Cirrus Logic Unveils Its Positive CY-2020 ASP Growth Vision Likely Driving Significant Revenue Growth

Summary

• Cirrus Logic expects significant ASP growth within wearables, laptops, tablets, and phones during CY-2020.
• Waiting until Cirrus updates its March guidance might be the prudent action before buying.
• Growth in ASPs isn't restricted to CY-2020 but will extend far into the future.
• Amplifiers, haptics, a closed-loop device, and, possibly, a new codec win within wearables fuel the ASP growth.

We expect Cirrus Logic's (NASDAQ:CRUS) share price to significantly increase over the next few years. At the last conference, the company explained that it expects strong ASP growth from many growth vectors during CY-2020 and beyond. With at least constant unit sales volumes, revenue grows, but beginning later in the year, strong unit volume growth is also expected driven by 5G conversion. Even during volatile markets, understanding coming growth is essential. Jason Rhode, Cirrus's CEO, answered in the January call, "We're excited about the new stuff that we've got going on this year. We've got further new content that we're excited about for the following year." From the call, the new content seems deep, meaningful and broad in scope. Let's get started.

Reviewing Last Quarter

We begin by reviewing last quarter's results. Revenue for the December quarter was $375 million, significantly above guidance driven mainly by new sockets in Android and higher iPhone unit sales with Apple (AAPL). As expected, non-GAAP earnings of $1.41 handily beat analysts' estimates. At the conference, Cirrus's guidance significantly beat analysts' estimates ranging between $250 million and $290 million. With the recent Apple revenue warning, it seems clear that that guidance will be updated lower possibly toward the end of March or early April.

As expected, Cirrus shut down its microphone development endeavor. Most of the resources successfully transitioned to other more valuable projects.

Describing What is Coming

The company noted in the shareholder letter:

As we move through the next 12 to 18 months, we are excited to have a number of new products coming to market that we expect to bolster our leadership position in audio and voice and establish a strong foothold with other signal processing components beyond these traditional domains."

This growth includes expansions with new and existing customers. Understandably, Cirrus offered nothing beyond ASP growth.

Rhode commented about revenue growth:

So we said last fall, we expected incremental new progress in hearable devices, wearables, tablets and laptops."

Cirrus has won several sockets within "untethered ear buds" "from multiple different customers." The other devices include "wearables, tablets, laptops. Those appear to be on track." Referencing timing, Cirrus expects "to deliver new content in . . . [certain] handsets later this year."

During last quarter, the company also communicated that growth in haptic devices, amplifiers, and closed-loop controllers was expected in coming months.

The company commented that risk from coronavirus, trade wars, the economy, and other matters can have very negative effects in the coming quarters. The current outlook was strong. With Apple's unspecified revenue warning, Cirrus will likely warn, perhaps even steeply. We should note that QORVO (QRVO) did warn lowering guidance by roughly $50 million.

Tablets & Laptops

Apple analyst, Ming-Chi Kuo, claims Apple will update multiple laptops and iPads during the CY-2020. The long list includes upgrades for MacBook Pro 13-inch to 14 inch, a 12.9-inch iPad Pro, a 27-inch iMac Pro, a 16-inch MacBook Pro, a 10.2-inch iPad, and a 7.9-inch iPad mini. We wonder if Cirrus will be adding content in most or all of these products. It certainly coincides with Cirrus's announcement.

Haptics

During the first 6 months of CY-2020, Cirrus expects "several new Android smartphones to come to market that use our components." Small form factors and industry trends toward physical button-less phones are driving this change.

Customers are testing a new next-generation chip cutting the required board space in half. The company expects revenue from this upgrade starting in CY-2021. Interest from customers for including haptics functions within wearables was also included in the last quarter report.

With respect to China, design wins represent singles and doubles not homers. But Cirrus is winning.

Amplifiers

The amplifier market seems ahead of the haptics market. The company expects continued ramps in the top four OEMs. The strong traction extends with both "flagship and mid-tier Android platforms." Cirrus expects these wins to begin during the next 6 to 9 months. The company forecasts greater demand driven from new wins within headsets and tablets. Up to this point, Apple hasn't used Cirrus amplifiers in its tablets. We believe that newly introduced iPads will use Cirrus amplifiers.

Perhaps the most telling statement concerning amplifiers follows from the shareholder letter, "we anticipate revenue from this product line will grow year-over-year in FY21." Apple uses Cirrus amplifiers in phones. In the past few years, Apple's iPhone sales haven't been stellar, yet the company included that statement on growth.

Closed Loop

The closed-loop controller, with a possible ASP of $1.25, remains on track to begin shipping later in 2020. Rhode added nothing further about its functionality. With the release being later in CY-2020, it seems inevitable that the new customer is Apple. When asked if this product might trickle down toward Android, Rhode answered, it might but we aren't planning for that. This product appears to be designed for one major customer. The shareholder letter did state that other future non-audio products are targeted with a wider customer base.

Wearables

Cirrus expects, though plans could change, good progress for design wins with wearables. Rhode answered a question concerning this product segment with this, "clearly an exciting segment of the market that's getting harder as time goes on." With products demanding additional functionality, Cirrus appears ready to pounce. Again, with Apple dominating complex wearable products at least at this time, Cirrus believes it has won something significant in perhaps new Apple watches. Rhode refrained from adding any additional information, but Cirrus could be providing a more complex codec and/or amplifier within the watches. We view this possible win as an important entrance step rather than one which will drive significant revenue for the coming year.

Missing Growth Products for This Year

Notably, missing from this year's growth is voice biometrics and mid-range phone codecs. We wonder if voice biometrics implementation might be delayed until the 22 nm form factor is released.

In Total

In total, Cirrus appears poised to gain content with phones, wearables, tablets, and laptops. ASPs per device might reach: $0.50 - $1.50 for phone amplifiers, $0.50 for phone haptics, $1.00+ for wearables, $1.00+ for tablets, and $2.00 for laptops. The ASP for the closed-loop device seems to be approximately $1.25. If this is with the new iPhones from Apple, this product will be in 100s of millions of units. Rhode did caution analysts that all products might not be up and to the right in growth. This seemed to apply especially to any gains with wearables.

We figured the ASP ranges from the following slide.

CY-2020 & Beyond

When asked about the future, Rhode commented during the call:

There are additional things beyond that, that are in an entirely different domain, again, non audio, non voice for handsets that we're extremely excited about that would be in the year [beyond]. So I think that's about as good a lineup, as I can ever remember us having."

Perhaps this is the most important comment concerning future growth.

Risks

In the next two years, risks seem limited to unit volume sales. In today's economic circumstances driven by pandemic scares, volumes could continue to fall.

Our belief includes Cirrus adding a new socket with Apple now being referred to as a closed-loop device. We see a small risk that this isn't with Apple since, in past conferences, Rhode referred to this opportunity as being lucrative. The timing being in the second half of the year also lines with new Apple releases. With production and business development shut down in China temporarily, Apple's new phone release could be delayed into October. Significant new revenue would also be delayed a month or two.

Our March Quarter Guess & Investment Strategy

Apple warned early in the March refusing to guide new revenue. It has little timing visibility for the coronavirus effects on manufacturing. We expect Cirrus to warn also. A new forecast for Cirrus might drop toward $200 million from the $270 mid-point guidance given in the January call. For us, phone sales delayed until the September quarter are positives long term. Cirrus will have greater content, we believe, with Apple beginning in that quarter. We also believe that with the demand from Apple's first 5G phones, Cirrus will generate greater revenue with any delay.

Our belief is that any further investing in Cirrus might best be made after Cirrus updates guidance. Sometimes markets over-correct during periods of grave uncertainty. When the news is announced, the price might turn higher. Sometimes markets continue correcting as it finds the circumstance worse. Even though the price could jump higher on the warning, our practice and belief are to wait. It might be better to pay a higher price. But, Cirrus expects significant ASP additions during the next 12-18 months. Still, it seems to us that this market correction is creating a nice buying opportunity for a company that is positioned for significant long-term and continued growth.

As always, investing in Cirrus Logic isn't for the faint of heart.

Analyst’s 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.

Comments

[Patient Tech Investor]

Riding Cirrus Logic’s ASP Hedges Through Grave Uncertainty

With the world economic uncertainly thriving, companies such as Cirrus Logic with its dependency solely on consumers, face unprecedented unpredictability. Yet, an alternate financial view might add understanding and predictability to this coming fiscal year.

It is clear that the June quarter smart phone unit sales won’t be stellar. Rumors abound claiming significant delays for delivering Apple’s newest iPhone, Cirrus’ most lucrative revenue generator. To add further uncertainty, Cirrus’ announced the loss of two sockets, the $1.50 codec in the newest Galaxy and approximately a $1.00 in-the-box convertor with the iPhone. Cirrus is countering those losses with a recently won amplifier within the AirPod Pro and a camera stabilization closed loop controller within a significant portion of the newest iPhone. The net appears to be ASP neutral with Apple and a minor loss with Samsung of $30-$40 million. Still unit sales for consumer devices hold significant uncertainty.

The Hedge

Perhaps this can only be considered a view, but a change in ASP within Apple’s new iPad Pro offers an interesting reason for optimism. Cirrus through several different conferences offered investors important in sight into the magnitude for the gain. The device has 11 Cirrus parts one of which is a codec valued at $1.50, a controller of some kind valued in our mind probably near $1 and 9 other devices most likely amplifiers. The company’s presentation includes a slide showing ASP’s for it products. Mobile amplifiers range from $0.40-$0.75. At its lowest amplifier ASP, the total of the 11 devices equals $6. At $0.5 per amplifier, the total ASP is $7.00. The ASP in older iPads was about $1.5 from the codec. The difference in ASP between devices probably ranges from slightly less than $5 to $6. To help investors to understand the meaning of this change, consider that revenue lost from an iPhone with an ASP equivalent of $4.25 requires 0.85-0.70 units of the iPad Pro to maintain a constant revenue year over year. For example, if Apple sells 15 million less iPhone, it take only 10-12 million iPad Pros to hold revenue constant on a year over year basis. How certain are we that this new iPad as an ASP this large? Right before the last quarterly report, we had guessed Cirrus’ revenue for March at $250-$260 million. They reported $280 million. That difference of $25 million was likely or could have been made up by this higher ASP. If Cirrus delivered 5 million units worth of parts, $5 times 5 million equals $25 million our difference. It seems that something change significantly and this is most likely the change.

In the past, Apple has sold between 10-15 million iPads per quarter or approximately 55 million a year. During the last quarterly conference call, Apple made it clear that tablets and other devices such as watches were selling much better than seasonal. The reasons for this increase leave us more than hopeful that units sales for tablets will at least follow similar historical patterns. iPhone sales have been known to have plummeted. The question becomes that at what percentage of the total is the newest tablet. Is it 25% or 50% or 75%? Our guess is that it will be at least 50% or close to 30 million units this year. Constant revenue between Apple phones and tablet sales can be maintain even if phones sales drop by 30-45 million year over year.

The Story Doesn’t End With This

Jason Rhode wrote, “Wearables. Other categories of wearables is still in front of us, still on track. We're still really super excited about it. Laptops are a little further out.” We expect an iWatch or something of similar size coming soon probably with an ASP between $0.50 and $0.75. But our real interest, is in the laptops. We believe that will come with Apple’s conversion to its own processors should include a new sound system very similar to the iPad Pro. If so, additional $5-$6 of additional ASP is coming beginning later in the year. This change won’t be as dramatic possibly near $5-$10 million a quarter beginning in December, but still it would carry the additional revenue 2-3 million phone units.

It appears to us that Cirrus’ new significantly design wins when viewed financially as hedges against uncertainty with the idea of holding earnings/revenue at least constant seems powerful. With this look, Cirrus likely earns at least $4.00 once again during FY-2021.

And More Is Coming

Cirrus broadcasted that wearable wins and significant haptics socket wins are expected over the next 6 months. We aren’t sure as to exact values, but a single chip haptics solutions on the way is likely to bring $0.75 or more. Those might begin as early as the March quarter.

The Totals

Growth from known new sockets plus major changes in tablet ASPs act strangely similar to hedges against uncertainty. The value seemed best measured in numbers of phone units primarily since there seems to be stability in the tablet business with many frozen at home.

Obviously, everything has some risk, but with this kind of assumption, the hedges might replace the revenue for the lost of 35-40 million Apple phones. That might seem like a lot of reduction in phones, but it is possible. June quarter rumors claim iPhone sales in April collapsed. Apple admitted that it wasn’t expecting good phone numbers during its report. Down 10 million units or more in June remains likely. If the expected iPhone 12 release moves from September to October, expect another 5-10 million for September. With a later release for the December quarter plus unknown weakness from unemployment around the world, a 10-20 million unit drop in that quarter is possible. That leaves March, which might be much stronger, but still unknown.

A stable tablet business might dampen this risk. Continuing with this view, iPhone units sales of 150-160 million between June and March quarters would still yield $4.00 in earnings. Changes to earnings either positive or negative could be figured by roughly $0.35 per 10 million phone units. For example, a year over year constant unit sale would add a little more than a dollar bringing earnings for FY 2021 over $5. In this case, Cirrus is extremely underpriced. Taking a more bearish case, Cirrus could likely end up with at least the same earnings year over year with the current price being modestly undervalued.

Certainly this is a strange way to look at an earnings evaluation, but this seemed the easiest view in which to put one’s arm around how the coming year might unfold.

We also noticed that Cirrus announced its earnings date on the second day of the new quarter. It likely had a good June quarter in compared with guidance. As a reminder for gauging June earnings, Cirrus tends to under guide. At $250 million, the top end of guidance, earnings equal $250 million times 0.52 minus $95 million times 0.90 divided by 58 million shares of stock fully diluted equaling $0.55. This compares with $0.35 last June or roughly the same. Each $10 million adds almost 10 cents.

FY 2021 for Cirrus will be challenging, but we don’t see it as catastrophic.

[otto1234567890]

Tnx for the interesting article. My main concern with Crus is its dependency on Apple for about 75% of revenu. Did the CEO mention something about differentiating more?

[Patient Tech Investor]

Yes he did. All amps haptics and devices like that are non-Apple.

Mark