Audio-chip developer Cirrus Logic (CRUS +0.00%) reported Q2 2018 earnings on Nov. 2 that beat analyst estimates on the top and bottom lines. While that looks great in isolation, Cirrus' revenue declined year over year, and concerns remain that the company doesn't have a lot of near-term growth drivers outside of Apple's (AAPL +0.11%) new iPhone models.
Even as Cirrus continues to get more of its boosted amps and smart codecs into Android-based smartphones, revenue growth is stagnating -- at least temporarily. The company is also hard at work on several larger opportunities. But those will take years to contribute significantly to earnings. Thus, Apple remains the primary driver of Cirrus' results and will probably remain so for a while.
Image source: Cirrus Logic
Apple -- still No. 1 by a long shot
Apple contributed 82% of sales in Q2, up from 76% last quarter. Based on the big revenue beat, it appears that manufacturing volumes for the iPhone launches ramped up more quickly than many expected. And even though the company is attempting to diversify its revenue base by pursuing content wins with the No. 3 through 10 Android phone manufacturers, Apple's share of the business is going up, not down for now.
That trend looks likely to continue. In its recent blowout quarter, Apple reported a jump in iPhone sales, citing the popularity of the recently introduced iPhone 8 models, as well as strong pre-orders for the iPhone X, which bodes well for Cirrus next quarter.
The near-term growth outlook is murky
Q2 revenue was down 1% to $425.5 million, coming in on the high side of company guidance and nicely above average analyst estimates of $410.3 million. That result was driven by demand for new product launches (aka the iPhone), offset by one of its major Android customers (aka Samsung) as it switches to a lower-priced component.
Cirrus isn't expecting much additional growth the rest of this year, either. The midpoint of Cirrus' Q3 guidance implies a year-over-year revenue increase of about 1%. And the company says it expects only "modest revenue growth" for fiscal 2018, which presumably bakes in the expected boost from the latest iPhone models.
Without any other obvious catalysts for growth on the horizon, analysts are expecting pretty uninspiring numbers over the next 18 months or so. Average estimates are for 6.5% revenue growth in fiscal 2018 and just 4.6% in fiscal 2019. The company still needs to bridge the gap between its current smartphone business and its longer-term growth initiatives that will take a lot more time to play out.
The most likely candidates for nearer-term growth opportunities are mid-tier Android phones -- where Cirrus continues to make inroads -- and digital headsets. Cirrus expects that the transition in Android phones from micro-USB to USB-C connectivity will accelerate demand for its headset solutions. That's because the USB-C interface can supply power to headsets and accessories, making it possible for manufacturers to add premium audio features that are right in Cirrus' wheelhouse, like noise cancellation. Having recently expanded its product portfolio for digital headsets and adaptors, the company stated that "we expect these products to produce meaningful revenue growth over the next few years."
For patient investors, huge potential remains
Looking out a couple of years, Cirrus is working on two initiatives in particular that have the potential to pay off big. The first is a voice biometrics chip, which Cirrus will begin demoing with key customers this quarter. Cirrus' chip allows a person's voice to be used as a means of identification -- creating a hands-free way to unlock your phone or other smart devices. The company believes the market opportunity here will be at least as large as fingerprint ID.
Then there's Cirrus' foray into the MEMS microphones business. The company hopes to become a major player in this niche where the major suppliers continually run into reliability issues. Cirrus already sells tens of millions of mics per year, but the company is currently investing heavily to build up its supply chain in Taiwan. The ultimate goal is to increase production capacity to the point where it can accommodate much larger customers who regularly buy a billion units or more annually. On the earnings call, CEO Jason Rhode noted that "if you could just take the surprises and the drama out of microphones, you'd be the most valuable supplier of those devices in the market."
Even if you believe that these efforts are likely to be successful, the next 12 to 18 months for Cirrus look far from certain to provide the kind of growth most tech investors generally look for. However, with the company currently trading at a P/E ratio of just 14, expectations are already pretty modest. With a stable smartphone business, what looks to be a solid relationship with Apple, and multiple possibilities for substantial future growth, there appears to be more upside in Cirrus' shares than downside.
