Reviewing the Recent Past
A quote from one of our recent Seeking Alpha articles states,
"We should note that at times Apple has reduced excess inventory during late December and/or during the March quarter. . . Referencing our belief on inventory for FY-17, our calculations suggest that in the September quarter 2016 Cirrus received an additional 100M for building Apple's inventory or parts for 15M iPhones. Should Apple choose to drop their inventory in March, we would expect March guidance to drop an additional 50M. . . This suggests that sometime between the months of January through June of 2017, Apple must either shed or sell inventory worth an additional 10M units. The represented revenue value of approximately 50M is not material, but we strongly believe that the quarter(s) in which any significant correction occurs will create a buying opportunity."
The morning after Cirrus's (NASDAQ:CRUS) call the stock price dropped 9 points or close to 15% driven by weak 4th quarter guidance and perhaps a comment made by the CEO that within a stable unit sales environment growth for FY-18 would be in the [high] single digits. Another major seller into both Apple (NASDAQ:AAPL) and Samsung, Qorvo (NASDAQ:QRVO), also offered very weak March guidance. We believe issues with Samsung and basic inventory reduction at Apple represent the difference between our prediction of 400M range vs. the guided 340M range, most of the difference, approximately 50M, is from Apple.
Total revenue in our view for FY-17 will now range from 1.55-1.60B. Earnings will exceed $4.50. The analyst from Needham raised his FY-17 earnings the day after the call to $4.60.
During the previous years, Cirrus's revenue improvement relied heavily upon ASP changes with Apple and other major OEMs. With the iPhone 6S and it's always on feature, Cirrus's ASPs increased from approximately $2.75 to $3.50. Cirrus provided a new codec and an additional amplifier. The iPhone 7 ASP increased further to approximately $6 when new and more higher powered amplifiers were added plus the addition of two new analog to digital conversion devices. In the June conference call investor letter Cirrus signaled the sources for the strong growth during FY-17. From the letter,"On an annual basis we anticipate sales of our boosted amplifiers and digital headset components to fuel FY17 revenue above our long-term target model of 15 percent year-over-year growth." In addition, speaking with respect to a large Android customer (Samsung), "In this particular case, customer opted for one smart codec in particular that's a lower ASP than the one they'd used in the most recent flagship model." This loss of approximately $1 in content results in approximately a 30-40M/year. Cirrus commented that mid-tier phones with the same vendor would be introduced this year and for future ASP growth in the flagship. We believe that the future ASP growth in the flagship will come from mics, amps, and headset D/A's.
In our view, revenue growth from iPhones will continue although at a slower rate. We believe that FY-18 growth will also come from four other sources outlined by Rhodes in a recent Bayclays investor conference: an expansion of amplifier and digital headphone DAC markets into more customers, ANC headphones, mid-tier phones, and an expansion of market share with OEM's 3-10, probably mostly in China.
Cirrus's Largest Customer
The iPhone revenue in FY-18 will still grow significantly, from small increases in ASPs and modest growth in unit sales. In our recent article about predicting future iPhone ASPs, we made a case for Apple eliminating the D/A converter cable with iPhone 8 therefore we expect an average ASP of $5 versus $4.75 in FY-17. Under a belief with an iPhone increase in unit sales of 25-30M during Cirrus's fiscal year, iPhone revenue will grow nearly 200M. If Apple continues their shipping of the converter cable, average iPhone ASPs increase $0.75 to $5.5 increasing revenue by greater than 300M. Other additional revenue expected from Apple comes with the rumor floated in October that Apple will eliminate the jack when new iPads are released in the spring of 2017. Using an estimate of 25M iPads at a dollar additional ASP, Apple revenue would increase by 25M plus the $200 to $300 from iPhones.
Cirrus's Samsung Business
Several times in the last few conferences, Jason Rhodes has mention trends which signal opportunities. Two of those trends, adding stereo sound and digital sound connectors on smartphones may play a key role for growing revenue during FY-18. Of this business, Cirrus recently commented," While we anticipate revenue from digital headsets to contribute significantly to sales in FY17, we are still in the initial phase of the transition from traditional analog headsets to digital and expect momentum to accelerate as we move through this year into FY18." From a recent Samsung watch group,"The S8 is also expected to ship with a USB Type-C port for charging and listening to music. Followed by ""SamMobile" notes a few other rumors, like that the phone might ship with stereo speakers as a result of no headphone jack, and that it won't feature a home button." Samsung sells approximately 70M units of S and Note phones a year. We wonder if Cirrus will be providing the D/A conversion for these digital headsets. In the January call, they mentioned that headset revenue would be driven mostly by digital not ANC types. The total revenue increase could range from 40-70M, offsetting losses in the codec.
In addition, "but as we also said in the shareholder letter, we see opportunities over the coming year to expand into additional products with that same customer." This is probably mid-tier products and would most likely be the high-end mid-tier. The total size of Samsung's mid-tier is 200M units a year. Guessing the size Cirrus might gain is an impossible task. We know it will be something. Codec ASPs are in the $1.5 range. 180 NM amps range between $0.50 to a $1. We believe that Samsung might add 50M-100M in the coming fiscal year.
Paradigm shifts in technology is about to drastically change the Active noise cancellation (ANC) market place. Cirrus released a chip about a year and half ago which enables ANC without the requirement of ear covers and can fit most any ear listening form including ear buds. It is based on digitally activity mics and signal processing located at each ear. In the current format, Cirrus's technology works with a wired configuration and costs about 12 dollars to build with a sells price around $80. Cirrus's parts include one or two ANC signal processing chips plus up to six Cirrus mics. The total size of the market is 1.5B units/year. We believe that this approach would be purchased as an add-on rather than come in the box. Cirrus's ASP is approximately $1 for mics and $2 for the signal processor for each ear. The total ASP for each headset might reach $4. Presently Cirrus has two OEMs getting ready to release their first version in the March quarter. In our estimation, we believe Cirrus might manufacture 10M, a small enough volume that Cirrus's mics can be supportable in full. Under this belief, Cirrus's revenue might increase by 30-40M during FY-18.
When describing Cirrus's future expectations in the mid-tier market they wrote," While we are gaining momentum in the mid-tier in FY17, we believe this business will accelerate in FY18 as we broaden our customer base and expand our product portfolio." There will be growth of some kind in this market and perhaps all may come from Samsung.
Cirrus's has already gained significant business with Lenovo. Three other Chinese smart phone manufactures, Oppo, Vivo, and Huawei are becoming increasingly important. A recent article from Fudzilla wrote,
" According to the latest estimates within the smartphone supply chain, China's top-three vendors are expected to ship a combined total of 500 million devices in 2017, or roughly one third of all global smartphone shipments." News release in September and another in November revealed Cirrus intention to specially target Chinese markers. From the September," The CS47L90 is supported on multiple application processor platforms, enabling a consistent feature set and high performance capability across a wide variety of handsets from leading OEMs. A variety of interfaces allows for integration with all of the key components in the complex architectures of the latest mobile devices, including baseband and applications processors, wireless audio transceivers, analog or digital MEMS microphones and boosted speaker amplifiers."
From the November article which announced a product "Beyond Flagship Smartphones,"
"The CS47L15 low-power smart codec is the newest member of Cirrus Logic's SmartHIFI™ audio and voice IC portfolio and enables smartphone OEMs to cost-effectively incorporate advanced audio features, such as "always on" voice activation, enhanced karaoke and virtual stereo and protection algorithms for enhanced speaker playback."
Both of these new products carry features critical in winning business within China. We are not in particular trying to define with any certainty what kind of growth Cirrus might see from China this coming year, but codec's plus amplifiers in flagship phones yield ASPs near $4 and the same in mid-tier phones yield $2. Modest wins with reasonable mixes between and flagship and mid-type phones yield a 100M in revenue for each 25M or 5% of their total phones sold. It is conceivable for Cirrus to add 50M or more from China during FY-18.
Conclusion and Growth Calculation
Adding up individual growths is one way of calculating FY-18 growth. 50M plus 75M plus 35M plus something equals 160M plus something. Perhaps a better method is to calculate revenue growth based on a statement made during the last conference. "All of that said, I'm sure you need something for your models, so I'd say something in the single-digit percentage growth range would be sensible. Assuming the products and markets we serve remain relatively stable, which again is not something we're predicting one way or the other, but is a reasonable place to base assumptions probably." And "While we see numerous opportunities to continue this successful formula over the coming years, we currently expect more modest growth in FY18." Of most importance, Cirrus is predicting revenue growth in an environment of stable unit sales with major customers. In the past, they have been conservative. We expect 10% growth YoY for our starting point. YoY 10% growth represents about 150M. Adding to that iPhone unit growth and iPad digital earbuds revenue, we might expect 375M of growth or a total of 1.9-2.0B. Defining the exact products in which new revenue will come is the FY-18 arduous task. But we believe our approaches represent reasonable estimates for FY-18 growth.
Cirrus is predicting lower growth rates in costs by holding SG&A costs constant. FY-16 non-GAAP operating costs were 325, and we anticipate FY-17 operating costs based on YTD plus March guided costs at 345-350M or about a 25M YoY increase. With SG&A being held constant, we expect FY-18 operating cost to be at or less than 370M. FY-18 tax rates are expected to slightly less than FY-17's rate of 25%. Earnings for FY-18 can be calculated by 1.95B times 0.485 minus .370B times 0.76 divided by 0.64B shares equals $6.8/share. (We assumed that Cirrus will buy back one or two million shares during this correction.)
A Last Conference Call Comment
"It is worth noting that our accomplishments the past few years have provided beneficial leverage to our business model and we are adjusting our long-term target operating margin model to be in the mid-20 percent range going forward." This is an important long-term change in Cirrus's belief.
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.