Cirrus Logic: Diversification Pays Off

Summary

• Cirrus Logic has grown as diversification efforts pay off.
• Still operating with a very strong balance sheet, there is more firepower to further pursue diversification attempts.
• I like the moves made by Cirrus, as further diversification from the Apple account could drive further appeal.`.
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Cirrus Logic (NASDAQ:CRUS) has seen quite an eventful year which includes solid operating momentum and bolt-on M&A. The relative stagnation in the share price makes enough of a case to update the investment thesis.

My last take on the business dates back to the very end of 2017, as I concluded at the time that the Apple (AAPL) reliance did not make for a logical buying opportunity. Fast forwarding in time, finally diversification efforts are paying off, driven by a solid organic performance and some M&A.

Former Take

Late in 2017 I observed that Cirrus has seen huge growth over the past decade as a key supplier to Apple. Shares came under quite some pressure that year, in contrast to the wider semi sector, as they looked cheap at 11 times earnings, trading around the $50 mark at the time. The lower earnings multiple was all the result of the importance and doubts on the longevity of the Apple relationship. The low valuation made for a steal if the relationship was set to continue, yet the reliance on the account created huge risks as well. Apple was still responsible for 79% of sales in 2016, as this account together with Samsung (OTCPK:SSNLF) combined made up some 95% of total sales.

The dependency is a key risk as Apple could switch suppliers, but on the bright side, it is the same relationship which had allowed sales to rise from just $200 million in 2009 to $1.6 billion on a trailing basis at the time. This revenue base supported a profitable operation, with operating margins posted around 20%, as the company knew it had to figure out a solution to diversify the operations. Hence, the company invested $300 million per annum in R&D efforts in order to diversify the revenue base, but with quite mixed results, one must say.

Fast Forwarding - 2020

Early in May 2020, Cirrus posted its full year results for the fiscal year 2020 as revenues were posted at $1.28 billion, actually down quite a bit below the 2017 numbers. The company posted operating margins around 15%, or about $200 million if we back out restructuring costs with GAAP earnings posted at $2.64 per share. So on top of actual revenue declines, Cirrus has seen some margin compression as well.

Shares traded around the $75 mark at the time resulting in reasonable multiples if we consider that the company operated with some $600 million in net cash, equal to around $10 per share.

Fast forwarding another year to May 2021, the company posted sales of $1.37 billion in the fiscal year 2021, hard to imagine at the outset of the pandemic. Audio sales were flat at $1.1 billion as revenues of high-performance mixed signals were up 55% to $265 million. The company posted operating earnings of $237 million, as net earnings saw a dollar boost to $3.62 per share.

Net cash holdings have risen to just over $800 million, or about $13 per share based on a share count of 60 million shares. With shares still trading at $75 in spring of 2021, the operating assets are valued at just $62 per share, implying that Cirrus is valued at just 17-18 times earnings.

The problem is that the dependency issues are still not solved, and quite frankly that revenue growth of the business is quite lackluster with sales actually down a bit from the trailing numbers in 2017. Trading at $75, the company was valued at $3.8 billion (operating asset valuation) equivalent to 2.7 times sales.

A Small Deal

In July of 2021, the company used the strong balance sheet to make a bolt-on deal. The company reached a deal to acquire Lion Semiconductor in a $335 million cash deal to gain IP and products for power applications in smartphones, laptops and other devices. Specific strength of the business includes higher-power settings, allowing faster charging with less power loss and heat dissipation.

This deal will grow the already rapidly growing high-performance mixed signals business. The deal is set to add some $60 million in revenues between closing of the deal and the end of the fiscal year 2022, that is the end of March 2022. Estimating this time to be approximately 8 months, I peg the revenue contribution at $90 million per annum, suggesting a 3.7 revenue multiple has been paid. The deal is furthermore set to be immediately accretive, but that is not a surprise, yet unfortunately this claim has not been quantified.

Just after the deal, Cirrus posted solid quarterly results with first quarter sales, seasonally being a softer quarter, up 15% to $277 million. Seasonally stronger second quarter sales came in at $466 million, up 34% on the year before.

Moreover, growth was driven by the high-performance mixed-signal businesses, which saw revenues up nearly 150% to $165 million as the growth in audio revenues was much less pronounced to $300 million. Net cash stood at $462 million following the Lion deal, even as the company forward-paid for some wafers in order to guarantee supply, given the supply chain considerations across the industry. This is needed as demand for Cirrus (Apple products) is solid, as revenues are seen at a midpoint of $510 million in the third quarter.

Improved operational performance led to shares rising to $92 here, which together with nearly 60 million shares outstanding makes that valuation come in at $5.5 billion, including nearly half a billion net cash position. The resulting $5.0 billion valuation corresponds to roughly 3 times sales which undoubtedly would come in around $1.7 billion this year. Moreover, earnings per share could come in a dollar higher than 2021, indicating that earnings could even come in close to $5 per share if we include some contribution from Lion.

Concluding Thoughts

Truth be told, I am a bit more upbeat on Cirrus here. If we back out net cash, the company still trades at just $86 per share, as realistically I see a run rate for earnings close to $5 per share here. Furthermore, momentum appears solid, even as there are reports of slower iPhone sales, in part driven by component shortages.

Amidst all of this, I am quite encouraged, certainly as the company has finally used its strong balance sheet to make a sound deal, one which further diversifies the business away from Apple, which is encouraging, but it is still a critical account here.

Nonetheless, the strategic choices of Cirrus are to be applauded. The company has diversified the operations and the focus away from audio and Apple results in revenue growth as of now, which is encouraging, as well as diversification. The combined effect of both could be that margin, but mostly valuation multiple expansion is expected to be realistic down the road, as Cirrus still feels like a decent semi play here, despite some historical underperformance.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.