Cirrus Logic (NASDAQ:CRUS) handsomely beat Wall Street's expectations in the second quarter. That gave the chipmaker's stock a much-needed shot in the arm right after the report, though it's still down about 25% so far this year thanks to consistent declines in both its top and bottom lines.

The stronger-than-expected earnings report doesn't change the currently downbeat narrative for Cirrus.

A processor inside an integrated circuit.

Image Source: Getty Images.

Reading between the lines

Cirrus' quarterly performance was aided by a shift in revenue from the third into the second quarter. As a result, the audio chip specialist's revenue of $366 million was substantially ahead of the $330 million consensus estimate. On the bottom line, the company reported adjusted earnings of $1.08 per share as compared to analysts' average estimate of $0.74.

Despite beating estimates, investors shouldn't miss the fact that Cirrus' revenue dropped nearly 14% annually, and net income fell approximately 20%. Additionally, the change in the timing of revenue recognition means that the chipmaker's revenue in the current quarter will take a bigger hit.

Cirrus now expects $380 million in revenue at the midpoint of its guidance range during the third quarter. That's a 21% drop from the prior-year period. So Cirrus investors need to keep their enthusiasm in check, as there are no signs of a turnaround in the company's fortunes just yet.

Diversification efforts aren't enough

Cirrus' reliance on Apple (NASDAQ:AAPL) for the majority of its revenue has turned out to be a double-edged sword for the chipmaker. A few years ago, when Apple's iPhone and iPad sales were growing at a terrific pace, Cirrus was a hot growth stock. But now that Apple's product line has matured, Cirrus has limited scope to boost its business.

As Apple's smartphone sales have hit apparently hit a ceiling, Cupertino is now focusing on getting more revenue from each iPhone that it sells by hiking prices, while boosting its services business at the same time. This is bad news for Cirrus, as lower sales volumes of iPhones mean that its top-line growth will remain restricted.

Additionally, Apple dealt another blow to Cirrus earlier this year when it announced that it won't be including a free headphone jack dongle anymore. This move has potentially erased around $300 million in annual revenue from the chipmaker's top line. So the only way Cirrus can get its growth back on track is by looking for sources of revenue beyond Apple, but its diversification efforts have fallen flat and despite ramping up its spending on marketing and product development over the past couple of years, Apple supplied 82% of Cirrus' revenue in the second quarter, up from 76% in the first one.

However, the company remains optimistic that it will return to revenue growth in fiscal 2020 on the back of design wins at Android smartphone original equipment manufacturers. Cirrus management pointed out on the latest earnings call that "design momentum across our portfolio was strong and numerous new devices were announced that use our components."

The company says that it has expanded its market share at some of the largest Android smartphone manufacturers, and it has already started shipping a new haptic driver in a flagship Android phone. Cirrus now expects that many more Android flagship devices using its audio amplifier and haptic technology will hit the market over the next year.

Wait and watch

Though Cirrus is promising a turnaround next year, investors shouldn't bet on it right now. The company's key financial metrics are moving in the wrong direction, and it will need to show concrete signs before I'd be willing to invest.

Of course, Cirrus will prove to be a good buy if it manages to turn its business around thanks to a solid balance sheet and an attractive valuation. The company has no debt and was sitting on $396 million in cash at the end of the previous quarter. Additionally, its inventories dropped by a third from the prior-year period to $142 million, paving the way for Cirrus to bring new products into the pipeline.

Cirrus looks attractively valued at 17 times next year's earnings, as this compares favorably to the industry average of nearly 20. So Cirrus could prove to be a nice bet if the company can turn its business around, but failure to do so will ensure that the stock's upside potential remains limited.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cirrus Logic. The Motley Fool has a disclosure policy.