Despite solid top- and bottom-line growth last quarter, shares of audio chip developer Cirrus Logic (CRUS 3.56%) have been falling over the past three months and are down roughly 6% year-to-date. The reason? Cirrus has offered a fairly uninspiring revenue forecast for the remainder of the year, and investors appear to be growing uneasy about the lack of visibility into the company's growth. Here are the items I'll be watching most closely when the company reports its second-quarter earnings on Nov. 2.
For now, it's still all about Apple
Last quarter, Apple accounted for 76% of Cirrus' sales, which was down a bit from 79% in fiscal 2017. The new iPhone 8 and iPhone X models are expected to factor heavily into Cirrus' results for the remainder of the year. But predicting how much of a bump those new models provided for Cirrus' sales in the second quarter is a guessing game. On its last conference call, the company stated it expected production to ramp up for product launches in the transition period between Q2 and Q3, and that even small changes in timing could cause big revenue swings. There have also been reports of production issues with the iPhone X, and any manufacturing delays may cause Cirrus' revenue to come in below expectations this quarter.
Image source: Cirrus Logic
Additionally, at least one analyst thinks that Cirrus' Apple business is topping out right now. Bank of America Merrill Lynch recently initiated coverage on Cirrus with an underperform rating and a price target of $50, citing concerns that the company's iPhone content may peak in fiscal year 2018. Merrill analyst Adam Gonzalez expects Cirrus' revenue to decelerate from the 24% compound annual growth rate of the past decade to just a 5% CAGR from fiscal 2017 through 2020.
Where will revenue growth come from?
The big question on investors' minds is where does revenue growth go from here? Last year, revenue grew 32% to reach $1.54 billion. And in the first quarter, revenue was up a healthy 23.6% to $320.7 million as the company notched additional content wins with smartphone OEMs.
But Cirrus' growth is expected to stall this quarter, with revenue guidance from the company of $390 million to $430 million, which represents a 4% year-over-year decline at the midpoint. Analysts are only slightly more optimistic, with an average estimate of $410.3 million.
Beyond this quarter, Cirrus hasn't provided full-year revenue guidance, saying only that it expects "modest" growth for fiscal 2018. Analysts, on average, are expecting yearly revenue of $1.64 billion, which would represent 6.5% annual growth.
In the near term, Cirrus is pursuing a strategy of getting more of its products like smart codecs and boosted amps into mid-tier Android-based phones, as manufacturers keep adding premium audio features to differentiate themselves. Additional content wins with these customers appears to be Cirrus' fastest route to incremental growth beyond current forecasts.
Look for updates on Cirrus' biggest opportunities
Cirrus is working on a handful of longer-term initiatives that could prove to be transformative. The company believes we are entering a golden age for digital headsets, fueled in part by the transition of Android devices to the USB-C interface (which allows headsets to be powered by the phone). With an average selling price for its digital headset codecs between $1 and $3, and an estimated market of more than 1 billion units within three years, it's easy to see why Cirrus is investing heavily in this space.
Cirrus has also created a voice biometrics chip that can positively ID a user's voice on a local device without sending data to the cloud. Noting that the potential here is at least as big as the fingerprint ID market, CEO Jason Rhode has said that the voice biometrics opportunity is "large, relative to the size of the company."
Finally, Cirrus is attempting to become a major player in the MEMS microphones business by becoming the most reliable supplier. Though microphones are a much lower-margin business than Cirrus' other core products, the sales potential here is enormous -- with large customers purchasing more than 1 billion units a year.
Though questions remain about Cirrus' future growth and earnings are likely to remain lumpy for a while, Cirrus' shares are currently trading at a trailing-12-month price-to-earnings ratio of around 13. By this metric, that's as cheap as its stock has been in the last three years. That seems low for a company still expected to increase revenue over the next couple of years, with multiple options for strong future growth. Should any of Cirrus' bigger investments pay off down the road, investors today may be getting in on a real bargain.
