- 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.
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.
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.
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.
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, 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.
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.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.