Cirrus Logic: Expecting Upside From iPod Sales

Wachovia believes Cirrus Logic (NASDAQ:CRUS) could see revenue contribution for iPod by the September 2007 quarter.

As a brief backdrop, Cirrus was late to market with a lower power CODEC product that is utilized in the iPod. Apple has utilized Wolfson Microelectronics as the sole source for a low power CODEC in every iPod generation. However, firm has been monitoring Cirrus's design efforts at Apple closely since last summer and their sense is that Cirrus is now in the position to take share. Firm believes that traction at Apple, one of the leading consumer electronic companies, could result in a meaningful improvement in sentiment in CRUS. They are increasing their revenue estimates by $1.5 million and $2 million in the September and December 2007 quarters, respectively based on our expectation of design traction in iPod.

Cirrus is generating a small percentage of revenue today from 2nd tier MP3 player OEMs. Given Apple's dominance in MP3 players, the ability to penetrate this key account could have large ramifications for Cirrus. Firm estimates that the ASP on low power CODECs is approximately $0.75 (although Cirrus could potentially manufacture the product at a cheaper price). Based on 60 million annual iPod shipments, this represents a $45 million opportunity. Even if we assume that Cirrus garnered only 25% market share in the first year, this represents a $11 million potential growth driver on the company's annual revenue base of $180 million.

Firm expects the GMs on products sold into Apple to be below the company's corporate GM of 60%, potentially approaching 50%. That said, they believe volume business at Apple would go a long way toward driving operating margin expansion at Cirrus.

Notablecalls: Actionable call alert! Back at my old trading desk I would have bought every stock within 10c of yesterday's close and sold'em 20-30c higher after the open.