Cirrus Logic (NASDAQ:CRUS) went public in 1990, and quickly became a stock market darling. The company went from $107 million in sales that year to more than $1.1 billion in fiscal 1996. However, across the subsequent years, the company turned into a tale of investing horror as tremendous competition in the chip space drove it to divest businesses and rack up massive losses. By March 2009, its revenue was back down to $175 million and its share price was at a mere 5% of its all-time high.
In 2007, Cirrus' story began to change after Jason Rhode took over as CEO and shifted the Cirrus' strategy. He de-emphasized the rat race of competing with giants like Texas Instruments, a pricing battle smaller firms had little hope to win, and instead focused on higher-end products with the company's best customers.
This strategy began paying dividends when Cirrus' win providing the audio codec for the iPod started expanding across Apple's (NASDAQ:AAPL) product lines. Today, Cirrus provides audio chips for every major product line at Apple. From that low point of $175 million in trailing sales in March 2009, the company has ramped up sales to $714 million in the past 12 months. All of this growth also comes at a time that the semiconductor industry is struggling. Overall, the global chip industry saw "strong" growth of 3.8% in December. In that quarter, Cirrus posted 153% year-over-year revenue growth.
The case for Cirrus Logic
Most of the attention focused on Cirrus Logic is on a single storyline: It's a one-trick pony that was lucky to ride Apple's rise. Cirrus saw a whopping 91% of its revenue come from Apple in the previous quarter, so you can see why attention on the company is so focused on this one area.
Yet the obvious storyline of Cirrus simply being a supplier who's managed to ride Apple's coattails ignores many of the challenges the company has overcome. Many other Apple suppliers have actually struggled in spite of being a supplier to the fast-growing technology giant. Apple isn't afraid to drop a supplier whose pricing isn't competitive or designs a product that's not up to its standards.
Has Cirrus been a huge beneficiary of Apple's amazing run the past five years? Definitely. However, it's also created its own success in ways no other Apple supplier has. It designed a best-in-class audio codec for Apple's products, but it also did so in a way that saved costs through eliminating surrounding components. It ran into design problems that caused an inventory writedown in early 2011, but it quickly addressed the problem and took every step to assure its relationship with Apple wasn't damaged. Most importantly, it leveraged its strong knowledge of Apple's needs to design new products that made their way into the iPhone 5, possibly tripling the amount of chips it sells into each phone from previous generations.
Cirrus has been successful being a supplier to Apple, but it built that success through years of focus and taking care to ensure its highly customized designs closely matched Apple's needs. I believe it now has the best customer relationship with Apple thanks to that hard work. In addition, it has used that experience to hire up a team of talented engineers who are applying lessons learned with Apple to other product lines.
Which leads me to an important point about the company: It sits in an industry with few examples of great a long-term focus on benefiting all stakeholders -- especially employees.
It's a space where the term "maximizing shareholder value" all too often comes down to short-term earnings goals. The brutal demand cycles in semiconductor demand have led to harsh punishment from Wall Street for any slight hiccups, especially come earnings time. This has led to CEOs in the space to focus on quarter-to-quarter management. One of the largest companies in the industry even holds a mid-quarter update.
It's stunning that in a space so dependent on human capital -- the intelligence and creativity of your employees -- Cirrus stands out for having passionate employees who care about what they do as a core value. On its quarterly earnings slides, Cirrus always includes a slide referencing its great culture.
Great Places to Work ranks Cirrus Logic the ninth-best medium-sized business to work for in the country. It's the only chip company to make the medium business list.
Finally, if we were to look at how Cirrus rewards shareholders, the results have been extremely positive in recent years. The company is up 394% over the past five years.
Cirrus recently saw a heavy sell-off in spite of the huge growth it posted last quarter. Wall Street has not only begun to fret about Apple's growth, but as a consequence of significantly expanding its presence in the iPhone, Cirrus lost a couple percentage points of gross margin.
What I like about the company is that rather than panicking about Wall Street's (overblown) reaction, it's using the opportunity to buy back its stock while it's on sale. The worst thing a company that's executing strongly can do is overreact to a panic over its stock price and ruin years of strong work. I don't think Cirrus investors have any reason to worry about the company taking such actions.
Overall, my sentiments about Cirrus and how it treats its shareholders are best expressed by Cirrus Logic CEO Jason Rhode himself. Here's what Jason said when I last interviewed him in January.
You can't create shareholder value by focusing on shareholder value. You create shareholder value by focusing on great products that people are going to enjoy using and are going to solve real problems. And the only way to create those is to have employees that are excited and passionate about the markets they're serving and the things they're working on.
The strength of Cirrus Logic is also the reason investors might want to shy away from it. The company is highly dependent on Apple, and it's an area with low transparency.
That's of little fault of Cirrus Logic itself; Apple has strict confidentiality agreements in place with major suppliers. However, it is unnerving that the company is so dependent on one company, but can't directly address its relationship with Apple.
Likewise, Cirrus has used its strong relationship with Apple to fund other ambitious goals like refocusing its energy division. While I applaud a company attempting to broaden its portfolio for the long run, Cirrus' success in these areas is still an unknown.
Foolish bottom line
The uniqueness of Cirrus Logic relative to the space it's in provides a strong argument for it being considered one of the best companies in America. This is a company which oozes a long-term vision that's beneficial to shareholders, employees, and its customers. Especially with the market missing these unique traits and selling Cirrus off along with Apple, I think investors will be well rewarded investing in the company.