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Bull of the Day

Apple’s decision to remove the headphone jack from iPhone 7 surprised many, but this audio chipmaker’s content increased substantially and the transition represents huge growth opportunity going forward.
 
The Company
 
Founded in 1984 and headquartered in Austin, Texas, Cirrus Logic (CRUS - Free Report) is a supplier of high-precision analog and digital signal processing components for a variety of audio, energy and industrial applications. They have ~1,380 employees and ~3,200 customers worldwide. Majority of their products are sold through direct sales channels.

The company has a strong intellectual property portfolio with 2,400 patents issued and pending. Cirrus Logic is the only supplier of a complete audio IC solution from capture to playback. Their audio chips are used in the leading smartphone brands, tablets, digital headsets, wearables and many emerging smart home applications.
 
Apple is CRUS’s largest customer, accounting for ~78% of the revenue in the reported quarter though the company develops solutions for many industry leading global brands.  

Jack-less iPhone a Boon for Cirrus
 
Apple’s decision to remove the headphone jack has been great for this company. Their content in each iPhone 7 unit has gone up substantially because their chips are used in new lightning EarPods and adapter.
 
This is a huge opportunity for Cirrus because Apple sells about 45 million units in a quarter and is expected to sell 70 million in the holiday quarter.
 
Many other smartphone makers are also making the switch from tradition headphones to digital headphones, following’s Apple’s lead.
 
Excellent Earnings and Upbeat Guidance
 
The chipmaker reported its Q2 fiscal 2017 results on October 27. Revenue of $428.6 million came in above the high end of their guidance thanks to better-than-expected demand for some portable audio products.
 
Adjusted earnings of $1.24 per share were substantially above the Zacks Consensus Estimate of $0.95 per share.
 
“We are extremely pleased with our progress in the September quarter as we began volume shipments of our new digital headset solution, expanded our share with boosted amplifiers and ramped production in a mid-tier smartphone at another leading customer”, said the CEO.
 
They also raised their guidance for the current year after solid results. Revenue is expected to range between $475 million and $515 million while GAAP gross margin is expected to be between 47 and 49%
 
Estimates Soaring
 
After the big beat and upgraded guidance, analysts have raised their estimates for the company. Zacks Consensus Estimate for the current year and next fiscal year have soared to $3.73 per share and $4.41 per share respectively, up from $2.83 and $3.35, before the results. Rising estimates sent the stock back to Zacks Rank #1 (Strong Buy).
 
The company has an excellent record of beating as can be seen from the following “Price, Consensus and EPS Surprise Chart”:
 


The Bottom Line

 
Audio/video features continue to grow in complexity and differentiation value. While they continue to expand in high-end devices, they have now started moving into mid-range devices. These features continue to expand beyond smartphones and tablets, into wearables, accessories, automotive and connected homes.
 
With its leadership position in Analog and Mixed Signal Technology and focus on fast growing markets, Cirrus seems to be well positioned for solid growth in coming quarters.
 
The company is highly dependent on a single customer, so that makes the stock a bit risky but I think it’s worth a look due to growth potential.
 
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