Cirrus Logic (NASDAQ:CRUS) has had an amazing run over the last four years. The company went from sales of $175 million in fiscal 2009 all the way to a fiscal 2013 where expectations have the company passing $800 million in sales.
It's a company that I've also recommended on the real money portfolio I run on Fool.com. The obvious reason most investors are drawn to Cirrus is the company's close relationship to Apple (NASDAQ:AAPL). You won't hear the company directly reference Apple -- the Cupertino giant has pretty strict disclosure agreements with suppliers -- but Cirrus will note 79% of revenue comes from its "No. 1 customer."
Seeing Cirrus Logic only as yet another Apple-supplier play would be missing the mark. Plenty of other Apple suppliers have seen poor performance across the past year as Apple either cut down the amount of chips in its products or the need to supply Apple caused those suppliers to forego other opportunities, such as supplying chips to Samsung. Investing in Apple suppliers is no slam dunk.
Yet, I've always sensed something different about Cirrus compared to other Apple suppliers. Their relationship always seemed stronger, and the differentiation and advantages provided by supplying a highly customized audio product made sense when shipping to Apple products, which still rely on iTunes integration as a major feature. Cirrus has proven out that stronger relationship this year, with teardowns showing the amount of chip content it's putting in the newest iPhone 5 has more than doubled compared to previous models.
Not only that, but from a general company culture standpoint, Cirrus is unique among semiconductor companies. In an industry famous for mid-quarter updates and cyclical peaks and valleys, the company has always put a focus on long-term value creation and employee happiness. That's a trend seen throughout many of the most successful companies across corporate America in the past five years, but it's oddly hard to find in the semiconductor space.
I interviewed Cirrus Logic CEO Jason Rhode, looking back not only at 2012, but ahead at some opportunities in front of the company. What follows is a lightly edited transcript discussing 2012 in review, Cirrus' opportunity in televisions, and the company's new lineup of digital signal processors (or DSPs). In a second part, we discuss the company's culture and some of the challenges affecting the broader semiconductor industry in America.
We hope you enjoy this lightly edited transcript of my interview with Jason Rhode.
Eric Bleeker: It's hard not to say it's been quite the year for the company. Last quarter, sales were up 91% -- it's getting even better from the guidance you guys are giving. These are the kinds of growth rates I think any chip company would kill for. You've had some nice wins this year, so as we head into 2013 and around the corner into the next year, what are you excited about and what should kind of investors be watching?
Jason Rhode: Well I remain really excited about the businesses we're in. There's a ton of growth left in the audio markets that we serve and we're really starting to see the LED lighting is taking off. This year wasn't really about a huge amount of revenue growth there, but the design wins are coming in and we're shipping in volume and we're seeing multiple customers really start to get their products out on the shelves. Those are our two big areas of investment, so to have both of them placed to continue to do good things is a big deal.
Bleeker: Okay, and I guess getting a little bit more into the nitty-gritty and my questions might be a little long here, so if at any point I'm rambling on for too long, just cut me off and say, What's the point? But TVs, just from a general point of view...
Rhode: What's the point? No, I'm just kidding. [Laughs.]
Bleeker: So I just wanted to talk about TVs. We've seen such innovation of mobile and you're a huge beneficiary around it, but television, it feels a bit like where the smartphone was at in 2005, so especially if you're looking at an individual investor, assessing where Cirrus could fit into the landscape. I want to discuss just the kind of content opportunities that could come if we saw a connected television really take off. So like as an example we saw Google Nexus Q trying to do some unique things. It came with a built-in amp, possibly shifting to more simplicity and all-in-one solutions instead of a labyrinth of boxes. That product was flawed, but if the market is moving more toward all-in-one solutions or just embracing television as something more user-friendly, how is Cirrus' product line up going to be situated to handle this, especially if it's a large growth mark in the coming years?
Rhode: Well the challenge historically with TVs is just that they're really not sold on audio at all; in fact, most of the time we don't even have a chance to listen to them. It's a big wall of TV screens and consequently manufacturers put about zero thought into the audio quality that comes out. It's a little frustrating, so I think the market need is there for what you've described. If somebody would come up with a quality product, whether it's built into a TV or whether it's just a good set-top box/amplifier/whatever else it might be, it certainly seems like the market need is huge for that and simplifying all the clutter in your home in your living room and with respect to remote controls, etc., would be hugely beneficial. I would love to see somebody like Sonos come out with a product like that. They're just such a neat company and they do such an amazing job of integration.
And as far as our product line, we have a very broad product line of audio converters and amps and DSP products that are exactly suited to that kind of application. It's certainly not for lack of IC products that the end products don't exist. Traditionally the receiver manufacturers are really frustrating because they haven't adapted their model at all. They're still competing on a model where whoever has the most holes in the back of their box has the best perceived product, which is silly because in an era where pretty much everything new you're going to buy is going to be connected via HDMI and then you're going to want to get it music via the Internet and everything else. That model's just dead and as a result, that market's shrinking, but none of them seem to be really rapidly adapting their products for what I think consumers would be really excited about.
So we're well positioned if that market opportunity comes to play, and I certainly, even as a consumer, I really hope it does. I would love to buy that product.
Bleeker: Yeah, I think we all would. Okay, and I just wanted to touch on another product you guys have been really excited about this year. That's your DSP offering. You talked quite a bit about that product at your Investor Day. I think there's some confusion around it, so I think obviously the big battle right now in mobile is discrete components versus integrated. You've had your fair share of time to talk about what you feel a value proposition on your audio products is, but when we look at DSPs, for example, I was just reading Qualcomm's (NASDAQ:QCOM) analyst slide the other day and they have "No. 1 one in DSP" splashed everywhere. It looks like they've gotten pretty aggressive about integrating DSPs in their Snapdragon processor.
I wanted to give you an opportunity to talk about investors to understand that that same kind of value proposition you're going for here and differentiation that made you go into DSPs in the first place.
Rhode: Sure. So one of the biggest challenges I think that we have in connecting with investors on this topic is just the term "DSP" in and of itself. We have a product line of capital letters, DSP Products, Digital Signal Processors, and in that particular circumstance, it's in many cases up to our customer what they want to do with it. The device is very programmable and we provide tools, and they can do any number of different things. For example, we're shipping in camcorders that are on the market today where the customer programmed up their own wind noise cancellation.
All of our products contain embedded digital signal processing, and in fact actually the vision for the company is to be the preferred provider of signal processing, whether analog or digital. So I think there's just confusion in general around "OK, we're marketing a DSP, but does this product or that product have the DSP in it versus does it have DSP in it at all?" It's for those acronyms that is kind of I think confusing to folks that don't have an engineering background.
That said, the device that we have on the market for portable audio DSP, capital letters, DSP, is a neat device that does allow our customers to do a lot of customization on their own. Certainly a lot of the core chips that suppliers like the one you mentioned, they tend to have a pre-set playbook that they're going to run and they're amazingly good at it.
I'm not by any stretch knocking that customer, but the folks that we would serve with our DSP would tend to be folks that want to do something on their own, that want to do something innovative that other people haven't thought of or other people aren't promoting to them. And our platform enables them to do a lot of their own programming or if the market opportunity is justified, we're happy to do it for them, but it's an area where we can engage with customers on new developments where the customer doesn't have to measure up to say a $3 [million] to $5 million new custom chip development.
We really prefer to do custom devices when we can find customers that warrant it, but again, a new full IC is probably $3 [million] to $5 million for us to develop and so it's got to be a pretty big opportunity for us to do a new custom device for somebody. But if we can approach it with one of our programmable products where the only customized thing is really code that goes on, that's obviously a lot lower bar to clear, there's a lot more customers.
That gives us a number of opportunities just to remain relevant in the market and keep our finger on the pulse of what's going on. We don't always win, but it gets us in a good opportunity to stay current on what people are working on because it's not always the guy that's shipping all the volume today that's going to win in the long run and we certainly need to be paranoid to make sure that we're assessing the market opportunities that are out there.
Bleeker: And maybe a follow-on here. I know in previous talks we had talked about, you just mentioned that $3 [million] to $5 million cost for a custom IC and you go into some new tablet that seems to have a lot of promise, but then it bombs and only sells a couple hundred thousand units. That's a a both a time and financial loss. So would it be right to read that the DSP getting more into that line has kind of been a response to being able to kind of attack some of those opportunities that we've seen in the mobile world that? I guess what I'm saying is a lot of those products, they haven't been panning out, so it gives you kind of the ability to play more lines without having to make such a large investment. What was the initial thinking in getting into it?
Rhode: Well for one, it was that exactly, that it gives us an opportunity to participate in the market where we're not certain that many of the products that are launched are going to really see a huge amount of market success, but we don't want to write them off. Many of our customers that ultimately haven't been successful in that space had plans that seemed pretty interesting at the time, so we certainly don't want to call the game before it's even played. So that's one element.
And then two, it's just a big part of our portable audio strategy that we should be integrating more and more signal processing functions into our device, some of which are probably best implemented on a programmable DSP, whether or not that's on the same device as one of our [unclear]. So you can kind of think of it as a stepping stone in a broader product line.
That's it for Part 1 of our interview with Jason Rhode. For all your Cirrus Logic coverage, make sure to check back to Fool.com or add Cirrus Logic to our free My Watchlist feature, which collects all your need-to-know Cirrus investing news. Also, if you're looking for more advice on finding the winners of the mobile revolution, make sure to check out our newly re-opened Supernova service.
Eric Bleeker, CFA owns shares of Cirrus Logic. The Motley Fool owns shares of Apple, Cirrus Logic, Google, and Qualcomm. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.