Cirrus Logic, Inc. Business Information, Profile, and History

Company Perspectives:

An exciting revolution is taking place in digital entertainment electronics. And it's sweeping across 650 million households worldwide as living rooms magically transform into thrilling home theaters. The market opportunity is enormous for DVD-based systems as well as Audio/Video Receivers, Game Boxes, Personal Video Recorders, Set-top Boxes, MP3/CD Players, and Wireless Residential Gateways. Winning in these growth markets will require powerful IC-plus-software solutions that deliver the state-of-the-art features that consumers demand. One semiconductor company is exceptionally well positioned to provide such solutions. A company that stands ready to offer the worldwide support and digital entertainment focus needed to capitalize on this timely window of opportunity. A company that offers Total Entertainment OEM solutions in every room and every corner, enabling consumers to experience extreme entertainment from digital content like never before. This company is Cirrus.

History of Cirrus Logic, Inc.

Cirrus Logic, Inc. is a leading manufacturer of audio chips used in consumer entertainment electronics, including audio/video receivers, DVD-based products, game boxes, and personal video recorders. The firm sells over 200 products to 3,000 customers such as Apple, Bose, Creative Technologies, Dell, IBM, Panasonic, and Sony. During the latter half of the 1990s, Cirrus restructured operations and eventually exited the magnetic storage integrated circuit (IC) market in order to focus on higher margin analog technologies that are used in the audio, communications, and data acquisition markets. The company also develops digital signal processing (DSP) technologies used for Internet-related applications.

Beginnings

Cirrus Logic traces its origins to a small company called Patil Systems, which was founded in Utah in 1981 by Suhas Patil, a former Massachusetts Institute of Technology (MIT) professor then teaching at the University of Utah. While at MIT, Patil had developed a microchip-level software system for controlling computer hard disk drives that he called Strategic/Logic Array (S/LA). The S/LA system represented a substantial improvement in the management of hard drive functions since it behaved more consistently and was easier to design than existing systems. Patil gathered together several associates and formed Patil Systems to market his new product.

Over the next three years, however, the company's efforts produced little commercial success. "I made the rounds and couldn't give it away," Patil would later recall in Upside. For help with the marketing and management of his tiny, eleven-employee company, Patil contacted Michael Hackworth, a former marketing executive for Fairchild Industries and Motorola who was senior vice-president of Signetics, the Sunnyvale, California-based semiconductor subsidiary of North American Philips, in 1984.

The prospect of working with Patil sparked Hackworth's interest. Although a prominent executive at Signetics, he was unhappy with the way the company operated and especially with the inefficiency with which it introduced new products. When Patil first contacted him, Hackworth thought that S/LA software might be of use to Signetics. However, as he later remarked in Upside, "When I got in and met the people and understood what they had, it hit me like a ton of bricks that this could be the basis for a new kind of chip company." Hackworth perceived that Patil's S/LA system could be used to develop a wide range of highly specialized semiconductors in a relatively short time. All the development process would require was a systems engineer who could program and arrange the chips to facilitate whatever function the product was supposed to carry out.

Instead of absorbing Patil Systems into Signetics, Hackworth left Signetics to join Patil Systems. He became president and CEO, while Patil assumed the posts of chairman and executive vice-president of products and technology. The company reincorporated in California in 1984 under the name Cirrus Logic, Incorporated, and moved its headquarters to Fremont, in the northern half of the state. The company's new name came about when Hackworth decided that Patil Systems needed a new name, but one that did not dip into the alphabet soup of Greek prefixes and suffixes in which the Silicon Valley seemed to swim. One of his daughters came up the idea of renaming the company after cirrus clouds, the highest clouds in the sky, as a way of expressing the elevated complexity of its products.

Opportunity in the Burgeoning PC Market: 1980s

Under Hackworth, Cirrus Logic pursued a strategy that emphasized developing peripheral devices in which the company's semiconductors were used. This emphasis stemmed in part from Hackworth's experience at Signetics, which had developed a 2650 microprocessor only to see it fail because its application in peripheral devices had not been taken into account during the design process. Under this plan, Cirrus Logic would use the versatility of the S/LA system in an opportunistic manner, jumping into new peripheral markets as they emerged. The company bought raw microchips from outside foundries to avoid the burden of running its own fabrication operations.

When major opportunities presented themselves, Cirrus Logic did not ignore them. Originally, Hackworth's master plan had envisioned the company developing products for microcomputers, but not the microcomputers themselves. But in the mid-1980s, the boom in personal computers began. Cirrus Logic responded with a neat product development sidestep, simply applying the concepts it had intended for peripherals to the emerging PC market instead.

The company's first major effort in marketing its hard drive controller resulted in its first major success. Though it faced daunting competition from more established companies such as Adaptec and Western Digital, Cirrus Logic had an advantage: it had developed the first controller chip that could be mounted inside the drive mechanism rather than on a card outside it. This innovation would eventually lead to more compact hard drives. At first, Cirrus Logic's product was too advanced to sell easily; an official from prominent hard drive manufacturer Seagate Technology told Hackworth that the Cirrus Logic controller was five years ahead of what his company wanted. Cirrus Logic modified the chip to fit Seagate's needs and received a contract from them. Conner Peripherals, which made hard drives for Compaq Computer PCs, soon followed with orders of their own.

Cirrus Logic's successful entry into the PC hard drive market paved the way for future successes. While its hard drive controller chip drove sales, accounting for as much as 80 percent of total revenues, the company developed new graphics and communications-related products. In 1987, IBM unveiled Video Graphics Array (VGA), its new technology standard for graphics display. This started a scramble among chipmakers to develop products to conform to the new standard, a competition that Cirrus Logic won, producing the first fully compatible VGA controller microchip. In 1989, the company developed a VGA controller for flat-panel liquid crystal diode (LCD) displays, barely anticipating the boom in notebook computers, which used such displays.

Cirrus Goes Public: 1989

Cirrus Logic went public in 1989. It used the cash raised by the initial public offering (IPO) to finance a series of acquisitions that broadened its technological expertise. In 1990, it acquired Data Systems Technology, which specialized in data compression and error-correction algorithms for modems. The next year, it purchased a controlling interest in Pixel Semiconductor, a video-imaging technology firm with expertise in the multimedia field, from Visual Information Technologies. It later absorbed Pixel Semiconductor's operations into its own. In 1992, it acquired R. Scott Associates, a modem software company, and Acumos, which specialized in high-integration desktop graphics. In 1993, it acquired Pacific Communication Sciences, a leading developer of Cellular Digital Packet Data communications technology. Also in 1993, Cirrus Logic announced that it would produce custom microchips for companies licensed by Apple Computer to manufacture Apple's Newton personal digital assistant.

In its first 15 years, Cirrus Logic grew from a tiny company struggling to raise a few million dollars in capital to an important presence in the microchip industry with well over $500 million in annual sales. At the same time that its sales skyrocketed, it broadened its technological expertise with similar rapidity. But its rapid growth brought problems as well as benefits, and in the wake of its rapid string of acquisitions in the early 1990s problems in incorporating these new subsidiaries became apparent. Difficulties in communication sometimes produced delays in developing and delivering new products. Consequently, the company embarked on a reorganization in 1993 designed to decentralize and streamline operations at the same time.

Cirrus Logic's growing importance as a supplier of semiconductors also increased concern over continued access to sufficient quantities of raw chips. Cirrus Logic had not only taken pride in its "fablessness," its lack of chip fabrication operations and consequent need to rely on outside foundries, but considered it a necessity. "We will never eliminate the fabless approach," Michael Hackworth declared in 1993. "The foundry thing has provided us with enormous flexibility that we would never ever have if we had to drag our own clean room for fabricating raw chips around with us. The chances of us doing a [brand-new] clean room on our own are zero or none." However, the production glut in raw chips that had made life easy for Cirrus Logic and similar fabless chipmakers began to dry up in the 1990s at the same time that demand for the company's products began to pick up from levels that were already quite high. In 1993, Cirrus Logic signed agreements with its suppliers to buy a set number of chips over three years in return for guarantees of foundry capacity, but even this did not prove entirely satisfactory.

Fortunately, Hackworth had not ruled out a joint fabrication venture with another semiconductor company with which it was not in direct competition. Thus, in 1994, Cirrus Logic took a first tentative step toward fabrication by signing a joint venture with IBM. Under the terms of the agreement, the two companies would refurbish an under-used IBM plant in East Fishkill, New York, that once manufactured chips for mainframe computers. Even with IBM's help, Cirrus Logic estimated that the venture, which was named MiCRUS, would cost it tens of millions of dollars. In 1995, Cirrus Logic took a second step into the fabrication scene by partnering with Lucent Technologies Inc. in another joint fabrication venture entitled Cirent Semiconductor.

Major Restructuring Efforts: Late 1990s and Beyond

These two fabrication efforts, however, would eventually prove to be both costly and strategically ineffective. In fact, Cirrus was plagued with problems during the latter half of the 1990s that resulted from poor investments and slow product development as well as overcapacity in both of its fabrication ventures. The firm began to reorganize in 1996 and, due to restructuring charges, the company posted a loss of $46.2 million on revenues on $917.2 million for the year. In early 1997, the company announced it would cut 400 jobs.

As the semiconductor industry became increasingly competitive, problems continued for Cirrus Logic. In 1998, the firm was forced to cut its workforce once again, and it also announced it would divest its graphics, modems, and advanced systems products businesses. An analyst with market research firm In-Stat Group remarked in a 1998 Electronic News article that "it's interesting how things change and how companies who were on top at one point are struggling; it really tells you how tough the semiconductor market is." The analyst continued that "it paints a pretty bad picture as far as chip companies go that are related to PC's. ... [A] lot of this is being driven from the low cost PC's and people having to figure out how to make money in this new environment."

In 1999, Hackworth stepped down from the CEO post--he remained chairman--and Cirrus Logic turned to David French, hired one year earlier as president and chief operating officer, to turn the company around. As CEO, French continued to reposition Cirrus Logic by making a series of significant moves. During the year, the company ended its fabrication partnerships with both IBM and Lucent. While forced to take a $127.7 million restructuring charge as a result, management expected the move back to a fabless business model would pay off in the long run. Cirrus Logic also acquired AudioLogic Inc., an audio technology firm. The purchase bolstered the company's audio IC division, which accounted for nearly 55 percent of sales by the end of 1999. The company's two other main business segments included storage IC's and data acquisition technology used for communication and industrial applications.

As Cirrus Logic entered the new millennium, changes continued. Company headquarters were moved from California to Austin, Texas, in an effort to cut costs. The early years of the new century were also marked by weakening global economies and faltering conditions in the worldwide semiconductor industry. In response, Cirrus Logic exited the magnetic storage IC market in order to focus on the cutting edge digital entertainment industry. As part of this new strategy, the company acquired four companies: LuxSonor Semiconductor Inc., a DVD decoder specialist; Stream Machine Co., an encoder firm; ShareWave Inc., a wireless home-networking company; and Peak Audio Inc., a Colorado-based audio networking concern.

French believed this new focus would pay off handsomely, especially since new consumer electronics products were based on digital audio and video technologies rather than on analog components. Consumer electronic products such as DVD players, MP3 players, and surround-sound audio equipment utilized digital semiconductor technology including decoders, optical-drive controllers, DSP's, and digital-to-analog converters, all of which Cirrus specialized in. Cirrus Logic eyed increased demand for this technology as key to its return to profitability. Having undergone significant restructuring over the past five years, Cirrus Logic management felt confident that with its new strategy, the company would emerge successful in the years to come.

Principal Subsidiaries: Cirrus Logic International Ltd. (Bermuda); Cirrus Logic KK (Japan); Cirrus Logic GmbH (Germany); Cirrus Logic Korea Co. Ltd. (Korea); Cirrus Logic (UK) Ltd.; Cirrus Logic International SARL (France); Cirrus Logic software India, Pvt. Ltd.; EAudio, Inc.;

EMicro Corporation; Crystal Semiconductor Corporation; Pacific Communication Sciences, Inc.

Principal Competitors: LSI Logic Corporation; STMicroelectronics N.V.; Texas Instruments Inc.

Chronology

• Key Dates:
• 1981: Patil Systems is founded in Utah by Suhas Patil.
• 1984: The firm reincorporates as Cirrus Logic; Michael Hackworth is named president and CEO.
• 1989: Cirrus goes public and develops a VGA controller for flat panel liquid crystal diode displays.
• 1990: The firm acquires Data Systems Technology.
• 1994: Cirrus enters into its first joint fabrication venture with IBM.
• 1995: The firm begins its second joint fabrication venture with Lucent Technologies Inc.
• 2001: The company exits the magnetic storage IC market to focus on consumer electronics.