3 Takeaways From Cirrus Logic's Earnings Results

Cirrus Logic (NASDAQ: CRUS  ) is in transition mode, and it's going to stay that way for some time. The Apple (NASDAQ: AAPL  ) audio-chip supplier reported its fiscal third-quarter earnings this week, and it beat the consensus estimates on both the top and bottom lines, despite Apple's report of lower-than-expected iPhone sales last quarter.

Yet again, however, the company disappointed analysts with its guidance for next quarter. Cirrus is struggling after posting great results through calendar 2012, and is now transitioning its product mix with more low-price products and its growing power-controller business. It's also trying to diversify into more Google (NASDAQ: GOOGL  ) Android products.

Here are a three key takeaways from Cirrus' third-quarter earnings release.

Revenue and gross margin are declining
Despite beating analysts' estimates, Cirrus saw its revenue decline 29% to $218.9 million. The decline in revenue was due mostly to a shift in "pricing structure," as well as product mix. As a result of pressure on its pricing, gross margin fell to 47.4%, down from 52.2% in the prior quarter and 51% in the year-ago period.

Apple may be weighing on its pricing as it tries to maintain its own margin levels. Last fall, it was revealed that Apple gave the audio amplifier socket in the iPad Air to Maxim Integrated Products instead of Cirrus. Although Cirrus maintained the codec in the product, and its position in the amplifier socket of all the other mobile devices, Apple likely made the move to send a message to Cirrus.

Even as Apple sold a record number of iPhones and iPads last quarter, the Cupertino-based company is facing headwinds this quarter, expecting flat revenue year over year despite the launch of the iPhone on China Mobile. As growth slows at the electronics giant, Cirrus must look to other opportunities, including Android device makers and automobiles.

Cirrus achieved a design win in Xiaomi's Mi3, and management says it's working with other Chinese manufacturers to capture part of the growing market. Still, most of these products will have lower sales prices, as most Chinese manufacturers focus on the low end.

R&D expenditure
Research and development expenses climbed nearly 10% year over year in the third quarter, as the company ramped up its 55-nanometer products. Cirrus' business requires heavy investment in R&D well in advance of revenue generation. The increase in R&D is encouraging, in that management has confidence in the market going forward, and believes it will be able to compete.

Management sees voice control as its biggest opportunity going forward, as technology like Google's Voice Search and Apple's Siri proliferate into more devices. Cirrus acquired Acoustic Technologies last quarter, which has valuable firmware for filtering voices, which Cirrus can lay on top of its chips.

The company sees opportunity in the automobile market, as well. Earlier this month, Google announced a partnership with several car manufacturers, as well as chipmaker NVIDIA, to put Android in the car, which would likely rely heavily on voice control. Apple, too, wants to put its iOS in cars.

Growing cash pile
Cirrus ended the quarter with $328 million in cash, or about $5 per share. If you back out cash, Cirrus' stock is trading for about one times sales estimates for next year. Of course, analysts expect profit margins to continue declining next year. But the stock still trades for less than seven times next year's earnings estimate, if you back out cash.

Although CEO Jason Rhode is averse to acquisitions, he's still willing to make them if the opportunity presents itself -- as he did with Acoustic Tech. Moreover, the company has a strong buyback program, for which it authorized $200 million in November 2012. Last quarter, the company bought back $29.7 million worth of shares, and has $72 million remaining on the authorization. It could potentially increase that authorization, but it doesn't plan on issuing a dividend in the near future.

The company has a strong cash position. With 30% of its market capitalization in cash, and a healthy buyback authorization, there's not a lot of downside risk.

Managing the transition
It's been tough going for Cirrus and its investors as of late. Its long-term outlook is for gross margin to come down to the mid-40s, so there's still some room for it to come down. The company should begin returning to revenue growth in fiscal 2015 as it faces easier comps, but the margin pressure could push profits lower. Look for the company to continue executing its buyback plan to bolster its earnings per share.

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