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Lifting The Hood On Cirrus Logic's Blowout Quarter

About: Cirrus Logic, Inc. (CRUS), Includes: AAPL
by: Patient Tech Investor
Patient Tech Investor
Long/short equity, Deep Value, Growth, contrarian

Apple pulled forward a significant amount of inventory, but it doesn't appear that this will have a major negative impact on the rest of the year.

Earnings for FY-20 might reach near $4.

A stock price near $70 is reasonable when compared with other sector valuations.

With Cirrus Logic (CRUS) blowing away the September analysis expectations for earnings of $1.55 vs. $0.95, a discussion about what drove the blowout is imperative. How much of the beat came because of Apple (AAPL) pulling forward inventory? How much was from new design wins? What might happen to iPhone sales in the December and March quarters? Understanding these impacts lifts the hood.

The December Quarter

Beginning with a comment from the conference from Jason Rhode, Cirrus' CEO, "[W]e feel good. Backlog is strong. The outlook looks good going forward." The December quarter isn't beginning weak. But it is also clear that Apple moved forward a significant amount of inventory. The amount of carry over inventory can be estimated by subtracting off the inventory value sold in September quarter versus the amount delivered through iPhone sales. Our estimate uses an average of $4.25 for Cirrus' ASP. Since Apple refuses to report the number of units sold, guesstimates are required. From a Bloomberg report, "The average selling price is expected to be $759.85, a year-over-year decline of 2.3%." Apple reported $33.5 billion in iPhone revenue divided by $760 equals 44 million units potentially sold.

Cirrus reported $310 million in revenue from Apple. In the past, we have estimated $30 million a quarter from tablets and Macs. This past quarter, Cirrus added an additional Apple product (believed to be an amplifier in Apple's new AirPods). With Cirrus' lowest amplifier valued at approximately $0.50, we estimate that the company delivered approximately $10 million worth of inventory for this new amplifier. The total non-iPhone revenue might have reached $40 million during September leaving $310 million minus $40 million or $270 million for iPhones or 63 million iPhone units delivered. If Apple sold 44-45 million units in the September quarter, Cirrus delivered an additional 18 million.

Cirrus guided $325-365 million for the December quarter. With Rhode remarking that the backlog is strong suggests at least at this point Cirrus expects revenue at the higher-end of guidance. At $360 million versus $390 million, Apple's revenue might be in the $270-290 million range. Subtracting $40 from the mid-point of $280 equals $240 million for phones or 55 million units. The total to be delivered or in inventory with Apple might be 73 million units. Last year, Apple sold 66-68 million iPhones in December. Unit sales for iPhones seem higher this year compared to last year. It appears to us that in the most conservative light, Apple will have less than 5 million units worth of inventory beginning in March than delivered. This is a modest $20 million inventory overhang.

We believe that unless market conditions significantly change, the probability for Apple to significantly cut inventory is remote. Cirrus hitting $360 million in the December quarter seems highly probable.

March Quarter

Comparing March FY20 versus March FY2019, several positive factors might significantly improve revenue YoY. First, it is rumored that Apple will be introducing a new upgraded lower cost phone. Second, the shareholder letter contained a comment concerning non-Apple business:

"Given our momentum and pace of innovation in boosted amplifiers, we anticipate revenue from this product line will increase on a year-over-year basis in the second half of FY20."

Third, Cirrus continues to add new design wins in haptics. Fourth, we believe that the new amplifier now shipping in the Apple AirPod is meaningful. Fifth, over the next 12 months, Cirrus will begin adding new content in tablets. Last March quarter, Cirrus reported $240 million. We expect this coming March to be above $250 million perhaps as high as $280 million.

Looking at March and December Quarters Together

With our expectation for $360 million for December and $260 million in March, the total revenue might reach $620 million, significantly higher than last year's $565 million. With margins guided in the 52%+ range, non-GAAP costs at less than $100 million a quarter, tax rates at 15%, and share counts approximately 59 million, earnings could reach $1.8 or more. With the first two quarters of the fiscal year generating $1.90, the total earnings for the year could reach $3.7. We might be significantly underestimating the March quarter with a new lower-cost iPhone and other design wins. It does appear that earnings for this coming year will be significantly higher than last fiscal year of approximately $2.70.

Summing Up

It appears that Cirrus is back on a path for both revenue and earnings growth. The improving costs, higher margins, and lower share count achieved during the last few years add to an expected significant earnings increase. It is clear that Apple did front load some inventory, but it doesn't seem excessive. At $3.7-4.0 earnings and an average industry price to earnings ratio of 17, a stock price in the high $60s to low $70s isn't unreasonable.

Owning Cirrus isn't for the faint of heart.

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.