Cirrus Logic (NASDAQ:CRUS) reported significantly better than expected earnings, but shy of ours. The primary reason falls within the general market business collapsing in similar fashion to others exposed in the Android market. Our past article, Characterization Of Cirrus Logic’s Fiscal Year 2024 And A Little Beyond, opened the door into Logic’s future. This writing continues the quest with added detail mostly obtained during the last conference. Although exact market sizes remain somewhat of a mystery, the targeted markets and Cirrus products enabling future ingenuity are mostly known. Jump in the DMC DeLorean and head “back into the future.”
Meaning from the September Quarter Results & FY-2024
Cirrus reported revenue of $480 million for September significantly above analyst consensus and significantly below ours. Noted above, the primary difference resided in the year over year collapse of general product sales. Apple (AAPL) represented 88% leaving the balance at a meager $57 million. During the September quarter of 2022, the reported $540 million contained $100 million in non-Apple business for a $40 million plus deviation. In the June quarter, general market revenue equaled $55 million, very similar to September. The year over year June drop was approximately $30 million. It has been weakening.
Of note, Cirrus is providing a new continuous loop controller at a modestly higher ASP for the iPhone 15 Pro models. We wrote in the above referenced article, “[w]ith regards to the low June revenue of FY-24, Cirrus also made a major change in its closed-loop control chip (CLC) with a new upgraded version increasing ASPs by “$0.20-$0.40 . . . ” This change, on average, adds approximately 3%-5% ASP per iPhone. It is clear that Cirrus delivered fewer parts for Apple’s iPhone and iPad products. iPad units sales dropped year over year by approximately 2 million units or $10 million worth of Cirrus parts ($7.2B minus $6.4B divided by $450 per unit times $5 of Cirrus products). The balance of the difference at $10 million plus the ASP increases lowers the number of iPhone units delivered by approximately 5% year over year. Apple took a more conservative approach to inventory in this year’s September quarter.
For Cirrus, the significant drop in general market parts plus slightly lower Apple deliveries will have significant impacts on FY-2024 earnings. When the 1st half of the year differences are extended for the entire year, earnings drop more than a dollar.
Also of significance is the lower cost structure created from a small layoff and the closing of a few sites. When considering this change, a comparison of costs is required. For March of 2023, non-GAAP expenses equaled $120 million. But June equaled $114 million, 5% lower year over year and quarter over quarter. For September non-GAAP expenses equaled $114 million down $9.5 million year over year. For December, management guided expense at $120 – $126 million vs. $123 million non-GAAP in 2023. The guidance includes an extra week increasing fixed costs by 8% or $10 million. Also, management generally guides costs high and revenue low. With this in mind, we expect actual costs under $120 million. Going forward, management lowered fixed costs in the $35-$45 million per year range. Cost cuts seem to add approximately $0.75 in earnings per year. With the company’s rich policy in repurchasing stock, it’s clear that Cirrus intends to counter most of the general market weakness over the next few quarters.
Guidance for the December quarter was virtually unchanged year over year being $520-$580 million last December and $510-$570 million for this December. But it also appears that Android weakness continues. Earnings will be lower on a year over year basis falling into the $6s driven mostly by weak general market sales. Although disappointing, the lower Android units offer another forward growth opportunity as stuffed channels unwind.
CY-2024 & 2025
Several trends continue to drive Cirrus’ future including Apple’s direction with revolutionary products; growth in power control and personal computers; a return to normal Android unit sales; and yet an undisclosed product line.
Beginning with a slide from the latest presentation concerning market SAM, we notice its unchanged and massive suggesting that the company still expects strong long-term growth.
Cirrus Logic Presentation
With total SAM in mind, Apple news abounds with a major upgrade in functionality possible, perhaps cutting edge. Regarding iOS 18, next year’s software, a report from 9to5mac states,
Bloomberg’s Mark Gurman reports that Apple has internally referred to iOS 18 as being “ambitious and compelling.” The goal is that iOS 18 will ship with “major new features and designs” alongside significant improvements to performance and security. . . [and] that Apple has a wide range of new artificial intelligence features in development for iOS 18.”
A report from Ming-Chi Kuo claims,
“he expects the company will aggressively catch up in 2024, updating the entire lineup with new models of iPad Air including a larger 12.9-inch size option, iPad Pro with OLED displays, updates to iPad mini and a new generation of the cheapest entry-level iPad.”
From a Cirrus perspective, investors must ask what latest technology in iPads might Apple include in this refresh?
Continuing, Cirrus expects its higher margin 22 nm codec and upgraded amplifier to ramp in the 2nd half of next year. In a recent personal update with Cirrus management, Stifel’s analyst, Tore Svanberg, write in an investor update,
“For CY24E, however, we came away with renewed confidence in CRUS’ content growth story featuring a material increase in the company’s Audio business with the introduction of a new 22m smart codec with three new boosted amplifiers.”
Our view of meaningful continues with approximately $2 ASP adders working its way into 90-95% of Apple’s iPhones.
A second growth trend showed for the first time in Cirrus’ investor letter under HPMS in Smartphones,
“Beyond the camera, we have also seen customer interest in our capabilities around battery and power. To capitalize on this, we have been investing in new intellectual property that aims to enhance overall battery performance, health, and longevity. With a solid pipeline of opportunities in our HPMS product line, we remain focused on growing and diversifying revenue in the future.”
John Forsyth, President, Chief Executive Officer, noted in the Q&A portion that he would limit his comments, but that opportunity was meaningful and not next year. Is it one customer, or the Android market, or Apple or all? We don’t know. In the past, Cirrus’s more quiet approach with respect to Apple has been the norm. If it is Android, the opportunity equals a $100 plus million; if it is Apple, it is in the $300 million range.
A lot of discussion took place with the coming PC market penetration. In the Shareholder letter, the company announced, “initial shipments for a high-end laptop model that launches early next year and features several amplifiers, haptic drivers, and a codec, resulting in multiple dollars of content.” Again, Stifel’s analyst, Tore Svanberg’s note, includes that the ASP opportunity was as high as $10.
The call added detail stating that the reach was across all types of PCs. Forsyth explained that by Calendar year 2025, PC revenue would exceed the Android revenue of today’s environment and would be in the $10s of million. For investors, this opened questions, was it $10 of millions per quarter or year? We ask this because in the recent past, Cirrus’s amplifiers and to some degree haptics devices are in basically in all Android flagship models plus two high-end mid-range Samsung phones. This represents significantly more than a 100 million units with up to $2 in content. Last quarter non-Apple business was $55 million most of which has to be Android. The other markets, professional audio, sensors, etc., have been very small. Even with cutting the unit volumes in half, Forsyth’s comment would have to be quarterly.
A last growth opportunity still exists with an unknown product line. We mentioned the possibility of it being a capacitance plus haptic design win with Apple in our last article. If that is the product, it won’t be with Cirrus parts in the iPhone 16 with management not referencing this during the call.
Management, also, wrote,
“In the general market side of our smartphone audio business, this quarter, we had multiple customers introduced new flagship devices featuring our audio components, and we anticipate more devices using our products to be introduced in the first half of the coming calendar year.”
Large organic growth opportunities still exist for Logic going forward. The new codec and amplifiers are now in-line first followed by PC penetration. In the hole, sits smartphone battery and power management with meaningful revenue. And there is still an undisclosed product of meaningful size coming.
Risks
With regard to risks, the big one is unit sales in recessionary environments. Zerohedge wrote about the loss of Federal tax revenue and its almost perfect prediction record for recessions. “It’s long been known that there’s a pretty strong correlation between falling tax revenues and worsening economic conditions.” With this observation, the author included the falling status for real income. A recession, at some level, is coming. Yet for us, the growth opportunities still out ways the risk. We are lifting our recommendation to a strong buy. The future for organic growth remains intact.
And taking a writer’s liberty, we second comments made by Loop Capital analyst David Williams, after upgrading Cirrus to a buy, it has a “handful of shots on goal,” given the constant emergence of new hardware product potential for Apple.”
Grab your hat and coast, the DeLorean is heading “back to the future.”
Read the full article here