Chip-designing company Cirrus Logic (NASDAQ:CRUS) reported bleak third-quarter 2014 results earlier this week. The company’s top and bottom line declined but these figures were better than what analysts were expecting. The slump was mostly on account of lower demand for its audio products from Apple (NASDAQ:AAPL) — Cirrus’ largest customer. Guidance for the fourth quarter remains dull as well. Let’s delve deeper into some essential numbers.
The Quarter in a Snapshot
Cirrus posted third quarter adjusted earnings per share (EPS) of $0.89 that nearly halved from $1.64 in the same period last year. However, the results were better than analysts’ forecast of $0.77.
Revenue for the quarter plunged 29.4% year over year to $218.9 million, but remained above analysts’ expectations of $213.3 million.
The decline was by and large due to Cirrus’ audio product business that witnessed a fall in revenue by 31.2%, driven by softer pricing and a shift in demand from high end to low-end products. On the bright side, the plunge in Cirrus’s overall revenue was partially offset by a 23.4% rise in sales of its energy products, which includes Power Meters, LED lighting and legacy product lines.
Gross margins fell 360 basis points year over year to 47.4%, again mainly due to a higher mix of low-margin audio products and soft pricing. Operating margin also witnessed a steep fall with a year-over-year decline of 1,010 basis points primarily driven by falling revenue and rising R&D expenses. The spending on R&D rose 9.5% mainly due to the transition towards the 55-nanometre lithography.
The Apple Conundrum
Since Cirrus derives more than 80% of its revenue from audio chips made for Apple’s iPhone and iPad, the company’s revenue outlook is largely dependent on Apple’s forecast for the coming quarter. And that doesn’t seem to be encouraging at the moment.
Apple expects its March-quarter revenue to decline sequentially by about 25.3%. As per Apple executives, a dip in sales of iPods and strengthening of the dollar against major currencies will have a severe impact on revenue. However, the tech giant was positive on its iPhone and iPad demand.
Unfortunately that’s not the biggest problem facing Cirrus.
Barclays (NYSE:BCS) analyst Blayne Curtis noticed that the latest version of Apple’s iPad Air features rival Maxim’s (MXIM) amplifiers — a replacement for Cirrus’ sockets. Another analyst from Stifel Nicolaus claimed that Apple’s latest iPhone 5S and iPhone 5C have fewer chips from Cirrus.
By this we can assume that Apple is beginning to alienate Cirrus, probably to cut component costs and arrest declining margins.
But All’s Not Lost...
Cirrus may feel the pressure of lower product demand and falling margins in the coming quarters. However, the company can make good progress with the acquisition of Acoustic Technologies which it had announced in October last year. With Acoustic’s expertise, Cirrus can strengthen its voice processing portfolio and tap the growing prospects in the portable audio space. Besides this, the transition to a 55 nanometer lithographic production process can reduce production costs and size of the chip itself.
What to Expect from Cirrus in the Future?
Cirrus expects its fourth-quarter 2014 revenue to be in the range of $130 million to $150 million, much lower than analysts’ expectations of $173.8 million. The forecast reflects an average sequential decline of 36.0% and year-over-year decline of 32.4%.
While the acquisition of Acoustic Technologies will benefit Cirrus, its huge dependence on Apple exposes its revenue to uncertainties which could potentially lead to disaster if the Cupertino-based company decides to drop Cirrus’ chips entirely. It is quite important for the company to secure large orders from Non-Apple customers. So what are your opinions on Cirrus’ prospects?