A Scorching Outlook Takes Cirrus to the Stratosphere

By Harsh Chauhan - July 31, 2012 | Tickers: AAPL, CRUS, SWKS | 0 Comments

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Sometime in the middle of July, I wrote a post that focused on two companies that supply components to smartphone behemoth Apple (NASDAQ: AAPL), and I told you why you might consider buying them. One of them was radio frequency chips manufacturer Skyworks Solutions (NASDAQ: SWKS), which posted a terrific quarter a few days back and its shares zoomed.

And the second component supplier was Cirrus Logic (NASDAQ: CRUS), whose recently reported quarter wasn’t as convincing as Skyworks. Cirrus failed to meet top-line expectations and just edged past on the bottom line. But its shares sprang toward the sky (jumping as much as 20% in extended trading) as Cirrus investors celebrated the company’s outrageous outlook.

The numbers and the reason

But first, let’s get into the specifics of the quarter. Cirrus’ first quarter revenue inched 7% higher from last year to $99 million in the quarter, falling behind the Street estimate of $100.9 million. Adjusted earnings (excluding one-time items) declined modestly to 22 cents in the quarter from 24 cents in the year-ago period, finishing just ahead of the 21 cent consensus.

But Cirrus’ mixed performance in the just-concluded quarter is no surprise. The company had already called for a weaker performance in the first quarter of the fiscal year. The reason – its largest customer, i.e. Apple, was busy offloading inventories of the older iPhone 4S and ramp-up for the iPhone 5 was not coming until the September quarter. Hence, the June quarter proved to be a dampener.

I knew this before!

But the luster of Cirrus’ celestial guidance was so strong that investors didn’t mind a mixed quarterly report. The following words from CEO Jason Rhode gave fodder to Cirrus bulls like me: “As such, we expect revenue in the September quarter to grow more than 70% sequentially and continue significant growth in the December quarter.”  

However, again, this wasn’t unexpected. Three months back Mr. Rhode had said that Cirrus would “transition to a sharply higher level of revenue beginning in the September quarter.” And he was true to his words when the guidance came in way, way above what analysts are expecting for the September quarter. Cirrus projects revenue in the range of $170-$190 million, which beats the Street consensus of $129.7 million hands down.

The catalysts

Such an astounding outlook makes me rub my eyes in amazement. However, it seems that Cirrus is prepared for some windfall gains as Apple prepares the next iPhone and readies it for a fall release. And going by the guidance numbers, it also appears that Apple is either expecting sales of the next iPhone to reach a never-seen-before number or there’s another iDevice apart from the iPhone in the offing.

And you’re guessing it right. I’m talking about the iPad mini, which might be released along with the iPhone ... if it really exists. This particular theory might find a little bit of credibility if we compare Cirrus’ September quarter last year to the guidance issued this time. Cirrus had raked in revenue of $101.6 million in the September quarter last year, which would result in year-over-year growth of almost 80% at the mid-point of the current guidance.  

Now that’s some revenue growth. A growth of this magnitude for Cirrus would be possible if its content per iPhone has increased considerably, or Apple is looking to go on a rampage with the next iPhone, or we have another device such as the iPad mini in the works. All these possibilities are open at this time but only time can tell what we are going to see from Cupertino.

The outperformers

Cirrus has been firing on all cylinders this year and the stock has doubled (including the after-hours jump) from what it was at the beginning of the year. The company’s fortunes have soared along with Apple, which accounts for almost two-thirds of its revenue. While such reliance on Apple is no doubt a risk, no one is complaining as long as Cirrus rides the coattails of the smartphone behemoth like it has done so far.

In case you are looking for a more diversified pick that is also an Apple component supplier play, you can surely take a look at Skyworks. The company supplies chips for not only smartphones and tablets but for devices like e-readers, LED TVs, etc. It has also diversified its customer base and is featured in the latest Samsung Galaxy s III.

The takeaway

Both Skyworks and Cirrus stand to gain largely from the smartphone revolution and their stock price performance has been fantastic this year. Both of them possess catalysts in the form of the next iPhone, the next iPad, the next iPad mini and so on, with Skyworks boasting of Samsung and HTC as an added attraction. In such circumstances, it would surely make sense to consider these two for your portfolio if you haven’t bought them yet. 

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