• Thu. May 6th, 2021

Dimancherouge

Technology

Cirrus Logic Unveils More About Its Lucrative Future (NASDAQ:CRUS)

Two recent events, Cirrus Logic’s (CRUS) quarterly report and Apple’s (AAPL) new product announcements, threw open a door into Cirrus’ bright future for revenue growth.

On August 3rd, Cirrus Logic reported its 1st quarter financial report which included a treasure trove of details about future products. Some of the products that were discussed are coming with a level of risk such as haptics outside of Apple. Others seem almost certain.

Apple, on September 15, held its first of two new products events. Although speculation left investors guessing, Apple introduced new iWatches and new iPads. In particular for new iPads, the features and spec-sheets describe additional Cirrus content. For the iWatches, exact timing for revenue growth remains more cloudy.

The investor response was mixed. Analysts, shown below, are betting Cirrus wins the pennant, but the market only saw a strikeout. So, which is it? Let’s go digging.

Analysts Got It, But the Market Swings & A Miss

After the 1st quarter investor call, the analysts really got it as illustrated in the table below. Strangely, the market missed. Mr. Market swung at a curveball and missed and only by a mile.

Analysts Change

Old Price Target

New Price Target

Cowen

$88

$90

Susquehanna

$76

$86

Stifel

$82

$85

Craig-Hallum

$65

$70

None of the analysts lowered targets.

The following chart generated using TradeStation displays the market reaction.

The above chart shows how badly the market reacted to Cirrus’ earnings report in early August. We expect price weakness to continue until the market figures out the significance of what is coming.

New Wins & Products

At the August investor call, the company announced that it “has a number of innovative products expected to tape-out this quarter and sample with our customers over the next year.” Targeted markets expanded to include “non-mobile phone applications, particularly those devices that require compact components to deliver a premium user experience while minimizing power consumption.” It appears that a significant share of the new wins will be with Apple.

We generated ASP and revenue estimates largely using the content value shown quarterly in Cirrus’ presentation.

Here’s a summary.

Closed Loop

The first product, the closed loop chip, which allegedly fills a critical role in a new Apple camera stabilizing function, carries an ASP of approximately $1.00 per unit.

At the August investor call, Cirrus added depth which is summarized below:

  • Key Customer: Ramping
  • Expected to be included in Apple’s highest end phones for FY-2021
  • Camera stabilization controller (analyst’s belief)
  • Meaningful long-term opportunity:
    • TAM of $500 million
    • Product variants are coming

The following table estimates revenue for the next few years.

Closed Loop

ASP

FY-2021 *

FY-2022 *

Long-term

1st Gen

$1.00+

$80-$100

$160-$180

2nd Gen

$1.25+ ?

$400+ **

* Apple’s fiscal year at 200 million iPhone units sold per year.

** Company projected $500 million potential during the August call.

Power Management

Next on the investor call, management offered investors several surprises. One included details concerning a new product discussed in previous calls emerged. It’s about an innovative approach to power management.

Again, Cirrus coupled with common sense added depth summarized below:

  • Key Costumer: Design & test phase
  • Custom Device (almost guarantees Apple)
  • Timing: 2nd half of CY-2021
  • ASP: Total TAM opportunity larger than microphones (+$500 million)
  • Greater than a $1.00 ASP
  • Likelihood: Favorable; Customer has invested considerable effort
  • Delivering innovative power features:
    • New power management application (not in existence today)
    • Not a charger
    • Hints from several recent Cirrus patents
  • Planned 2nd generation increases functionality and ASP

This table summarizes revenue from the power management socket.

Power Management

ASP

2022 *

2023 *

Long-term

1st Generation

$1.25+

$175

$225

2nd Generation

$1.50+

$500

* Apple’s fiscal year at 200 million iPhone units sold per year.

Our long-term estimate uses Cirrus CEO Jason Rhode’s call statement that this is larger than the microphone business. Our belief was that the microphone business was $2 ASP times 200 million units equaling $400 million plus. We could be high, but it seems reasonable.

22 nm Codec

Some of our readers may dispute our interpretation of the company’s announcement that its first 22 nm technology product is now in development. But, we are confident. Cirrus commented, “the company is finalizing the qualification of key intellectual property and smart codec technology on a 22-nanometer process.” The processing-intensive codecs are targeted for applications where power, processing and size drive market penetration.

On the investor call, John M. Forsyth, Cirrus’ President, added a comment concerning voice biometrics, “now, the likelihood is that we will, in due course, be able to talk about certain of those technologies being incorporated within products, which drive import[ant] business for us.”

We believe that the two seeming disconnected comments are indeed tightly bound. With the implementation of voice biometrics, Cirrus developed a 29 nm chip. The company made this comment in the May call. “Outside of Android, interest in innovative smart codecs that set new standards for power, performance and size remains robust and is fueling investment in new technologies [including] our mixed-signal intellectual property [transitioning] from 55-nanometer to 22-nanometer.” We believe that voice biometrics is coming and arrives with the 22-nanometer technology. At Cirrus’ most recent investor call with Oppenheimer, again, Forsyth discussed voice biometrics talking all around the idea that it would appear within the 22 nm product.

Our summary follows:

  • Key Customer: Non-Android (Apple)
  • Timing: September 2022-23
  • Codec ASP: $3.50+ ($1.50+ Adder)
  • Driven by voice biometrics & other functionality
  • Long term: Will drive standalone processing

This table again summarizes Cirrus’ possible content gain and revenue from Apple. Again, the base case is 200 million iPhone units sold.

22 NM Technology

ASP

2023-2024 *

2024-2025 *

Long-term

Revenue

$1.50

$150 **

$270 million ***

Large

* Apple’s fiscal year

** 50% iPhones

*** 90% iPhones

Haptics/Closed Loop

With each earnings conference call, Cirrus has opened its windows a little wider, allowing investors to attain a better view into the haptics market. Forsyth, during the August report, spoke concerning the market while referring listeners to slide 9. He stated that of that billion market size in 2024 for haptics, approximately half was haptics, the balance closed loop. Slide 9 follows:

We had wondered how large Cirrus considered the haptics market. If Apple’s amplifier size now equals approximately $100 million or $0.50 per device, this leaves growth at approximately $400 million.

Wearable & Hearable Codec Plus Other Devices

The company presented its progress for its 2nd generation wearable and hearable codec. It seems poised to enter the wireless headset (hearables) and wearables markets with much greater content and penetration. In total, it’s targeting providing amplifiers, ASP at $0.50; a codec, ASP ranged between $0.50-$1.50; and haptics devices, ASP ranged between $0.50 and $0.75. The $0.75 haptic ASP includes the analog input function. In the shareholder letter, Cirrus offered, “we believe there is a considerable opportunity to provide an immersive touch experience in other devices including wearables…” Continuing, “The company is also gaining momentum in wearables, where our audio and haptic components enable a premium user experience while conserving board space and power.”

With respect to headset chips, John Forsyth, Cirrus President, commented on headset opportunities at the Oppenheimer Conference, “We have a new product that’s sampling to customers right now, which will be our first – actually, the first product that’s focused on truly wireless from us that introduces [hybrid] ANC.”

Kuo King, in a 9t05Mac, stated, “Looking ahead to 2021, however, the analyst writes that he expects that a “significant form factor design change would come with new Apple Watch models in 2H21 at the earliest.”” When considering all of the news, we expect to see a Cirrus codec in this new iWatch form factor. Kuo also offered an opinion on AirPods stating, “The company will replace [AirPod] with AirPods 3 in the first half of 2021. Kuo describes the AirPods 3 as featuring a new form factor design “similar to AirPods Pro.””

New depth summarized below:

  • Key Costumers: Now sampling
  • Timing: 6-12 months
    • AirPod 3 – March 2021
    • iWatch – September 2021
  • ASP:
    • AirPod Pro $1.00 (Amplifiers)
    • AirPod Pro 3 $1.5 (Codec with hybrid ANC)
    • iWatch $1.00-$1.50 (Codec)
    • iWatch $0.75 (Haptics)
  • Delivering Innovative Features:
    • ANC, environmental listening, hearing augmentation and a personal sound amplification (PSAP).
    • For extremely small batteries. (Translation: AirPods or iWatches or other non-Apple devices)

ASPs and possible market size are summarized next.

Wearable/Hearable Devices

ASP

2021 Revenue *

(Millions)

Long-term Revenue **

(Millions)

iWatch 7 (codec + haptics)

$2.00+

$20 * *** $60+ ***

AirPods (Amplifiers Pro; Codec Pro 3)

$0.80-$2.00 ****

$20 + $40 ***** $100+ *****

Total

$80

$150-$200

* iWatch 7 represents 1/3 of sales in the first year

** Haptics and codecs in iWatch

*** 30 million plus iWatch sold yearly

**** AirPod Pro contents 2 amplifiers. New AirPod Pro contents a hybrid ANC codec

***** 50 million plus AirPods sold yearly

Computer & Tablet

During each investor call, management continues to alert investors of coming new business. In August, that message came, “But also has very much been about how we broaden — leverage those IP investments and broaden our range of targets to other markets. So tablets were, for a short, part of that. We’ve mentioned notebooks as well.” Cirrus had already won key sound content in Apple’s iPad Pro in March 2020. At the new product event, Apple announced two more new tablets in which we expect amplifiers and haptics devices from Cirrus. Approximately 50+ million iPads and 20 million MacBooks are sold a year.

We have estimated the high-end tablet total ASP at $6-$7 driven by the inclusion of eleven chips. During its last new product announcement on September 15th, Apple announced two new tablets, the iPad 8 and iPad Air. Specification sheets included with the new products suggest that each uses two speakers instead of four employed in the iPad Pro. Our conservative parts estimate includes, a codec, 4 amplifiers and a haptics chip. Our ASP calculation includes a $1.50 codec, $2.00 for amplifiers and $0.50 for the haptic totaling $4.00. An ASP average for the three new tablets might be $5.00 ($6.00-$7.00 plus $8.00 divided by 3). Apple continues to sell a mini-version, but its cost is only $50 cheaper than the iPad 8. Compared to older models at $1.5 (codec only), Cirrus increased its long-term revenue to $$250-300 million from $75 million or by $200 million.

Timing and exact content for Cirrus’ coming computer solution with Apple is unknown, but not without hints. An Apple patent posted on 9To5MAC discloses major audio changes. The invention uses three sound sources with audio cross canceling in creating visual surround sound. “Audio signal processing for virtual acoustics can greatly enhance a movie, a sports event, a video game or other screen viewing experience, adding to the feeling of “being there”.” It appears that Cirrus might include a codec, a controller and several amplifiers in such a device. An ASP above $5.00 would result.

Cirrus seems to have always had some minimal content in Apple’s Macs. An increase of $4-$5 per unit would add $80-$100 million in revenues given Apple continues to sell 20 million units per year.

Summing the Big Change

Cirrus is on the cusp of gaining significant revenue with Apple and in other markets. We view the Apple wins with great certainty; the other wins with less. The company is winning new amplifier and haptic revenue outside of Apple. We are uncertain regarding schedules and quantities, but are confident, that wins are coming.

Between March and October of 2020, Cirrus, coupled with analysts, have signaled that a Samsung codec worth $60 million and the last iPhone in-the-box digital convertor worth 200 million units times 0.9 time $0.80 or $140 million in our view will be discontinued. The total loss isn’t small which in our view lowers the base revenue generated in FY-2020 from $1.3 billion to $1.1 billion. Cirrus did win a $0.75 haptics device in new Samsung phones plus it also began delivering an ASP of $7 for Apple’s higher end iPads for two quarters ahead of Apple new fiscal year. The sum of the two wins might be $40 million for the haptics devices and four million times $7.00 for the iPads totaling $70 million.

To summarize the magnitude, we begin with the following table that includes our very rough estimated ASP and timeline. In CY-2020, Cirrus won a new closed loop controller in the iPhone. Cirrus is strongly expecting a larger ASP gain with Apple during 2021. Between the years 2022 and 2023, Cirrus is targeting the release of the 22 nm codec. We expect Apple to include this chip to add voice biometrics plus other functions.

Apple Product ASP iWatch iPad Mac iPhone AirPods
Beginning $0 $5 ? $3.60 $0.80 in half
2021 $2.00 $5 ?

$4.60 half $

3.60 half

$0.80 in half

$2.00 in half

2022 $2.00 $5 $5.00

$6.00 half

$4.75 half

$0.80 in half

$2.00 in half

2023 $2.00 $5 $5.00

$7.50 half

$6.00 half

$$2.00
Long term $2.00 $5 $5.00 $7.00-$7.50 $2.00

The next table shows our revenue estimate by year using 200 million units per year sales for the iPhone, 20 million Macs, 50 million pairs of AirPods and 50 million iPads.

Estimate Apple

Revenue *

iWatch iPhones iPads AirPods Macs Totals
Base Case $1.1B
2021 $20M $80M $200M $60M $25M $400M
2022 $20M $250M $0M $0M $25M $300M
2023 $20M $250M $0M $40M $25M $325M
2024 $0M $125M $0M $0M $25M $150M
Long-term ** $60M $700M $200M $100M $100M $1.2B

* Apple’s fiscal year

** Rounded totals

The above table excludes targeted markets possibly outside of Apple in particular the $400 in haptics opportunities, plus the amplifiers and closed loop controllers at $300 million. In addition, the 22 nm chip targets attractively large sized markets of unquantified TAM beginning, we believe, in calendar year 2022. Also, our estimates exclude revenue from iPhones sales above 200 million units or for that matter iPads above 60 million and Macs above 20 million and wearables/hearables above 100 million units a year. An additional 50 million iPhones sold in 2023-4 might add 50 million times $7 or $350 million. From dissecting conference calls, Cirrus seems to allude that it could add somewhere between $1.5 and $2 billion in revenue during the next four years to its $1.2 billion base. Even with these significant revenue increases likely, we still expect minimal additional operating costs.

A Better Time to Buy?

In our view, at prices near $60, it’s time to buy. But remember, existing macro issues, in particular health, might dramatically negatively affect future results. We can’t overlook that issue, but Cirrus’ future growth seems bright. As always, owning Cirrus isn’t for the faint of heart.

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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