Image Source: Cirrus Logic
When audio codec supplier Cirrus Logic (CRUS +0.18%) releases its fiscal 2017 third quarter results on Feb. 1, investors can expect another period of rapid growth from the company. Cirrus Logic has benefited from Apple's (AAPL 0.01%) decision to remove the headphone jack from the latest generation of iPhones, leading to strong sales of its wireless headset solutions. This should drive a strong quarterly performance at Cirrus, but the company's over-dependence on Apple for 78% of its revenue could be a deal-breaker as far as the broad investor outlook is concerned.
Apple will drive strong growth for Cirrus in the third quarter . . .
Cirrus expects to post third quarter revenue of $475 million to $515 million with a gross margin of 48%. The midpoint of this guidance puts its year-over-year growth at an impressive 42%, which is not surprising given the content gains that Cirrus has witnessed in the iPhone 7.
A teardown of the latest smartphone by Chipworks revealed that the device uses three audio amplifiers from Cirrus, as compared to two in the iPhone 6S. Now, the actual device is not the only place where Cirrus is going to make money. iFixit's X-ray of the Lightning-to-3.5mm adapter, used to connect legacy headphones to the iPhone 7, reveals the presence of audio codecs from Cirrus as well.
What's more, Cirrus has also supplied digital-to-analog converter chips for the Lightning EarPods, according to a teardown of the device by the Vietnamese site Tinhte. All of this indicates that Cirrus has received a serious bump in its chip content at Apple. In fact, Pacific Crest Securities forecasts additional content gains of $2.50 for Cirrus Logic with the iPhone 7, including the Lightning EarPods and the second stereo speaker.
Encouraged by the booming business, Cirrus seems to have directed most of its manufacturing capacity toward making chips for the iPhone and related accessories. This is why revenue from its largest customer shot up to 78% of total sales in the July to September quarter, when iPhone production was being ramped up, as compared to 63% in the year-ago period.
iPhone orders from suppliers for the December quarter reportedly stood at 89 million units. Now, the iPhone 7 and 7 Plus won't account for 100% of Apple's device sales. To provide some perspective, sales of these two models reportedly made up 72% of total iPhone sales in the U.S. in the fourth quarter, according to Consumer Intelligence Research Partners.
Assuming that 72% of the 89 million iPhone unit orders Apple placed in the fourth quarter were for the two new devices, that would account for approximately 64 million units. Multiplying this estimated unit count by additional content gains of $2.50 for each device, Cirrus revenue would increase by $160 million from the prior-year period when it reported total revenue of $348 million.
This alone puts Cirrus revenue at about $508 million for the fiscal third quarter, which falls at the higher end of its guidance range. But apart from the dollar content gains, Cirrus will also benefit from the production of an additional nine million iPhone units as compared to the Dec. 2015 quarter, when estimated volume stood at 80 million. Therefore, Cirrus is poised to outperform even the higher end of its guidance range.
. . . but hurt its longer term outlook
However, Cirrus Logic's outlook could prove to be a problem as iPhone production in the first calendar quarter of 2017 is expected to decline to about 42 million units, as indicated by a UBS report. Earlier, Apple was expected to produce 43 million iPhones during the period, but it has reportedly downsized production in order to avoid an inventory glut.
Assuming the iPhone 7 and 7 Plus maintain a 72% share of overall production, these two devices will account for approximately 30 million units in the current quarter. With the $2.50 per unit of additional content, the new devices will add $75 million to Cirrus' top line in the fiscal fourth quarter.
To factor in the lower production volume, iPhone builds in the year-ago quarter stood at an estimated 55 million units. This puts the anticipated year-over-year decline in volume at 13 million units. Assuming that the production cut pertains to the older iPhone 6S, Cirrus' revenue could drop by as much as $45 million since it was making $3.50 on each unit of the prior generation device.
Therefore, the revenue gains from the iPhone 7 will be reduced to just $30 million after accounting for the decline in overall production. This indicates that Cirrus could post sales of approximately $262 million in the fiscal fourth quarter as its revenue in the prior-year period was $232 million. Barring major gains in other business areas, Wall Street analyst estimates of between $312 million and $350 million in fiscal fourth quarter revenue will be tough to beat.
This tough outlook could lead to a potential sell-off since investors will consider booking profits as Cirrus Logic shares have already doubled in the past year. Investors can find out more when the company reports after the close this Wednesday.
