Valuing Possible Future Cirrus Logic iPhone ASPs

| About: Cirrus Logic, (CRUS)
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Summary

Cirrus' yearly average iPhone ASP could range between $5-$5.5 for the next few years.

FY-18 average iPhone ASP will probably be slightly higher than FY-17.

Cirrus' iPhone revenue will began to follow iPhone unit sales rather than major changes in ASPs.

Changes to Cirrus' (NASDAQ:CRUS) ASPs with Apple (NASDAQ:AAPL) products, their largest customer, have been a major concern. Understanding how the iPhone ASP might change in the next two years is important to Cirrus investors.

Cirrus's ASP History with Their Largest Customer

During the 90s, Cirrus provided sound chips for Apple Computers. This business ended with the practice by many computer companies of migrating peripheral functions from separate chips to CPUs. However, once again in 2007, Cirrus won a major design with Apple, replacing Wolfson's audio codec with a more highly differentiating part. Cirrus integrated the functionality of two large-sized capacitors previously mounted and occupying significant physical space within Apple's iPod Classic. Jay Srivatsa, then an analyst with Roth Capital, penned a prophetic statement: "Having finally gained inroads at Apple, we believe CRUS's portable audio revenues may have reached an inflection point,"... "With its first significant win in the portable audio space, we believe the company could begin to see further traction in this segment in 2008 and beyond." At this time, the ASP for the Cirrus codec was approximately a dollar. Apple continued use of the Cirrus design in their first iPhone which was released in June of 2008. From 2008 through early 2012, Cirrus provided audio support for all of Apple's major products including Macs, iPhones, iPods and iPads. They would grow this ASP from approximately $1 to approximately $1.5. The approach used to increase their ASP was designing solutions which eliminated formerly passive and expensive parts into the codec. Total Apple BOM significantly decreased while Cirrus' ASP increased.

Apple introduced the iPhone 5 in September of 2012. Included in this model was a new codec and amplifier from Cirrus Logic. Cirrus' ASP suddenly jumped from approximately $1.5 to almost $3.5. Cirrus' Non-GAAP earnings jumped to $3.25 for FY-13. As often happens, the price of CRUS jumped from its trading range of 12-20 to a high of 45 in September of 2012. With the significant ASP increase, it had also agreed to significantly lower its margin with its largest customer from the mid-fifties to forty-nine.

After the September peak, the stock price continued to trade in the 35-40 range. On the morning after their September conference on October 31, the stock traded in early morning markets at prices close to 50. Jeff Schreiner, an analyst with Feltl & Co., downgraded Cirrus shortly before the opening, causing a price tumble. The stock traded the whole day significantly under 40 on volume near 20M shares. His reason for downgrading was that Cirrus was now on the semiconductor slippery slope of forever GM and ASP decline. Within a few months, Cirrus' largest owner FMR completely sold out. Over the next few years, even with Cirrus' non-GAAP earnings never dropping below $2, the stock price would trade as low as 17, only reaching highs of 26.

The continued cheap price of Cirrus deeply troubled retail investors for years. It would not be until late spring and summer of 2013 that enough color would appear for the outside world to understand the deep drop in price on what appeared to be solid growth in 2012. At the Barclays conference held May 13, Cirrus announced an additional margin cut primarily with their largest customer. Cirrus announced margins would fall from the fifty ranges to the mid-forties. With the release of the new iPhone 5S, Cirrus' Codec ASP dropped from the $2.75 range toward $1.80-$1.90, as well as the total iPhone ASP dropping by over 20%. Total revenue for FY-14 dropped to 715M or a 12% YoY decrease.

Predicting Future iPhone ASPs

What reasonable ASPs in a newer iPhone can be expected for this coming year? Several cases beginning with what we believe would be the lowest ASP will be discussed. In our view, Apple will discontinue selling the D/A converter worth slightly less than a dollar with the iPhone 8. On the surface, this 25% ASP reduction seems similar with the 2012-2013 ASP drop with a possible significant stock price drop. But the real effect only appears when digging into the details, which includes comparing iPhone ASPs for FY-17 to ASPs in future years.

Calculating FY-17 ASPs included several assumptions plus actual financial information. Since Cirrus' fiscal year ends in March, and Apple releases new iPhones in September, approximately 40% of Cirrus' revenue comes with older ASPs. In our calculations for FY-17, the following assumptions or actual data were used - units sold in millions by quarter or half quarter for the September quarter was or will be as follows:

Quarter

(FY-17)

iPhones sold

June

40 M

Sep (Beg)

26 M

Sep (End)

20 M

Dec

77 M

Mar

55 M

The assumptions for the selling mix for each quarter are in the following table:

Phone type

Selling Mix

iPhone SE

10%

Older Model iPhone

15%

New iPhone

75%

ASPs by phone type are assumed as:

Phone type

ASP

iPhone SE

$3.00

iPhone 6

$2.75

iPhone 6S

$3.5

iPhone 7

$5.85

iPhone 8

$5.00

The average FY-17 ASP is calculated at $4.75.

To forecast FY-18, we use the same mix, but we reduce the ASP by 85 cents in the iPhone 8. We estimate the following unit sales in millions:

Quarter

(FY-18)

iPhones sold

June

40 M

Sep (Beg)

25 M

Sep (End)

25 M

Dec

85 M

Mar

65 M

The average ASP for FY-18 calculated out to $5 slightly higher than for FY-17.

A calculation was also made for FY-19 assuming an 8S iPhone similar in content with the 8. The ASP dropped to 4.85 or 3%. Although the ASP might drop slightly YoY, our belief is that this estimate is based on time too far away to be meaningful. By FY 2019, the new phones could include other CRUS technology, including a cost effective mic approach ($2), or ANC with mics in wired headsets ($5), or biometrics ($1). We also know Apple may ship the later iPhones with the D/A headset. In this case, the ASP would remain closer to $6.

In the case that Apple continues to ship the D/A converters with iPhone 8s, the average ASP for FY-18 and 19 increases modestly to $5.5, a 20% increase. We believe that Cirrus' future Apple ASP for the not too distance future is bracketed between $5 and $5.5.

In our view, with respect to Apple revenue, unlike the last two years, it will depend on iPhone unit sales, which we believe will show modest increases starting in September 2017. Unlike 2012, drastic stock price decreases from negative changes in iPhone ASP will most likely be moot.

More about other Cirrus business coming in future articles.

Disclosure: I am/we are long CRUS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.