The following interview is the second part of my chat with Cirrus Logic (NASDAQ:CRUS) CEO Jason Rhode. The first part of the interview can be found here and focuses on Cirrus' performance last year, as well as on its audio products and newly released digital signal processor (DSP) chips.
In the following interview, we discuss not only Cirrus Logic's energy lineup, but also its unique company culture. We hope you enjoy this lightly edited transcript of my interview.
Eric Bleeker: OK, let's move on to energy. In your presentations you've talked more and more about compatibility when it comes to LED dimmers. A chance to talk about that could be helpful. I think the compatibility angle is, is that the main selling pitch to tier one customers? I've seen your slides, comparisons to rivals, but what advantages allow you to keep a lead and not suffer and competition as it kind of reaches that "good enough" threshold? Basically I'm asking, where do you see the concentration in the market going, and if you do see 1.2 billion units in 2016, I know there's a ton of unknowns, but what kind of slice of the pie might you be happy with down the road?
Jason Rhode: Let's see, so that's a bunch of questions.
Bleeker: Yes. This was my warning at the start!
Rhode: No, that's OK. Let me see if I can do them justice. We think LED lighting is just tremendously important in general, because it reduces the country or the world's power consumption, electrical power consumption significantly, and one of the big barriers to adopting LED light bulbs broadly is the fact that even the ones that say they're dimmable, when you take them home, they're incompatible with a vast array of dimmers.
The best competitor that we've found out there, aside from ourselves, is perfectly compatible with about 65% of the dimmers that we have in our lab. We've got a collection of well over 200. There are 500-plus million of these things installed around the world, and the reality is, consumers don't even know which one is installed in their house, and for the most part, if you're a nice little old lady that's lived in her house for a long, long time, you might not even know what that means. You may have used that dimmer for years, but it maybe doesn't even register when you read on the box in big, giant red letters, "not dimmable." The feedback we've gotten from retailers is that there's a lot of consumers for whom even that isn't simple enough, and they take them home, and it doesn't work with a dimmer, and they paid $20 for the light bulb, and the stupid light bulb doesn't work.
So as time has gone on, we've seen more and more pressure from the retailers on their supplier to improve the dimmer compatibility dramatically. The date we've got says that many hardware store chains -- LED light bulbs are the most returned product in the store, and the No. 1 reason for returns is that they don't work with dimmers.
So we have a solution that is compatible with every dimmer we're aware of. Again, the next best solution out there is maybe 65%, next best thing that we're aware of. We've taken a fundamentally different approach to that market in that our algorithm is entirely embedded in the digital portion of the product, which gives us the ability to reprogram the device, even after the product has been designed. So a customer finds a new dimmer or some new feature that they want to incorporate; they can add that even after they've designed the board and after they've designed the light bulb.
Then, in fact, one of our newer products has the capability to drive two strings of LEDs, so that a customer can use one bright white string of LEDs and then one string of, say, red or amber to achieve an overall warm light quality and also achieve the brightness that they want. And we've built into that product the ability to calibrate the brightness at the end of the production line, as well as calibrate the color temperature, which we believe offers our customers a significant potential cost savings on the LEDs themselves. The LEDs are still by far the most expensive part of the light bulb, followed by the housing, the heat sinking, and other apparatus you have to wrap around one of these things.
So we think it's a huge and growing market; whether it's 1 billion or 2 billion, and whether it's in 2015 or '16, is anybody's guess. New technology and new markets usually take longer to deploy than people think. But as time goes on, it appears to us that there's more and more pressure to be more compatible with dimmers, and as long as we can achieve a solution that doesn't put a huge cost premium on being compatible with every dimmer out there, then why wouldn't it just be easier for everybody involved if the stupid things just worked? If you buy a new light bulb and take it home and screw it into the house that you've lived in for 20 years, you don't blame the house when it doesn't work. It's "the dumb light bulb doesn't work right, newfangled things," and then that slows the adoption, and it's just bad for everybody.
So that's one big angle that, well, it's a lot of big angles that we think tilt the table in our direction. We've got models that we could easily see going a bunch of different ways. Is the market going to be 30% dimmer-compatible or 70% dimmer-compatible, and then what does that mean? is there some fraction of the dimmer-compatible section that is content with "good enough" dimming, or does the pressure continue to increase to really be compatible with all the dimmers and provide what we think is a right answer, which is to be more or less equivalent performance to an incandescent light bulb?
Our expectation currently is that it's shaping up more and more like the latter, just because products like ours -- well, specifically our products -- are making it possible to produce that with really no penalty. So it'll take a while to take off. This is an area where we have to be patient just because it is a very fragmented market. There's maybe five to 10 lighting suppliers in the world that ship the vast majority of the volume, and every one of them has a hundred different SKUs. It's a remarkably complicated electronic design, to squeeze all of this power electronics into the base of a light bulb form factor that really was not designed for that in the first place.
Bleeker: All right, and thank you for getting to my 18 questions there. I wanted to ask you from more of a broad sense -- this is more of a policy-related question. You're a company that's hiring. You've noted before the great challenge as American universities aren't pumping out enough engineers to meet demand. I was just wondering some short-term and long-term solutions for the problem at hand here.
Rhode: Well, it is frustrating. I'd say that's a two-parter. It's challenging because American universities aren't pumping out enough grad students in electrical engineering in total, and then of the ones they are producing, a good percentage of those are from other countries in the first place, which, thank goodness, they're willing to come over here and go to school if our own kids aren't. But then their government makes it difficult for them to stay here. In my view, anybody that is willing to come over here and get a master's degree or a Ph.D. and is willing to stay in the country, there ought to be an immigration agent waiting for them on the far end of the platform with a signing bonus and a blue pen.
Because if you look just at Cirrus as a little micro-example, that's the rare commodity in the company. Every job in the company is important, everybody has to play their role in order for us to be successful, but the thing that's really scaling our ability to grow the organization is hiring design engineers, and we really need people with master's degrees or Ph.D.s.
If you look at the numbers for every one of those people we hire, we hire four more people -- applications engineers or marketing people or various other skills, and those we can find in this country, so it's really short-sighted, in my view, to be looking at it as a U.S. jobs issue. We should be encouraging anything that's going to increase the amount of product design, innovation, etc., that's done in the U.S., and I don't think there's any way in the short term to radically increase the number of American students that are staying past their bachelor's degree in electrical engineering.
Now, for our part, we're doing what we can to identify them, even early in undergrad, the real superstar kids. We do a lot more internships at the undergrad level now, and when we find people that are really amazing, we flat out offer them a fellowship. We'll flat out pay for your master's degree if you'll stay in school and then come work here for two years. It's like the Army, except it pays better.
So for our part, we can have a little tiny impact, but we're a pretty small company. The country really overall just needs to spend some time thinking about -- there's all these politicians getting all bent about job creation and all this manner of stuff, but if you put enough talented people in the streets that know how to innovate and how to design products and how to create things, that seems like it kind of has to be good.
Bleeker: Yeah. I want to ask about your culture. That kind of brings up an interesting point that hiring and culture are kind of two sides of the same coin. The intern program and being innovative around that, I just wanted to hear a little bit more about that. How much have you scaled up in recent years or how much has the -- I guess, what are the challenges in a high-growth company and one that really values its culture of trying to keep that as you're managing that growth, and some of the qualities that really got you to where you are?
Rhode: You really hit the nail on the head for the big challenges facing us in the next year or so. We've got tons of opportunity. We have absolutely no shortage of opportunity out there. The challenge is we've grown our revenue a ton, and we need to grow the company into that revenue. And it's already hard in our industry to hire enough talented people to do what we do, but then when you layer on top of that that it matters a great deal, the people become a good cultural fit for what we're doing. That certainly makes it more difficult, but the benefits are just huge. People that like their jobs, and they like who they're working with, and they like what they're working on, work 10 times more, 10 times harder, and 10 times more creatively, and they don't tend to leave their jobs. And in an environment where people that are talented enough to do what we do are so scarce, then keeping the ones that are already here just becomes vitally important.
So we very much look for that when we're interviewing. We try to make sure that people are great engineers, but they also have something else to them. We want to hire people that are fun to be around and have something else going on in their lives and personalities. I think a lot of bad advice is given out in career centers. I keep being told that people are told to minimize all this other distraction stuff at the bottom corner of the resume about hobbies and interests, and frankly, by the time a resume gets to me, I can assume that they went to a good school and they've got a good GPA. I want to know what makes them different. What else did they do that they didn't have to do?
It's the intangible things like that that really make people effective, especially in engineering, where there's tons and tons of smart people that go into engineering school, and the number of people who are actually effective in the company is a lot lower percentage, and the thing that makes them effective is social drive and an ability to communicate, ability to write. It's a very painful thing for those of us that are good at math, that your 11th-grade English teacher was right, that learning how to write a good five-paragraph essay is one of the most important things you'll ever learn in your life. When you look at the union of people who know how to write a good five-paragraph essay and the people who went to get a master's degree in EE [electrical engineering], it's a pretty small set.
Bleeker: I guess just a final question here, just to bank off that question on culture. There are a lot of obvious reasons to be interested in Cirrus Logic if you're an investor, and at The Motley Fool, we don't really care about quarter-to-quarter performance. Instead, we focus on the long term, and we also look for these kinds of intangible qualities in companies, and I can't really think of another semiconductor company that talks the way you do about your culture and employees. Was this something passed down to you? How is this kind of formed at the company? Because it is very unique.
Rhode: It's surprising to me that it is so unique in the semiconductor industry, and there are certainly other good companies to work for out there, but I think honestly it stems from a number of things. One, the company was kind of a mess for a long time, and when my staff and I kind of first assembled, a lot of us had spent a lot of years here, and we really wanted to prove we weren't nuts for staying here as long as we did, so we kind of had a chip on our shoulder about proving to the world that we were pointing it in the right direction.
And then, two, I've never been a CEO before, so I went out and bought the book and read it, and actually most of what we're doing is kind of common sense, and it's in a lot of business books, so it's a little puzzling that people don't. If you read Good to Great, there's a huge part of the entire theory behind that book that it really matters a lot that people are passionate about what they're working on. If you want to inspire people and you want people to really bleed for the company when you need it, then they'd better care about what they're working on. So we just kind of took that and extended it.
I get asked that a lot: "Why does it matter to you to have a company where people really like their jobs?" And my smart-aleck answer is because I work here. But I think it doesn't cost anything meaningfully more to run a company that people like to work at, and the benefits for doing so are so tremendous.
So it's really surprising to me, when we place highly on these national lists of "best places to work," and you look on the list and there's not a single other semiconductor company out there, it's really puzzling. Because it's not expensive, it increases your returns to your shareholders immensely, and as a leader and as somebody in the organization, that's just a ... lot more fun, so it's a little odd to me that more people don't put more focus on it.
Bleeker: Yeah, definitely. Coming from a company [The Motley Fool] that survived the dot-com crash, we have definitely put an outsized focus on culture and our people. It's kind of odd to me that you have this cult of shareholder value maximization, but you think about a stakeholder model focused more on employees, and yes, it's a bit more intangible, but it seems like we see that pay off time after time, and it's something a lot of investors don't focus on.
Rhode: Well, it is interesting. I think you bring up a good point, because obviously, shareholder value is paramount, and it's something that we think about a lot. But you can't create shareholder value by focusing on shareholder value. You create shareholder value by focusing on great products that people are going to enjoy using and are going to solve real problems. And the only way to create those is to have employees that are excited and passionate about the markets they're serving and the things they're working on.
And it absolutely, in the industry we're in, nothing we do this quarter, the first order is going to improve our results this quarter. We build products that were designed in a year ago or they weren't designed in a year ago, and this quarter's number is basically, really, how well do our customers do? We can screw it up, obviously, by failing to deliver or causing big issues, etc., but on a steady state, normal basis, our revenue and our results and profit, etc., this quarter kind of predetermined quite a long time ago. We don't always know what they are, but it's already baked in.
So we have to have a long-term focus. We have to think three to five years out from now and what products that we're working on today are going to really be driving the revenue three years from now. It's rare to find an investor that wants to talk about, "Gee, what are you going to be working on three years from now?" So that's why I say creating shareholder value is immensely important, and that the best way to do that is to focus on creating products that your customers love and your engineers are excited about working on.
That's it for our interview with Jason Rhode. For all your Cirrus Logic coverage, make sure to check back to Fool.com or add Cirrus Logic to our free My Watchlist feature, which collects all your need-to-know Cirrus investing news. Also, if you're looking for more advice on finding the winners of the mobile revolution, make sure to check out our newly reopened Supernova service.
Eric Bleeker, CFA, and The Motley Fool own shares of Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.