CRUS - Characterization Of Cirrus Logic's Fiscal Year 2024 And A Little Beyond

2023-10-17 02:10:26 ET

Summary

• Cirrus Logic is currently out of favor in the market due to various factors, including a higher tax rate and the loss of an Apple chip win.
• Despite this, the recommendation for the stock has changed from hold to buy.
• The focus is on the future performance of the company and its potential for growth.

Cirrus Logic ( CRUS ), similar to other technology companies, continues its out-of-favor status. Several factors drive this market view including: a slightly higher tax rate (1%) year over year, loss of an Apple chip win through another vendor's failure, recession worries, etc. Our hold position disseminated in other articles changes to a buy. In part, it is about price. But it is far more; it's the future. Seabiscuit's owner , Charles Howard, in the movie, Seabiscuit , wisely spoke:

"And, you know, l can't help thinking... that if we can start out there and end up here, where can't we go in America? Hmm? So, as corny as it sounds, l'd like to propose a toast to the future."

In markets, it is the future and beliefs thereof that drive itself. For Cirrus, it is everything. Head to your favorite chair, sit down, grab the remote, hit the future bottom, and let's go. But, before we do, remember that Apple ( AAPL ) is Cirrus' largest customer at 75%-80%.

Estimating FY-24

With the stock in the dumps, it seems wise to first view a probable estimate for this fiscal year. This action begins with a revenue table from the past two years.

* Rounded results.

** Guidance was $500 million at the top end.

*** Above guidance.

**** Major CLC upgrade in ASP. Clearing old inventory always significantly negatively impacts the quarter in which this occurs.

From the results, a randomness appears with Apple's ordering pattern. For example: a big beat in September and a nice beat in December last year followed by an inventory correction in March. Apple clearly corrected inventory in the March and June quarters of the calendar year 2023. With regards to the low June revenue of FY-24, Cirrus also made a major change in its closed-loop control chip ((CLC)) with a new upgraded version increasing ASPs by "$0.20-$0.40 . . . "

Next, a review of iPhone sales follows. Several articles with opinions surfaced in the later portion of September. With iPhone 15 Pro Model delivery times lengthening, the critical question became, is it demand or manufacturing? Two opinions support flat to strong demand year over year. Wedbush analyst, Daniel Ives, wrote a note to investors, "says that its own analysis shows iPhone 15 pre-orders up at least 10% year-on-year,” and that the most expensive model in the lineup is doing even better. He also noted that 250 million iPhone owners are in the right window to upgrade. India and China orders were particularly strong.

Ming-Chi Kuo "published a report on the first weekend of iPhone 15 pre-orders," stating that "the iPhone 15 Pro Max is selling particularly strong so far." He noted that the 15 and 15 plus orders were on equal ground with last year, but that the Pro was weaker. In essence, phone sales, year over year, remain unchanged.

Another report called the data mixed at best. We should note this report contained vague statements without backing its conclusions. It seems that the iPhone 15 is at least on par with last year and likely better.

From the above commentary, an estimate for the rest of the year was drawn.

* Actual.

** Slightly above the top end of guidance.

*** With an increase in ASP from the higher valued CLCs and constant unit sales year over year or slightly higher, it should be marginally higher.

**** Assumes a moderate September result.

In addition, during December, Apple's plans seem to point at ordering parts for its new headset which we believe Logic has a significant presence.

Over the past two years, total revenue equaled $1780 million and $1895 million respectively. Our revenue forecast includes a modest increase driven by higher ASPs with the CLC product and constant or slightly higher unit sale volumes for iPhones.

Howard's Toast to the Future

More growth comes and it won't be small within the next twelve months. Management confirmed solidly at the last conference and the last quarterly report that its 22nm codec plus new amplifiers begin shipping in the second half of next year with an increase in ASP. In our view from the past experience, we estimate this change at $1.5 to $2. It appears that Apple will receive new products from Cirrus that once again reduce more passive components in addition to huge changes in computational capabilities at the edge. This view places the iPhone in a unique position, one outstripping the functionality of Android.

Second, an interesting find concerning new button functionality coming with the next iPhone recently appeared. In a report from Forbes , "MacRumors claim a new button will be added to the next generation of iPhone." Analysts report the button, unlike the failed attempt for new buttons on the iPhone 15, is based on "capacitive [properties]; it will not move, but thanks to haptics it will offer physical feedback to the user like the iPhone SE’s home button." Cirrus management hasn't confirmed a win, but we know this:

• Management continues highlighting a new undisclosed product line that is thus far inappropriate to discuss.
• Past employment openings sought engineers for tear-down spying with among other talents, knowledge, and skills with capacitance solutions.
• This functionality is directly inside Cirrus' wheelhouse.
• At the KeyBanc Technology Leadership Forum , Carl J. Alberty A Vice President-Mixed-Signal Products, Cirrus Logic, Inc., noted that a need for maintaining or increasing fab capacity continues.

For our readers from our Cirrus article, Synergy Investing: Cirrus Logic's Coming Story , we wrote,

"Forsyth, again at the Stifle Conference, added,

"And so, that's a whole range of [HPMS] areas there from cameras, power, haptics, and other areas beyond that that we haven't necessarily spoken about yet, but a very significant broadening of the SAM that initially has relevance in the smartphone market."

The new functionality includes both a capacitance and haptic function. Is it possible for Cirrus to provide both? We shall see in time. An ASP gain might equal $1 with growth potential in eliminating all buttons.

And finally, it's about PCs. Cirrus is moving sound and power products with ASPs north of $2 and as high as $6 quickly into mid-high PCs. But, thus far, PC sales continue to be dismal. Analysts expect growth once again starting with the December quarter and going forward .

ASP increases in iPhone and other Apple products aren't small and are summarized in the next table.

* 220 million iPhone units.

** 50% penetration in the first year.

*** Our estimate.

We sense that $200 million of additional revenue for FY-2025 is coming with a possibility of $100 million more. This grows into $400 million to $600 million during the following year. $600 million equals earnings increases at $4.25.

We excluded significant upside revenue growth with PCs, several hundred million, also during this time period.

Finally, in recent quarters, the company made major structural cost adjustments, closing at least two smaller offices and reducing staff by eighty.

Updating Our FY-24 Earnings Estimate

An earnings update arises from Cirrus' lack of stock purchases in the June quarter and a modest lowering of revenue. We lowered our revenue by $100 million. With respect to stock, fully diluted stock actually rose by 1.4 million in June. Our expectation had been for a reduction to 54 million. To recalculate our last yearly estimate of $8.5 requires an adjustment in stock count, our basis of 53 million shares on average for the year is significantly high. This update increases the average to 55 million plus the reduction of $100 million in revenue thus lowering the yearly earnings toward a range of $7.00 - $7.50.

Conclusion & Risk

The first risk is price, one heading seemingly in the opposite direction with fundamentals signaling a market that doesn't care. We remind readers, that with Cirrus, it is always not for the faint of heart . The market seems focused on the analysts estimate of approximately $6.5 per share earnings during the year. Obviously, we disagree. Another risk, economic health isn't stellar either. A recession still is possible and it might be deep. The price of crude oil trends significantly higher continuing its part in increasing inflation. Finally, uncertainty in Taiwan and China relations spells even more risk.

Even with all this negativity we are upgrading our position to a buy. We believe that the price is low enough that one is in order. Adding our $7.50 estimate coupled with $4 plus in added earnings coming in the next year or two, Cirrus stock is cheap. Investors might be best served with multiple buys rather than purchasing all at once.

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