Cirrus Logic Stock: Nailed It Financially in Q2 (NASDAQ:CRUS)

Cirrus Logic (NASDAQ:CRUS) nailed it at its November 1st quarterly report. The most important statement from the call came during the question and answer session:

And then going forward, we’ve signaled that we have — we believe we’ve got multiple other opportunities to expand content outside of the audio space, in the high-performance mixed signal area. And that’s something where we believe that gives us visibility and reason for believing that we can deliver year-on-year growth as we go forward.

That comment adds significant depth into Cirrus’ future. Go grab the nail gun, the tool belt, the lunch box and head to the job. The construction site is rich in investment opportunity.

The September Quarter

Cirrus pounded sure nails with the key financial measurements. Cirrus reported:

• Record Q2 revenue at $540 million.
• Record EPS at $1.99 non-GAAP.
• Developing next-generation smartphone amplifier.
• Sampling the first SoundWire®-enabled codec designed for laptops.
• Increased customer adoption of camera controllers.
• Guidance of $520-$580 million. (A note on guidance: Cirrus’ available production capacity is limited and $580 million is likely near or the very top.)

Of Interesting Note

Management discussed several coming advantages clearly stating that it is “maintaining our leadership position in smartphone audio; second, broadening sales of audio components in key profitable applications beyond smartphones; and third, applying our mixed-signal engineering expertise to develop solutions in new, adjacent HPMS applications and markets.” The results of the quarter demonstrates that reality.

The 22-nanometer smart codec, designed for smart phones, adds enhanced functionality across audio, sensing and other signal processing. Of most interesting note for us is within the sensing category. We believe it is for battery management. A new amplifier design, next generation, is being developed in conjunction. We suspect that this new generation will be 22 or 28 nanometer is size.

For laptops, the company developed a specialty amplifier and codec, which are now sampling. We wonder if any of these devices support motion detection, a feature that Cirrus embraced some quarters ago.

During the coming 12 months, new design wins in AR/VR headsets, gaming and wearables are anticipated. Management noted that they are engaging several OEMs, who seek higher-quality sound and haptics.

Referring to power chips, new features and designs are in progress including size reduction, enhanced battery subsystem performance and health and longevity. The goal is to expand the whole application and product category over coming years. This interesting comment follows, “Finally, we continue to engage with a strategic customer and expect to bring a new HPMS component to market in smartphones next year.”

With respect to Apple (AAPL), management reaffirmed its strong relationship and are working on a next-generation camera controller adding new features. On timing, John Forsyth, Cirrus’ CEO, noted that additional HPMS content during the back half of the year will come forth. This could be new haptics devices added to replace the physical volume and on/off buttons. Ming-Chi Kuo claimed this application change which adds three new haptic devices for the iPhone Pro models only. This adds approximately $1.50 – $2.00 ASP for those devices. It could also be power management for the forward side of the battery adding $1.00 – $1.50. Our best understanding suggests the former application.

Before closing the call, management reminded investors that the supply side of the business is close to capacity altering the normal seasonal revenues builds and ebbs. For example, the December quarter is basically target at zero growth quarter over quarter. Adding detail to this issue, Forsyth, noted:

“Longer term, we are transitioning certain mixed-signal intellectual property from 55-nanometer to other advanced process nodes and seeking to expand foundry optionality, both of which we believe will enable us to alleviate some of these capacity constraints.”

Again, we believe that this is both haptics and amplifier designs. For investors, it begs the question about what features will Apple add or include. Amplifier motion sensing completely changes phones possibly eliminating the need for a physical touch.

A Few Thoughts

We offer a few thoughts beginning with reviewing our estimate. Before the report, we estimated the September revenue at $490 million plus or minus. Our estimate for December was $550 million. Between the two, it appears that we were about $50 million short. Our concern remains with the March quarter – with high energy costs in Europe, that alone could limit what Apple sells. The stock seems genuinely worried about this coming issue with it being flat after rising into the middle 70s after the report.

Second, it is clear that new products at significantly smaller size are coming in the next 18 months. The capacity freed will allow the company to greatly expand its amplifier business into Android devices. The company finds itself between the rock and the hard place on this capacity issue. But, what is clear that on the other side are some exciting and revolutionary products that will feed growth for years.

A $450 million March quarter will put the total revenue at $2 billion, approximately 12% higher than last year. This is outstanding while so many other semis are bleeding revenue and profits.

Lately, the stock price is relatively cheap trading near $70 or close to a P/E of 10.

Risk & Investment

Market price risk still abounds. After the report, Cirrus traded higher by almost 10% until the Fed announced its interest rate increase and confused the market as to its direction. The price dropped almost the same amount following the market. Continuing, Apple faces work issue from the virus in China with negative manufacturing effects and its stock price is also suffering, trading in the $130s. But for us, Cirrus is now a buy especially on weakness. The company is generating a lot of cash and will be buying stock back at a more rapid rate, in our view. The fundamentals are in play for short-term and long-term growth. The street view for the construction site is impressive. Huge positive changes in both technology and reachable market share are coming and growth is still in place during weaker markets. Again, we are buying.