Does Cirrus Logic Have a Future Beyond Apple?

The chipmaker is aiming for a turnaround, but the iPhone looms large over its prospects.

Harsh Chauhan
Harsh Chauhan
Feb 18, 2019 at 8:31AM
Technology and Telecom

Cirrus Logic (NASDAQ:CRUS) paid heavily for its reliance on Apple (NASDAQ:AAPL) last quarter. The audio-chip specialist's top and bottom lines took a massive hit thanks to weak iPhone demand and its failure to diversify its revenue stream beyond Apple (the tech giant produced 83% of Cirrus' third-quarter revenue, up from 82% in Q2).

Given Apple's headwinds in its smartphone segment recently, Cirrus' reliance on the company meant its guidance was ugly as well. Cirrus is looking at a 27% annual drop in the top line for the fourth quarter, though it hopes that new product ramps and customer launches over the spring will make up for weak smartphone sales to some extent.

A man looking up and wondering in front of a wall with question marks.

Image source: Getty Images.

The iPhone problem

Cirrus, however, doesn't seem confident of returning to growth in the near term. The company was originally looking to deliver revenue growth in fiscal 2020, but it is now refraining from providing top-line guidance for the period, citing "the wide array of uncertainties surrounding the macroeconomic environment and their unknowable impact on smartphone volumes."

However, the company seems confident about getting more revenue from Android customers thanks to content gains and a strong product launch pipeline. But all those efforts won't move the needle substantially for Cirrus given its massive dependence on the iPhone.

The chipmaker pointed out in the shareholder letter that its relationship with Apple remains "outstanding," with both companies engaged in design activity on various products. However, the only way Apple could drive Cirrus' top line is by selling more iPhones, and that's something that Cupertino is finding difficult to do.

However, Apple is reportedly looking at ways to boost sales, such as reducing iPhone pricing in certain markets where the devices are more expensive as compared to the U.S. due to foreign exchange fluctuations. Such a move could breathe life into iPhone sales -- and Cirrus' prospects. iPhone sales at Chinese retailers spiked in the range of 70%-83% after a round of price cuts in January.

In all, Cirrus can only hope that Apple takes some concrete steps to arrest sliding iPhone sales. Otherwise, there's not much of a chance of a turnaround in its financial fortunes in the near term.

Check out the latest Cirrus earnings call transcript.

The long-term picture

Cirrus predicts that its revenue opportunities will be more diversified going forward.

Flagship smartphones currently occupy the biggest share of the chipmaker's serviceable addressable market, and that doesn't seem to be working in its favor anymore. As a result, Cirrus is now looking to expand its presence in midtier smartphones and smart audio accessories, while unlocking new opportunities in voice biometrics, smart audio, and haptic drivers at the same time.

Graphic showing change in Cirrus Logic's addressable market.

Image source: Cirrus Logic quarterly presentation.

Clearly, Cirrus expects the flagship smartphone market to contract going forward, but at the same time, it expects other opportunities to pop up. For instance, management believes revenue from haptic drivers will increase meaningfully in fiscal 2020, as the technology might gain traction beyond smartphones.

The good thing is that Cirrus seems to be making a concerted effort in going after these new opportunities. That's evident from the fact that the company hasn't pulled back on its research and development expenses despite the top-line decimation. It has spent close to 30% of its revenue on R&D in the first nine months of fiscal 2019, compared to 22% in the same period last year.

But the problem for Cirrus is that these investments won't bear fruit anytime soon, as Apple's shadow looms large over the chipmaker. That's why Cirrus Logic investors need to wait until its foray into new opportunities starts delivering tangible results, or see if Apple is undertaking some serious efforts to move more iPhone unit volumes. Until then, it is best to stay away from the chipmaker, as its fortunes are heavily dependent on a device that is losing ground in the smartphone space.