We're good at that, too, but...
So I would say the logistics and the business stuff, if you are winning based on your CEO's relationship, or you're winning based on … a hot salesgirl on your team or something like that, with all due respect, that's just not the way to play the game. We want to win because our products are better and they help our customers differentiate.
A big factor, really, on the winning side is [that] I am not aware of a socket in the world where they don't care about cost, and so a successful company in our space is able to point to the total bill of materials and say, look, our chip enables your bill of materials. So the purchasing guy, if you really engage with the purchasing guy at a customer, they always want to talk about the price of your chip. Fair game, but really you want to have a good argument that says, look, yeah, that's fine. The price of my chip needs to be competitive, but we just saved you $0.50 worth of passive components that goes around my chip, cut us some slack here.
And most folks are pretty receptive to that line of reasoning. It works better for them and better for us and all that. That's really how we got started in portable audio … we came up with an innovation that removed literally $0.30 worth of fairly large capacitors from a design where the chip itself was on the order of a dollar. It's pretty tough in this space to bomb your price by 30% to hang on to a socket, so we were able to slide in.
The logistics and the operations stuff that you mentioned, that is really more stuff that's kind of like quality; quality is assumed. You don't win by having good quality, but you sure lose if you don't. It's the same with delivery. We've got customers that ramp from zero to millions of units in a matter of weeks, and being able to support that with operations excellence is just critical. You wouldn't stay in the socket long if you didn't do that.
Sun: If we're looking at you guys versus your competitors, then -- just a very basic example -- if I'm an individual investor, what's the key item to be looking at, for instance, in your financial statements? Since you're saying that technology is really the driver of this business, should I be looking at your R&D expense and saying, you guys are doing so-and-so, and look what their competitors are able to do, and is that a competitive threat?
Rhode: Right. It is interesting. I have talked to investors and whatnot; we do these interviews to get the different perspectives that, thank God, really [are] interesting. I think that looking at the R&D expense is a pretty good indication that we're very confident about what we are doing, and we have communicated a model that says, over the long term, 55% margins, 20% operating profit, and 15% revenue growth. So we obviously buried the needle on the revenue growth this last little while, and [that] drove us up on the profit side in a way that kind of makes you go, well gee, now you're going to have to decrease your performance to get back to the model. It's really not about that -- it's just that you do need a certain level of R&D. We think that 20% R&D-kind of number in our business is what enables you to really do a meaningful amount of growth going forward.
If I was an investor, I would for sure look for us to be closing that gap and continuing to increase our R&D spending, which is what we were doing. If I could wave a magic wand and drop 50 engineers down on the fourth and fifth floor here, I would, but unfortunately you can't do that. That doesn't – unfortunately -- work. So certainly that is one of them.
To me, I think the thing that people should really look for -- and I have no advice whatsoever for those trading in and out of this on a monthly basis. That's not our job to figure out how to help them. I mean, Godspeed, I'm sure that is a lovely investment strategy for somebody, but I don't know how to help them.
Our focus is two years out, two to five years out, because that is really where we can have an impact. Anything shorter term than that in our business, we are a proprietary semiconductor chipmaker, so literally it takes our customers a year to design our product in. Then it takes them a while to get their stuff into production. Within the quarter, or even next quarter, there is just about nothing we can do, ethically, to have a positive impact on our business. It just sort of is what it is, and we try to manage it carefully, and we make sure the channel doesn't get overfull so we have revenue issues or all that, but we just try to run a tight ship and make sure to not get out of whack.
You can certainly do things that screw up your business for the short term. I'd pay a lot of attention to how focused -- if you are really an investor -- to how focused management is on long-term issues versus short term. Especially the fall of 2008 was brilliant for this. You'd see actual public companies put out press releases about how they were cutting back expenses and scaling travel. It just always makes me laugh. Well, was it travel that you shouldn't have been doing in the first place, or was it travel that was really important, and now you are not going to do it? It is just goofy.
So when we hit the fall of 2008, we had very good indications that our strategy was working. We have a ton of cash, no debt. We talked through the whole thing with our board, and there is zero value in optimizing around our worst couple of quarters. Let's invest in the business and hire great people while they are available, because in our industry, that's not usually the case. We'll just power through it and take market share. That works, too.
That's it for part two of our chat with Jason Rhode. Keep tuning into Fool.com for the final part of the interview, where we'll discuss new growth areas for Cirrus Logic. To stay up to date on all things Cirrus Logic, make sure to add the company to your watch list. Also, if you're interested in the company, be sure to check out my buy recommendation from the Fool's recent Rising Stars series.