Cirrus Logic (CRUS) is trading modestly lower today (it has bounced off its lows) after reporting disappointing Q3 (Dec) results and issuing downside Q4 (Mar) revenue guidance last night. Although you probably have heard of Cirrus Logic, you may not be familiar with what they do exactly. Basically, CRUS makes semiconductors, or integrates circuits (ICs), for audio and voice signal processing applications, including in smartphones, tablets, digital headsets, wearables, speakers and emerging smart home applications. The company supplies a wide range of products including ICs, codecs, ADCs, DACs, digital interface and amplifiers.
CRUS breaks up its business into portable and non-portable audio products:
- Portable (90% of YTD revenue): On the portable side, CRUS is a supplier of analog and mixed-signal audio converter and digital signal processing products. The company has an extensive portfolio of products that target flagship and mid-tier devices, including "codecs" - chips that integrate analog-to-digital converters (ADCs) and digital-to-analog converters (DACs) into a single IC, "smart codecs" -- codecs with digital signal processing integrated, amplifiers, micro-electromechanical systems (MEMS) microphones, as well as standalone digital signal processors (DSPs). Additionally, its SoundClear technology provides features such as enhanced voice quality, voice capture and audio playback.
- Non-Portable (10% of revenue): On the non-portable side, CRUS makes high-precision analog and mixed-signal ICs for a variety of products in consumer applications, including the emerging smart home market, automotive, industrial and energy. CRUS supplies a wide range of products including ICs, codecs, ADCs, DACs, digital interface and amplifiers. Within the consumer market its products are used in laptops, audio/video receivers (AVRs), home theater systems, set-top boxes, musical instruments and professional audio products. Its products are also used in the automotive market for satellite radio systems, telematics and multi-speaker car-audio systems.
By far, its biggest customer is Apple (AAPL), which accounted for 79% of FY17 revenue, up from 66% in FY16. Most of that is from Apple's iPhone product. Its next largest customer is Samsung at about 15% of revenue.
Turning to the Q3 (Dec) results, non-GAAP EPS fell 15% YoY but rose 17% sequentially to $1.59, which was quite a bit below market expectations. Revenue fell 7.7% year/year to $482.7 mln, well below prior guidance of $510-550 mln. The company also issued downside guidance for Q4 (Mar) as they expect revenue of just $300-340 mln. On the call, management provided a little color on FY19, saying revenue should be relatively flat with FY18.
Unanticipated weakness in smartphone demand that materialized in late December drove its DecQ results below expectations and impacted the MarQ guidance. On the call, during Q&A, CRUS said that this is how the semiconductor industry operates. In many cases, if one of CRUS' customers gets a cold, CRUS catches the flu. At the end of the day, when you ramp really heavily and then at some point have to reconcile exact supply with demand, it can impact your P&L in a pretty major way. CRUS wanted to calm investors, saying the sky is certainly not falling but this is a period where CRUS has to get supply/demand back in check.
With that said, CRUS thinks its markets are healthy and robust. Perhaps rather than a super cycle, CRUS got a pretty good cycle. Management also said it has a bunch of good things in the works that will drive future growth, a lot of which should help with customer diversification as well. For example, CRUS says it's got great things going on in the smart codec space for the Android community in particular. CRUS sees some good opportunities for headsets as well. Also, voice biometrics has the potential to be transformative for the company.
In sum, this was a difficult quarter for CRUS and the guidance is making investors nervous as well. Although it should not come as a huge surprise as Apple was saying iPhone X demand has been weak. However, the size of the miss and the size of the MarQ revenue guide-down probably did catch investors off guard.