Apple Inc's iPhone Beat Is Good for Cirrus Logic's Upcoming Earnings

Cirrus Logic (CRUS -1.48%) is set to report its fourth-quarter earnings on Thursday right after its largest customer, Apple (AAPL -1.22%), reports Wednesday. With over 80% of its revenue derived from the Cupertino-based company, a lot of Cirrus Logic's results will be determined by Apple.

As growth at Apple has slowed, so has growth at Cirrus. The company lost the amplifier socket in the iPad Air last year, but still makes the chips for the faster-growing iPad mini as well as the iPhone. Still, Apple's move may put further pressure on Cirrus' pricing, continuing to push down margins this quarter.

With that in mind, let's take a look at what we can expect from Cirrus Logic on Thursday.

Stats on Cirrus Logic

Source: Yahoo! Finance.

Word on the Street
After Cirrus' disappointing outlook for the fourth quarter, analysts dropped their estimates from $0.49 to $0.32. The drastic fall in earnings estimates corresponded with an initial decline in stock price. Shares have recovered nicely, and now sit about 9.9% higher than before its third-quarter report. Comparatively, the S&P 500 is 4.7% higher than its January 28 close.

Cirrus is making a habit of beating analyst estimates, after lowering them with disappointing guidance. Last quarter, the company beat on both the top and bottom lines with earnings of $0.89 per share versus estimates for $0.77 per share. Revenue topped estimates of $212.95 million with sales of $218.9 million.

Despite the beats, both numbers represent a year-over-year decline. Moreover, Cirrus saw a decline in gross margin to 47.4% from 51% in the year-ago period.

This is likely a result of Apple weighing on its pricing structure. Cirrus lost the amplifier socket in the iPad Air last year, as Apple has become more focused on price and its own margin. Apple's gross margin has fallen nearly eight percentage points from its peak in 2012. The company is aiming to stabilize that number as its growth slows.

For Apple's second quarter, the company reported gross margin of 39.3% on the back of 43.7 million iPhone sales and 16.4 million iPad sales.

That iPhone number is well above expectations of 37.7 million, but the iPad's missed by more than 3 million units. This mix, however, strongly favors Cirrus Logic's revenue number. The weight of the iPhone mitigates the affect of losing the iPad Air socket.

Cirrus could still benefit from diversifying away from Apple. It could also benefit from Apple diversifying its product line and releasing its long-rumored wearable. Cirrus' amplifier chips are especially suited for smaller form factors, and the company would likely be the first choice for Apple should it finally release the iWatch.

In the meantime, wearables are growing, but the competition for wearable amplifier sockets at other OEMs is fierce. Apple is Cirrus' best bet for wearables.

Foolish final words
When Cirrus reports, watch its gross margin for the impact of Apple's pricing pressure. Margins will give us a better indication than revenue, which is driven more by volume, of how Apple is affecting Cirrus' price.

Look to see if the company is having success in diversifying away from Apple with companies like Xiaomi in handsets, or in the emerging LED lightbulb space where it designs power controllers. This quarter, however, results will still be driven by Apple. So, I'd expect some good results based on what I heard Wednesday.