Cirrus Logic Expects a Smartphone Slump This Year

Audio-chip developer Cirrus Logic (CRUS 3.30%) reported its fiscal fourth-quarter results after the market closed on May 2. Softening demand for smartphones ate into its revenue and profit, and the company now expects a double-digit decline in revenue during fiscal 2019 due to weak smartphone demand. Here's what investors need to know about Cirrus' fourth-quarter report.

Cirrus Logic: The raw numbers

Data source: Cirrus Logic.

What happened with Cirrus Logic this quarter?

• Revenue from portable audio products dropped 9.6% year over year, to $262.8 million. Non-portable audio and other product revenue grew 8.6%, to $40.4 million.
• The company blamed reduced smartphone unit volumes in the second half of its fiscal year for the lackluster results, as well as a negative impact from the sale of lower-priced components at key Android OEMs.
• GAAP gross margin was 50.3%, up from 50.1% in the prior-year period.
• Cirrus generated 79% of sales during the fourth quarter from Apple, its largest customer, down from 86% in the third quarter.
• At the end of the quarter, Cirrus had $435 million in cash, up from $413 million at the end of the third quarter.
• Cirrus used $60.2 million for share buybacks during the fourth quarter. It has $200 million remaining in its latest authorization.

Cirrus provided the following guidance for the first quarter of fiscal 2019:

• Cirrus expects revenue between $210 million and $250 million, down from $320.7 million during the first quarter of fiscal 2018.
• GAAP gross margin is expected to come in between 48% and 49%, down from 50.4% in the prior-year period.
• Combined GAAP research and development and selling, general, and administrative expenses are expected to be between $133 million and $139 million.
• Cirrus' guidance reflects continued weak demand for portable audio products targeting the smartphone market.
• Cirrus expects full-year fiscal 2019 revenue to decline by around 10% but anticipates a return to growth in fiscal 2020.

A Cirrus Logic digital LED controller. Image source: Cirrus Logic.

What management had to say

Cirrus gave an update in the quarterly letter to shareholders on its efforts to get its wares into products other than smartphones: "Cirrus Logic's digital headset business has been highly successful since its launch in CY16, shipping over 765 million components into wired and wireless headsets and adapters. While we continue to focus on diversifying our customer base, we are excited to be enabling continuously adaptive ANC in retail headsets with the two largest smartphone OEMs in the world."

During the earnings call, Cirrus CEO Jason Rhode discussed the drivers behind the weak guidance for fiscal 2019:

So, generally, the biggest deltas are, one, a little bit weaker on the handset side; two, a little more conservative modeling of what happens later in the year than what we had, which frankly is not, again, just to drive that point home, nobody knows how many people are going to buy a new handset when it's launched on the market -- not us, not our customers, not analysts, or you name it. Everybody's got an opinion and then we find out what's right when that actually happens.

Looking forward

Cirrus depends on the iPhone for the bulk of its sales, so the company's weak guidance for fiscal 2019 reflects a pessimistic view of how that product will perform in the coming year. Cirrus may be overly conservative here, but with global smartphone unit sales declining during the fourth quarter of last year for the first time ever, some pessimism is probably warranted.

Cirrus' long-term growth depends on it diversifying away from smartphones and away from Apple. The company has made some progress on that front, but not nearly enough to offset weak demand for smartphones. Fiscal 2019 is shaping up to be a not-so-great year for the audio-chip specialist.