What We Learned From Cirrus Logic's Presentation at Goldman Sachs' Growth Conference

Last Thursday, Goldman Sachs kicked off its first small/mid-cap, or SMID, growth conference, pulling together over 60 companies to present to over 800 registrants.

Considering Cirrus Logic  (NASDAQ: CRUS  ) has experienced tremendous growth over the past four years, it's not surprising that the company was invited. Since 2009, its compounded annual growth rates for revenue, operating income, and operating cash flow were 54.2%, 99.2%, and 85.6%, respectively.

Though Thurman Case, Cirrus Logic's CFO, started his presentation with some housekeeping items related to the seasonality of Cirrus Logic's business, continuing with an interesting discussion on inventory management, what followed pieced together exactly why Cirrus Logic bears may soon be running for the hills.

Audio segment still chugging along, thanks to Apple
Despite continually referring to Apple as "[Cirrus Logic's] biggest customer," what Case clearly communicated regarding this well-developed, long-term relationship was heartening.

According to Case, Cirrus Logic's engineers don't just provide a generic product or service to Apple. Instead, this relatively small and nimble company focuses on over-investing in Apple, such that Apple clearly understands what it gets from Cirrus Logic, namely valuable customer solutions designed specifically with Apple in mind.

This type of service helps Apple innovate and improve upon functionality, while also saving money. In other words, Cirrus Logic's engineers don't just dedicate themselves to improving the product itself, they simultaneously strive to increase its profitability.

Importantly, Case highlighted how Cirrus Logic couples this bespoke, tailored approach with a proven track record of "hit[ting] deadlines [and] work[ing] with very complex technology." This likely keeps Cirrus Logic comfortably situated in Apple's pocket, a company infamous for holding on to high-standards while shifting supplier deadlines (at times, seemingly on a whim).

If you want to keep playing, you have to make yourself indispensable. Although a supplier probably can't do this in an increasingly fungible world of component inputs, bringing white-glove service to the table along with a great set of minds and proven reliability likely means more to Apple than procuring the next marginally cost-efficient input. (Consider that the iPad mini still contains Cirrus Logic's audio amplifiers and it's clear that the company gets preferential treatment.)

Nurturing its Apple investment
Perhaps more importantly, Case also explained why Cirrus Logic feels more than comfortable with Apple.

In short, Case intimated how Cirrus Logic's management understands the trade-offs and risks involved with this type of business model. He claimed that this is exactly why management allocated a large amount of the company's human capital toward its biggest client.

Furthermore, bears should note that it makes more sense to listen to what management says -- namely that the relationship is strong and the company is dedicating necessary engineering support to best ensure this remains true -- while checking to see if audio revenue has grown accordingly.

Additional opportunities within audio
Case went on to note how Cirrus Logic isn't just focused on growing its portable audio segment; it is also focused on gaining share in the automotive market.

Interestingly, Case spoke to how automakers are shifting their audio capabilities to more high-end audio solutions across a wider range of models. According to Case, Cirrus Logic can have up to 10-12 products in any model, and as such, Cirrus Logic continues to invest in this segment.

Developing these relationships further should benefit the company immensely, as the auto industry continues this shift forward in audio capabilities.

A burgeoning LED opportunity
Now, marry this strong, relatively high-margin audio segment to a comparatively nascent revenue stream in the LED market, and investors quickly begin to understand why Cirrus Logic has so many bulls excited to walk down the aisle. In general, consumers are dissatisfied with the currently available analog LED solutions since they create seizure-inducing flickering when dimmed. Notably, digital design solutions do not have this effect.

Cirrus Logic is arguably best-in-class when it comes to the digital dimming design solution for LED lighting. (For what it's worth, Case did note how Cirrus Logic's digital solution is similar to iWatt's.) Moreover, Cirrus Logic can apply its digital design to almost any OEM lighting structure and it will work as intended. No more flickering should equate to a higher adoption rate of LED lighting, and a higher consumer satisfaction level, as well.

The LED market is still in transition, so it will take time for this to hit Cirrus Logic's bottom line. Also, another potential detractor, aside from time, is that Case believes the dimmable portion of the LED market to currently be around 25%. Still, this percentage should increase with a shift to digital dimming solutions. Add in less market fragmentation and lower price-points in the near future, and the opportunity grows even more.

So, with forecasts estimating the global LED market opportunity at upwards of $42 billion by 2019 -- spurred on by energy conservation efforts both at the consumer level (i.e., bottom-up change) and at the government-level (i.e., top-down change) -- Cirrus Logic's future in the LED market looks bright.

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Let level heads prevail
Those who listened to Case discuss the growth potential of his company likely came away with a much better understanding of Cirrus Logic's planned future. The future certainly isn't here now, but it's on the horizon and the path looks clear ahead.

As such, Cirrus Logic has positioned itself well by solving a nontrivial problem every component supplier faces: securing a strong revenue stream with the most popular brand in the world. This certainly isn't something investors should scoff at or fear, especially when Cirrus Logic continues to diversify its customer base with recent component wins (including both a tier-1 phone maker in the U.S. and several Chinese phone makers).

Perhaps now is the time for contrarians to consider going long on a company where management appears conscientious of managing downside risk for investors while the market looks on in disbelief.

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  • Report this Comment On November 23, 2013, at 10:58 AM, Fool4Value wrote:

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  • Report this Comment On November 27, 2013, at 4:06 PM, BachHandel wrote:

    I am struggling to understand why a company that specializes in audio chips is moving into the LED lighting space. This seems to be two different things, and I am hesitant to buy a company who is taking tangents differing from their core strength when the core strength seems to be getting weaker. To me, this seems like a company who is trying to come up with a back-up plan in case Plan A fails or falls short in some way. That makes me nervous about investing in CRUS.

  • Report this Comment On December 10, 2013, at 2:59 PM, Hugz wrote:

    I'm sorry it's taken me so long to respond, but I'm slowly onboarding myself here and realize I must check these sections more frequently--and I promise I will!

    As for your concern, BachHandel, this is a sentiment I used to share, as well. However, when you take a deep dive into what Cirrus Logic aims to provide, you may come to a similar conclusion: their engineers focus on creating value-add products that address specific issues within a larger market. Understanding this to be Cirrus Logic's core competency then illuminates how their audio segment correlates nicely with their LED development.

    Within the audio, Cirrus focuses on various products that enhance the customer experience (e.g., low-power audio amplifiers that provide high output power efficiency along with superior audio quality, all the while allowing the mobile device in question to minimize power consumption, especially during idle time).

    They also recently acquired a company that will allow them to continue to make headway in a part of the audio segment that deals with noise-cancellation (e.g., devices will be able to filter out background noise on either end better).

    With the LED push that Cirrus has committed itself to, their engineers are working on similar issues within the consumer experience in this space. Their most notable one, for me, would be their arguably best-in-class LED driver integrated circuits (ICs). With the incandescent replacement bulb industry gaining ground, one of the big pain points for consumers making the switch to dimmable LED lighting revolves around the flickering that dimmable LED lighting experiences when consumers use the dimming functionality of analog circuits.

    However, Cirrus, along with at least one other company, has done a great job creating a digital solution in the LED driver IC market that allows LED lighting to be switched into existing dimming solutions and the LED bulbs will no longer flicker. If marketed properly, this should prove a boon to Cirrus's top and bottom line (i.e., these products have margins close to / that exceed 50%).

    My article here tries to explain why management here is something you can bank on by investing early in this company that is currently beat down, but, when looking at the various pieces, should necessarily bounce back nicely in the coming months. If you doubt the Apple play, see here and understand that Cirrus likely has much more revenue headed its way in 2014: http://www.fool.com/investing/general/2013/12/09/apple-to-gr...

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