Cirrus Logic (NASDAQ: CRUS) will report its third-quarter earnings results next Wednesday. The company is closely tied to Apple's (NASDAQ: AAPL) iPhone and iPad lines, supplying the audio amplifier and codec in most of the mobile devices. The stock took a beating after a teardown revealed Maxim Integrated Products (NASDAQ: MXIM) took the audio amplifier socket in the iPad Air.
Although over 80% of Cirrus' revenue is derived from Apple, the company has been making efforts to diversify its business. It had several key design wins last year, and management sees the Chinese market as a great opportunity. Additionally, it is involved in the growing LED lightbulb industry with its power controller chips. Let's take a look at what we can expect from Cirrus in its upcoming report.
Stats on Cirrus Logic
Analyst EPS Estimate
Change From Year Ago Revenue
Earnings Beats in Past 4 Quarters
Word on the Street
Since Cirrus' last earnings report, analyst estimates have steadily increased from a consensus of $0.69 to $0.77. The consensus added another penny after its second analyst upgrade in the last 30 days. The stock is down about 16% since its last earnings report, while the S&P is up about 4%.
Cirrus' second-quarter earnings beat expectations on the top and bottom lines. Earnings per share came in at $0.84, 40% above the consensus estimate of $0.60. Revenue beat consensus estimates of $181.7 million by $9 million. CEO Jason Rhode cited strength in chips for portable audio as the main reason for the earnings and revenue beats.
Nonetheless, investors punished the stock on concerns that those audio chips may find their way into fewer products. As mentioned, a teardown of the iPad Air found Maxim took the audio amplifier socket away from Cirrus, and some investors are concerned that this may translate into more losses tied to future Apple products.
For Maxim, the design win doesn't amount to much. The company is significantly larger than Cirrus, and audio amplifier chips (even 10 million of them per quarter) won't make too much of an impact on a company that's expected to generate about $620 million in the latest quarter.
Apple is expected to sell about 25 million iPads and 55 million iPhones in the December quarter. Cirrus will have a presence in all of those devices despite losing the amplifier socket in the iPad Air. Apple will report its earnings a day before Cirrus, so it should give a good indication of what the chipmaker will report.
Cirrus is facing pressure from Apple to compress its margins. As a result, its third quarter guidance was for gross margin between 45% and 47%, down from 52.2% in the previous quarter. The move to Maxim was perhaps a shot across the bow that Cirrus is better off providing Apple with better pricing than losing the contract altogether. Management has iterated that it expects long-term gross margin to sit in the mid-40s, but seasonality will cause it to vary.
Aside from Apple products, Cirrus designs are finding their way into more devices and electronics. The same chip it makes for the iPhone is in Xiaomi's Mi3 smartphone. The Chinese company specializes in high-end phones sold near cost and has been tremendously successful in its home country. It plans to expand operations to more developing countries in the coming year. Additionally, Cirrus is providing power controllers for LED lightbulbs and garage-door openers, and management sees an opportunity to get its audio products into high-end automobile sound systems.
Perhaps that diversification will come in handy in the long-term, but for the upcoming report it's business as usual, and that means Apple. Look for Apple to drive Cirrus Logic's revenue and weigh on its gross margin.