Investors might be most familiar with Cirrus Logic (Nasdaq: CRUS) from the company's inclusion in Apple's (Nasdaq: AAPL) lineup of products. However, the company has a wide range of design wins across a variety of products. Here's just a sample of the markets, and end customers the company sells to:

  • Home entertainment: LG, Panasonic, Philips
  • Smartphones and media players: Apple, Sony (NYSE: SNE), Samsung
  • Automotive: Sirius XM (Nasdaq: SIRI), Ford (NYSE: F), Bose, Harman International
  • Smart Grid and metering: Itron (Nasdaq: ITRI)

Cirrus has managed to secure design wins with this impressive customer list by providing custom designed products that target the high-end segment of these end markets. After closely following the company during several quarters of high growth, Rule Breakers analyst Sean Sun and I had the chance to talk with CEO Jason Rhode. Below is a lightly edited first part of our chat that discusses Cirrus' focus now, and how the company has managed to refocus itself:

Eric Bleeker: I just wanted to thank you for taking the time out to talk with us today.

Jason Rhode: Sure, my pleasure.

Bleeker: So first of all, just from a high level, Cirrus Logic, it is a combination of both the audio and energy end markets, which to some might seem kind of like divergent areas. Could you explain how these two areas came together for your company and give the readers some background on the products each segment offers?

Rhode: Sure, there are kind of two themes to that. One, we really kind of, when I took over, we kind of sat down and really mapped out where we wanted to go as a team. The areas of the company that we are doing, wow, we are all related to signal processing in some way or another and typically as close to the analog to digital boundary as possible. So either sound waves into digital format or digital format back into sound waves, which is an obvious audio application, but also actually from a technology point of view, it is quite similar to the technology that goes in, for example, a power meter chip or an energy exploration, the type of energy exploration products we make as well. So from a technology point of view, they are actually quite similar, even though the end markets are kind of divergent.

At the same time, we really felt like, it's not like we came up with this concept, but we really felt like for any company to be successful at what they do, you really need to tap into the passion and excitement of your employees. People work a lot harder and a lot more creatively on stuff that they believe in and that they are excited about. For audio, that is easy. That has been the case for many years. Audio is all over in our lives. The customers are exciting. You can pretty easily describe to your mom what you do. We are in that saying, oh, OK, I get it.

But for years we have been in the industrial area and industrial is a little hard to get excited about, per se, but within industrial we have some product lines in the energy arena, such as power metering and seismic. We had some pretty cool ideas for how we could participate in some of this energy efficiency conversion that the world is going to go through, so power factor correction, LED lighting, some of this stuff, and we realized that thematically, energy is something that is just as easy to get excited about as audio. It helps from a recruiting point of view, it helps from, like I said, just a passion and commitment and excitement factor within the company, and that happens to be a topical and growing market, which is a nice combination if you can get it.

Those two things are kind of how we ended up with audio and energy, and it is not that those are the only areas we would ever serve, but we are looking for new stuff to do when we are done with this, I guess.

Bleeker: When about did that refocus happen?

Rhode: It was 2007. Yeah, and a lot of this stuff was already going on. I don't want to make it like I came in and I got promoted and waved a magic wand over things or anything like that. It was kind of a catalyst event, because I have been with the company for 15 years.  My staff and I were all working kind of side-by-side under my predecessor. So when the leadership change happened, we just viewed that as an opportunity to sit down as a group. I have never been a CEO before, so I went and bought the book, and it said you are supposed to have a sight and a vision mission and values and all that. So we did. Sometime it worked.

Bleeker: So when we look at revenues the company is bringing in, there's a lot of shift into the more new and away from legacy products. Do you still see a future for a lot of those legacy products or is it just a continuing shift into more rapid product cycles along these new lines?

Rhode: Well it is not even; it is funny. People have this expectation that audio must be so much shorter than some of the traditional industrial or energy products that we sell, and in a lot of cases that is true, but we still have audio products that the fab will shut down 15 years later and we can't make them anymore and customers get upset about it. So it is not so much a shorter product cycle, although there is some of that, it is really just that we have really dialed in the efficiency of the product development team. We are putting out more new products than ever, and a higher percentage of them are really turning into home runs, and so just as a percentage of the total business, the older stuff is getting smaller. Of course, old products don't typically grow superfast. They typically slowly kind of decline as a long-term trend, so really it is kind of the new stuff outpacing the old, but it is a percentage shift.

Sean Sun: Jason, you mentioned that, this is Sean, by the way. You mentioned that the life cycles were changing. Were they shortening

Rhode: No, I was trying to say they don't necessarily change. People assume that they do when you move from energy to audio, and certainly there are some very short cycle audio sockets, but the audio stuff has a longer life cycle than most people expect, I think.

Sun: So one of the things I am kind of interested in is you were talking about how you guys decided to move into energy products, but Cirrus Logic has been around for 30 years now, I guess.

Rhode: Twenty-five, yeah.

Sun: Twenty-five, yeah. So it is interesting because even though you guys have been around this long, moving into an entirely new market is a very entrepreneurial-type of activity, so I would like to hear some of your thoughts as CEO about -- you already explained why the natural progression of going from audio to energy, but can you talk about some of the challenges that you guys faced regarding breaking into that market? Were you guys accepted readily? Were there other competitors that you had to break into the market?

Rhode: Sure, that's a really good question. So partially, we weren't like Magellan sailing off into the distance there, because like I say, we have a couple of product lines that if you looked at the industrial business, you could go, well, OK, technically those are in the energy arena like our metering tips, which we have been selling for years and seismic. And frankly, those are the ones in energy where we are getting the revenue today, but really the focus on energy was to some degree that one of our technical fellows and most of the management of the company, the product lines at least, our engineering backgrounds, had this idea of how to do power factor correction digitally and there is this wave of energy efficiency cycles coming in the market through things like LED lights and etc. So our technologists had some pretty cool ideas for what we could do there, something we could deploy our signal processing strength in a way that could potentially be disruptive to that market.

On one level, it was kind of, audio was fairly well sorted what we wanted to do there, but as we looked at this broad, industrial business, like I said, we just thought, you know what? It needs to be exciting, it needs to be targeting a topical market and needs to deploy technology that we can be the best in the world at. ...

Bleeker: Keep going.

Rhode: And so that is kind of where we went. We had faith that if we could really map out a strategy like that, that given enough time, we could execute on it. I really think at some level, if you want to be good at anything, a really key component of it is faith. Not blind, stick-your-head-in-the-sand kind of faith, but just; yeah, we'll bring this thing up and we're going to go and make it happen and let's not worry too much about the short term.

The biggest catalyst, and frankly, I give our board a lot of credit for this, for the patience, for having patience to wait, because like you say, going off into completely new business, which OK, power meters and seismic are not, but power factor correction and LED lighting are. It takes a long time, and it speaks to the kind of the discipline in the company and in the board that as much as people want to talk about semiconductors being this real rapid cycle and high-tech moves so fast and everything else, it takes years.

If you look at our portable audio business, which people generally regard as a stunning overnight success and it took us five years to turn that into a real significant piece of business, and that is in a market where we had some good adjacency. Power factor correction and energy or LED lights, for example, we really didn't. That is new technology, new market and frankly, we really revamped the whole team there.

That's it for part one of our interview with Jason, to catch part 2, check back to tomorrow.

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