Not all Apple (Nasdaq: AAPL ) investors know what Cirrus Logic (Nasdaq: CRUS ) is, or what it does. But they should.
That's because Cirrus is one of the closest pure plays to Apple, with its chips in almost every Apple product. In the last quarter, 59% of the company's sales came from Apple. Two quarters ago, that figure stood at 70%. When Cirrus' sales are booming, you can usually thank Apple.
With that in mind, Cirrus reported earnings tonight. With the iPhone 5 set for launch in probably just a few short months, expectations were already high for Cirrus. Analysts were expecting $130 million in guidance for the upcoming quarter, a heady sequential jump of nearly 30%.
Well, Cirrus beat that number. In fact, it smashed it. Looking ahead to next quarter, Cirrus Logic sees sales of $170 million to $190 million. At its midpoint, that's 81% growth from Cirrus' just-finished quarter. Oh, and that guidance was good enough to destroy analyst expectations by 38%. That was an impressive figure, too.
Just the iPhone 5?
The obvious catalyst for Cirrus' jump is simple: It's ramping for the iPhone 5. It's easy to see why analysts hadn't seen this quarter coming: Predicting large ramp-ups like the iPhone 5 can be extremely difficult. Not only do you have to estimate the size and speed of the initial run that could occur in a quarter, but there's the matter of paring down production on the previous model (the 4S) to eat through any bulging inventory.
Cirrus' guidance shows the aggressiveness with which Apple is planning on building out the iPhone 5. However, even with production of iPhone 5 audio codecs running at full speed, Cirrus' guidance looks almost too good. Just take a look at how the company guided last year in advance of the iPhone 4S release.
Source: Company reports. Revenue figures are in millions.
The difference between the ramps is enormous. Keep in mind that Apple ended up selling more than 37 million iPhones last December quarter! The sheer size of Cirrus' guidance leads one to wonder how exactly Apple is planning on producing this many iPhones when other partners such as Qualcomm (Nasdaq: QCOM ) are complaining of supply constraints and Skyworks (Nasdaq: SWKS ) just presented capable, but by no means blowout, guidance when it last reported.
A few thoughts come to mind:
More content per phone?
Cirrus Logic could be increasing the amount of content -- i.e., the money it receives -- in each iPhone. Cirrus CEO Jason Rhode previously discussed with me the company's ability to design out other components and increase the value of Cirrus' chips. On the post-earnings conference call, Rhode said as much, saying Cirrus' bullish guidance was the result of both unit increases and increases in the content ASP Cirrus provides in each iPhone.
Bumping up the release date?
Apple announced the iPhone 4S last Oct. 4, and the phone first went on sale Oct. 18. Reports have been moving fast that the company will have a special event for the iPhone 5 on Sept. 12, meaning the next iPhone could launch in late September. That means there were 18 days of production in the non-September quarter before launch last year. That led to a smaller sales bump for Cirrus in the September quarter, and a larger one in December. This time around, there will be more ramp time in the September quarter itself, if those Sept. 12 event rumors prove correct. Also, Apple could be pushing up release dates in other countries. When the iPhone 4S launched, its China debut was enormous, but it wasn't until early January. If Apple's attempting to get clearance to sell the iPhone 5 in China closer to the American release date this time around, it could lead to a pressing of more sales into the September quarter.
An iPad Mini?
One final piece of Cirrus' puzzlingly good September guidance could be the iPad Mini. It's long been reported Apple was planning on launching one along with the iPhone 5. If Apple were producing 10 million or more iPad Minis in anticipation of the holiday quarter, that'd be a hidden booster for Cirrus Logic. It also could help explain why Cirrus Logic's guidance is so much better than other Apple component plays. A cheaper iPad Mini would be Wi-Fi only, meaning no need for a baseband from Qualcomm or radio frequency components for connecting to mobile networks from Skyworks.
Many questions to be answered
There are many questions to still be answered from Cirrus' quarter, but at the end of the day the simplest lesson it points to is that Apple is preparing for unprecedented iPhone 5 demand. In the wake of Apple's lighter-than-expected earnings last week, a popular storyline has emerged asking what happens if the iPhone 5 misses expectations later this year.
Well, after looking at Cirrus' report, I think the better question investors need to answer is, What if the iPhone 5 is bigger than anyone predicted?
I bought Cirrus Logic nearly two years ago in a real-money portfolio I manage on Fool.com nearly two years ago. If the company holds on to its after-hour gains, that position should be up 177% by tomorrow. However, while I bought Cirrus Logic because I find it to be a tremendous company, the bottom line is I was investing in Cirrus based largely on Apple's strength.
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