Anybody who follows the world of Apple (AAPL 0.85%) supplier stocks has probably heard of Cirrus Logic (CRUS +0.79%), a company that builds audio chips used in Apple's iPhone, iPad, and Mac product lines. Sales of audio chips to Apple have been nothing short of game-changing for Cirrus Logic, affording the chip maker a large source of revenue and profitability over the years. In fact, during the first nine months of Cirrus Logic's fiscal year 2019, sales to Apple made up an eye-popping 81% of the company's overall revenue.
While Cirrus Logic should, of course, continue to invest heavily in developing new products to keep the money from Apple flowing, it's clear that the company needs to diversify its business over the long term. Ideally, diversification means faster growth as it goes after incremental revenue opportunities, but from a more pessimistic perspective, that diversification could allow Cirrus Logic to survive, say, Apple ultimately deciding to vertically integrate audio chip development.
Image source: Apple.
To that end, here are three ways that Cirrus Logic is trying to broaden its customer base.
1. Targeting Android
In its most recent investor presentation, Cirrus Logic highlighted "mid-tier" audio products as a $500 million opportunity in 2017 and one that's set to grow to $900 million by 2021. The company also pegs the opportunity in "flagship audio" at $1.6 billion.
The company has already captured a large part of the flagship audio market by way of its Apple business, but Apple is by no means the only company that builds high-end smartphones. Other companies, including Samsung, Huawei, Oppo, and Vivo (the last two are owned by the same parent company) also successfully serve this market.
By going after both mid-range smartphones (an area that Apple arguably doesn't serve) as well as flagship Android smartphones, Cirrus Logic can ultimately grow its top line while reducing the percentage of revenue that comes from sales of chips to Apple.
This diversification will take time, though. While CEO Jason Rhode said on the company's most recent earnings call that the company is "absolutely on track to get back to having a second 10% customer again," referring to a customer that makes up at least 10% of its overall revenue, this could take a while. Moreover, even if that were to play out, a second 10% customer still isn't going to contribute anywhere close to the kind of revenue that Apple does.
Nevertheless, the smartphone market is substantially larger than Apple in terms of unit volumes and while not all of that opportunity will be open to Cirrus Logic, there should be enough there to -- if Cirrus Logic plays its cards right -- dilute its dependence on the iPhone maker.
2. Smart accessories audio
Cirrus Logic appears quite bullish on the market for smart accessories. According to the company, smart accessories will require largely the same kind of silicon content that a mobile device has, incorporating audio codecs, audio amplifiers, haptic drivers, and MEMS microphones. The total addressable market for such products, per the company, will be about $900 million by 2021, up from about $400 million in 2017.
Now, to be clear: Apple is a leading maker of so-called smart accessories. Market research company IDC reported that in 2018, Apple was the top seller of wearable computing devices with 26.8% overall unit share. Cirrus Logic reportedly has $0.50 worth of chip content inside the latest Apple Watch products, though it apparently doesn't have any content in the current AirPods products.
However, both the smart watch as well as wireless earbud markets are expanding rapidly. With many non-Apple companies making serious pushes into those product categories, the opportunity for Cirrus Logic in these markets over the long term could be quite substantial. Now, the company could very well see a significant amount of revenue from Apple in these markets (particularly if the chip company were able to snatch wins in future AirPods products), but the opportunities outside of Apple look set to be so significant that Cirrus' revenue here might not be as concentrated in Apple as its smartphone audio business currently is.
3. Smart home
Another growing option that Cirrus Logic is going after is the smart home market. The opportunity here isn't quite as large as the opportunities in either mobile or smart accessories, which makes sense considering that, according to Cirrus Logic, such products don't require the breadth of chip content that smartphones and smart accessories do. Indeed, while the company says that a mobile device needs an audio codec, audio amplifier, haptic driver, and a MEMS microphone, a smart home product might only need a codec and a MEMS microphone.
Nevertheless, by 2021, Cirrus Logic thinks that its total addressable market here will be on the order of $400 million, which is certainly significant. The company says that it's already a supplier to "top 2 smart home OEMs" and that, broadly, it expects to "expand content with new and existing customers in [fiscal year 2020]" across its customer base (this is a statement about its business as a whole and not just specifically about smart home).
While Apple has made it clear that it, too, is interested in this market (even if its first crack at a smart speaker -- HomePod -- probably isn't selling as well as the company had hoped), it's by no means the volume leader in this field. Since Cirrus Logic is already working with two of the top players in the field, it wouldn't surprise me to see the company leverage its successes there to go after additional customers. That customer base growth coupled with the underlying growth of the market could translate into significant non-Apple revenues for the company.
Investor takeaway
Cirrus Logic has been critically dependent on Apple for a long time and nothing in the near-term -- save for the company outright losing Apple's business altogether -- is going to fundamentally change that. This should be a relatively slow process, and when all is said and done, Apple is still likely to be Cirrus Logic's biggest single customer.
In the process, however, the company's push into more markets and to broaden its customer base should translate into greater revenues, additional profits, and a better risk profile -- all things that could be conducive to a higher share price.
