News

Apr 28, 2023

Cirrus Logic: The Impact Of Apple's New iPhones (NASDAQ:CRUS)

On September 12th Apple (AAPL) introduced several new products including a new

On September 12th Apple (AAPL) introduced several new products including a new watch, 4K TV, and two iPhones, the iPhone 8, 8 Plus and iPhone X. We will not discuss all of the new features, but a couple of features did directly affect Cirrus Logic (NASDAQ:CRUS). Apple announced improvements in SIRI and audio quality particularity noting significant enhancements for the new iPhones bass sound, features provided by Cirrus. A review of the iPhone 8 speaks loudly about the sound quality of the phone compared to new Samsung phone, the LG phone, and the iPhone 7. Siting the review, "the iPhone 8 and 8 Plus have spectacular speakers that should not be technologically possible, yet they are. The sound they deliver is outstanding and way ahead of the competition." The teardowns expectedly uncovered new parts. Evaluating iPhone demand and Cirrus ASP is the focus of this article.

Apple's New Lineup and Cirrus Logic

In figuring the iPhone ASP, we are interested in several parts, headphone DACs, amps, and codec. When Apple posted its products online, the company included a what's-in-the-box. For the models 7, 8 and X, the box contained both the analog DAC and digital DAC with a total ASP of approximately $1.8. We were not expecting but were rather pleasantly surprised that the analog speaker DAC was still included. With the inclusion of the analog dongle, Cirrus's average ASP is significantly higher for FY-18 and FY-19 than we predicted in the previous articles. The new parts included in the new iPhones are shown in the following graphic. The part numbers are 338S00248 (codec) and 338S00295 (3 amps)

Calculating Cirrus's ASP

Figuring the base case percentage for each of the five models in the iPhone lineup is a mysterious task as there is no history. Analysts seem to be all over the map. It is also not easy to determine the ASP average for Cirrus, because the ASP in some models are different and not publically disclosed plus Apple does not disclose the individual model unit sale's percentages. Instead of just looking at Cirrus fiscal years, we first evaluated Cirrus ASPs within the Apple fiscal year. With that information, we looked at a possible Cirrus fiscal year average ASP using the assumption that Apple sold 30% of its phones between April and September and 70% between October and March. The basis of the calculation also included assumptions for Cirrus's ASP by model and mix ratios. In order, the ASP for each phone was SE-$3, 6-$2.75, 6S-$3.5, 7-$5.85, 8-$5.85 and X-$5.85. For Apple's FY-19, we assumed that the ASP for the 8, X, and XS dropped from $5.85 to $5, the dongle being optional.

For FY-16 using a mix of SE 5%, 6 25% and 6S 70%, the average Apple ASP for Cirrus was $3.30. We used mixes for SE, 6 and 6S of 10%, 20% and 70% for FY-17 respectively; for FY-18, SE, 6S, 7, 8, and X of 10%, 10%, 10%, 20%, 50%; for FY-19, SE, 7, 8, X and XS of 10%, 10%, 10%, 20%, 50%. Following the same methodology, for FY-17 through FY-19, the average ASPs during the Apple fiscal year were: $5.1, $5.3 and $4.9-$5.0. For FY-19, we assumed that at least 10% of the purchasers would opt to purchase the dongle.

We evaluated the average Cirrus ASP for the period of the Cirrus fiscal year using the 30/70 ratio 30% of the iPhones were purchased between April and September, and 70% were purchased between October and March. ASPs, FY-17 through FY-19, were $4.6, $5.25 and $5.10. Without any additional design wins, we modeled beyond FY-19 in a range between $4.9-$5.0. Using a base case of 225M iPhones sold per year, the difference in revenue by Cirrus fiscal year beginning with FY-17 ($4.60) yields, FY-18 +145M or $0.90 and in FY-19, it reduces to +80M or $0.50/yr. The difference between FY-18 and 19 is 65M or approximately $0.40/yr. For FY-18 and FY-19, each 10M additional iPhone units sold will add approximately $0.30/yr. We should also note. If Apple offers both DAC devices in-the-box, Cirrus's ASP will average above $5.25 for the foreseeable future. Also, we expect Apple to add the digital port to the SE in the very near future refresh adding an additional $0.10.

Recent Analyst Activity

With the Cirrus's stock price trading near $65, an analyst downgraded Cirrus from "Equal Weight" to "Underweight", with a $55 price target. Illogical comments included an evaluation that FY-17 guidance is achievable keeping FY-18 EPS at $4.44 while discounting any mix ASP increases, but follows by dropping FY-19 from $4.58 to $3.69.

Investment Bank Barclays predicted that Apple would continue to put the adapter with Lightning connectors and 3.5 mm in the box with all new models of smartphones iPhone released this year but by September FY-19, would eliminate the analog dongle. The price plummeted several points within a few days. The analysis conveniently offered no reason for excluding revenue increases and earnings in FY-18 from the natural ASP increase through mix and possible Apple super cycle unit sale. The action destroyed, at least temporarily, Cirrus's chart.

More recently, Bank of America Merrill Lynch initiated Cirrus Logic at Underperform with a $50 price target. The analyst writes that the company's iPhone content might peak in FY18 leading to slowed sales and earnings since Apple accounts for 75% to 80% of overall revenue.

Although he acknowledges that Cirrus has multiple large opportunities in the Android space, he argued that he expects revenue growth deceleration from +20% to a 5% growth CAGR between FY-18-FY-20. Once again the stock price plummeted reaching near $50.

Early iPhone Sales

Predicting Apple's iPhone sales for its FY-18 period is difficult at best, but for this year, is an even more important task for Cirrus stock owners. Apple has never sold a line with five phones with two release dates. An article issued through Digi Times claimed demand for the iPhone 8 was running at rates 40% of the previous two Apple launches. Digi has been known to provide incomplete or inaccurate information.

Even so, the 40% number itself points to what some analysts believe is a strong number. KGI analyst Ming-Chi Kuo believes that the preorders for the X phone might be 50M or more. He commented worries over a slower than normal iPhone release are exaggerated by an "excessively negative" market. He thinks that Apple divided the production split 50/50 between the two new models adding that data from the combined first week confirmed that the 8-adoption rate was approximately half of the 6 and 7. He also added that the updates contained in the X will began the next Apple iPhone super cycle lasting two or more years. Kuo notes that production issues will be Apple's primarily concern, not demand.

What We Expect

In our view, it seems that the new iPhone's will create a super cycle for Apple, although the growth period might be lengthened and more subdue from early production issues. We have lowered our iPhone sales from 250M units in Cirrus FY-18 to 230M or slightly more than Apple's last fiscal year of 215M. The numbers are broken out by Cirrus quarters: June 41M (act), September 50 (Est), December 80M (Est, supply constrained), March 60M (Est, supply constrained). Under this belief, Cirrus's earnings will increase $0.90 from mix and $0.45 from increases in unit sales. These are rough numbers, but provide a magnitude.

We also know that Cirrus won a design with Amazon's home speaker system, and we expect Cirrus parts in the new Apple Home Speaker, and also in the newly announced Samsung home sound product. In our view, these devices will have a significant ASPs, $5-$10 per box. Every 10M units sold per year adds $50M-$70M of revenue. We believe a conservative number of 3-5M units could be sold during Cirrus's FY-18 or roughly $25M, representing another $0.15/share.

The net effect of this small increase in YoY revenue ($250M) adds $1.5/yr. to Cirrus's earnings a far cry from the total $4 or $3.5 predicted elsewhere. In one of our recent articles, we discussed why for FY-18, Cirrus's most probable cost increases could be completely offset by the YoY cost savings leaving revenue increases to directly add to earnings.

We have made a compelling case for Cirrus's FY-18 earnings to increase from last years $4.5 to $5.5-$6.0. We question the validity of the two most recent analyst downgrades. Price targets near $50 imply a P/E significantly less than 10. A P/E of less than 10 for a company still growing, in the worse case, acknowledged by Bank of America, generating cash at yearly rates of 12% of market cap., and possessing highly probable new business possibilities with long-term growth rates above 30% a year, seems to us highly suspect. Are these actions about competency or character?

We could be wrong, but it will be because of major iPhone production issues, an event which at least one of the two was not considering with the downgrade.

As we stated in our first article, owning this stock is NOT for the faint of heart. They can and do play games with the price. On a brighter note, we have noticed through the many years of observation that the depth of the major corrections, whether created fairly and competently or not, also create greater than expected highs. This most recent correction just opened technically the possibility of a $100 price.

This article was written by

Analyst's Disclosure: I am/we are long CRUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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