Cirrus Logic: Strong Future Revenue Stream Just Cleared Up (NASDAQ:CRUS)

Cirrus Logic: Strong Future Revenue Stream Just Cleared Up (NASDAQ:CRUS)

Close-up of a female doctor carefully holding her patient's ear to establish a clearer view of the inside of her ear, to see if she needs hearing aids in a modern clinic

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During times of economic dislocation, investment prices rarely reflect actual value. In reality, buying opportunities, that cursed term, create themselves. The question is always, when? For cirrus logic (NASDAQ:CROSS), a serious price dislocation is taking place Progress. The company reported a record June quarter that will not be exceptional. Since the recording of the log, management discussed on the call and the next investor conference afterward, a treasure trove of valuable audio.

Base

We start a long-term vision with an Apple (AAPL), followed by non-Apple revenue. For Apple, our belief suggests that unit sales of each of Apple’s major products equals: 210 million iPhones, 65 million iPads, 45 million Apple Watches, and 20 million iMacs. Investors can find the information at this site, Apps business, a little more than valuable.

Growth

Management clearly laid out a path forward for increasing ASPs, which is likely to be with Apple. Perhaps the most important recent announcements were in the presentation of Cirrus. with KeyBank. Cirrus CFO Venkatesh R. Nathamuni added clarity to the pleasing audio sounds of the future:

  • Revenue for fiscal 2023 is a year of incremental growth.
  • Fiscal ’24 is about “reasonable” growth.
    • Mainly driven by high performance mixed signal products.
    • New content.
    • A new unannounced category.
    • Top client involved without details, but it is unique and differentiated. (In our opinion, built with input from Apple.)
    • The “combination of those 2 product areas” should deliver growth in FY’24.
  • 22nm codec/Fiscal ’25
    • Definitely an important client. (Apple)
    • Substantial performance improvement.
    • Substantial savings in space and energy use.
    • “It represents more features and capabilities, so you typically expect to see a buildup of ASPs…” (Our estimate is more than $1 or $200 million to $400 million per year increase.)

The CFO summed up,

“So if I were to take a step back, I’d say in FY23 there was pretty minimal growth, but still growth, we think. And then in FY24 we’re going to see more growth driven primarily by the fact that we’ve increased attach rates with existing products, as well as some incremental content and some new content or a new category, I should say. And then fiscal ’25 to overlay that when we introduce the 22-nanometer codec, which should add additional capacity.”

Moving on, Nathamuni discussed more details with their mostly non-Apple laptop opportunities. These devices could have up to four amplifiers, a codec, haptic power management, and charging. In short, Nathamuni spoke: “And I think there is a distinct possibility that it could get to the same level of content that we have on some of the smartphones, on the flagship smartphones.” By the way, that targets the $6-$8 ASP range. Nathamuni also raised the PC SAM opportunity to “$1.2 billion to $1.3 billion from $1 billion for FY26.”

The following table summarizes revenue using the above basis.

Income 2022* 2023 2024 2025
iPhone** 1200 $1,500 $1,750 $1750
iPad *** $260 $300 $400 # $500
Clock **** $50 $50 $50 $50
pc***** $150 $300 $500 $800 ##
android misc $200 $200 $200 $200
Totals $1900 $2400 $2900 $3300

* Estimated revenue using previous unit sales could be significantly lower. For example, iPhone unit sales could be significantly higher.

** ASP: Codec $2, 3 Amps $1.50, 3 – 4 Continuous Camera Drivers $1.25, Power Management $1 = $5.5. In 2023, Cirrus adds two new products that we have priced at $1-$2. In 2024, Cirrus adds a new codec that adds more than $1 worth of ASP.

*** Variable ASP but estimated at $4.0.

****ASP approx $1

***** Management noted a few quarters ago that last year it was $50 million. The company gained plugs into many new PCs.

# At some point, the new sockets gained on the iPhone will migrate to tablets. We estimate that, over time, the ASP tablet will be equivalent to the iPhone at $7.

## Over time, past experience suggests that Cirrus earns at least 55% of the TAM.

Several growth potentials are missing from our table above, including revenue growth from increased 55nm chip capacity now capping Android revenue and valid estimates around a new product line. Regarding the 55nm capacity shortage, management stated in the shareholder Letter, “In the near term, we are working with our partners to expand capacity where possible, and continue to prioritize supply toward key customers looking to maximize total smartphone unit volumes in light of these constraints.” Cirrus always puts a SAM on his presentation slide it follow:

S.A.M.

Cirrus Logic Inverters

In 2021, Cirrus generated about $1.8 billion or 55% of the total market share. Using 55% of the $7.3 billion, Cirrus’ revenue could be more than $4 billion. We view our $3.5 billion with a very conservative eye. Our hunch is that the estimate above is short.

We are providing a link to the employment section of Cirrus, something we have followed for over 2 decades. This is now in record number from what we have observed so far.

Next quarterly report

As we said in our opening, the markets are out of whack, with extreme energy and inflation issues abounding. Apple seems somewhat immune so far. Canalys preview September smartphone analysis shows Apple up 3% in market share and, after a little math, up 10% year-over-year in unit sales. Although demand for the Pro line remains strong, a recent report from Seeking Alpha counter enthusiasm with supposedly drastic cuts in iPhone 14 Plus orders. We see September at the top end of guidance $490 million more, with a guideline of no more than $550 million for December. Last year, Cirrus generated $550 million in that quarter, at or near the top of its production capacity. Although the new capacity will be available shortly, the new capacity is generally not for existing products, but for new ones to come. Yes, management is again working diligently to get more 55nm chip capacity.

For the September quarter at a 50% margin rate plus $123 million cash expense plus a 23% tax rate and 55 million shares, earnings could equal $1.80 in line with last year. Note: Cirrus’ high tax rate is temporary and could disappear immediately with changes in the law, but if not, it will gradually disappear within three years to 13-15%.

One more thing

Investors often rightly challenge management on the issue of dividends. We have ourselves. In our opinion, an answer is on the way. Management at some point will be forced to do so. A bit of history: Two decades ago, a former CEO bought several small companies using stock, one company that failed. With a new CEO and CFO, Cirrus bought back all 30 million shares issued, clearly understanding the dilutive effects. This bungled event created a culture within the company in managing the share count, which is now close to 55 million. During periods of cheap appraisals, Cirrus has a history of buying back extraordinary amounts, something we now expect. But, at recent purchase rates, Cirrus’ count will drop or could drop to 50 million or less. Investors, management has to ask themselves, how low can they go? A company may have too few shares, creating business problems or buyout risk. And by the way, it is not fixed with stock splits either.

Cirrus’ likely potential future cash flows increase dramatically. For example: $4 billion times 0.51 margin minus $550 million in cash expenses times 0.85 equals $1.2 billion a year in cash. At 50 million shares, that works out to $25 per share. From our article, Type Definition Investment For Cirrus Logic, The company issues approximately 1.6 million shares of stock options. With earnings of $25, buying back 1.6 million shares requires about $400 million. Without buying back shares, the company’s extra cash is equal to $800 million. A continuous addition of cash of $15 to $20 per share creates interesting structural problems. Remember, $4 in dividends costs $200 million. In our view, management’s resistance to dividends will come under pressure, albeit still a few years from now.

Investment and Risk

First, let’s consider downside risk to market sentiment; is markedly in place. A hold on action is back in place. Some might suggest a sale. So far, though, Cirrus’ business isn’t experiencing a terrible decline. High-end markets have a level of isolation for the short term. Management’s growth song includes critical wording for two of the three growth vectors. The third, PCs, are greenfields that produce growth regardless of volume. The premium turntable has never played such high-quality growth music. The question is when. For us, patience defines the atmosphere, but at some point investors may find increases in long positions a must. The music of growth is too light. It will be rocky anyway. And before we leave this topic, our concern is with the March quarter. Europe, with its huge energy problems, will just emerge from a winter that could be costly in many ways.

Still, the sharp growth vision is sharper and the harmony is divine. Cirrus Design Plugins require 2-3 years with Apple. With management willing to share a road two to two and a half years from now, it means they have joint efforts in place. Apple is compromised. Scheduled purchases appear to be in order despite market uncertainty. Note: We have set aside a level of cash to purchase sometime between now and January.

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