Cirrus Logic: Still Apple-Dependent (NASDAQ:CRUS)

Cirrus Logic, Inc. (NASDAQ:CRUS) is a fabless semiconductor company that specializes in the Digital-to-Analog (‘DAO’) market and offers a range of high-performance mixed-signal products. In this analysis, we aim to identify the key drivers that could support the company’s revenue growth outlook. To begin with, we conducted a thorough examination of the revenue breakdown of Cirrus Logic’s Audio and High-Performance Mixed Signal Products, in order to identify the segment that is driving the most growth. Subsequently, we analyzed the growth outlook of the codec and haptics market, and compared it to the company’s projected SAM growth, to gain further insight. Finally, we evaluated Cirrus Logic’s overall market positioning in the DAO market, with a particular focus on its audio and high-performance mixed-signal products.

High-Performance Mixed-Signal Segment Driving Growth

Source: Cirrus Logic, Khaveen Investments

The company has two segments which are Audio and High-Performance Mixed-Signal. From the table, its Audio segment accounted for the majority of revenue in FY2022 at 67% of revenue while its HPMS represented the remainder of its revenue (33.4%). Based on its annual report, its Audio segment includes revenue from products such as codecs which are “used to encode and decode or compress and decompress various types of data” according to GlobalSpec.

However, while its HPMS segment is smaller, its growth outpaced that of its Audio segment with a higher 3-year average of 65.77% compared to 4.57% for the Audio segment. Its HPMS segment revenue consists of products such as haptic drivers and power management ICs. According to Android Police, “haptics can be defined as tactile feedback produced by an electronic device that relays information to the end user”.

Source: Cirrus Logic, Khaveen Investments

Based on its annual reports, Apple is the company’s top customer and represented 79% of revenue in 2022 and has consistently remained as its top customer. The company’s revenue from Apple had grown by an average of 15% which is in line with its total revenue growth. In 2019, Apple first introduced its Haptic Touch technology which replaced 3D Touch for its iPhone XR models and expanded its use of Haptic Touch across all iPhone models with the iPhone 11 in 2020 and continued with the iPhone 12 and 13 models. We believe this explains the tremendous growth of its HPMS segment in FY2021 which ended in March 2021 following the adoption of Haptic Touch for the iPhone 11 models in 2020. However, in 2022, the company’s revenue from non-Apple revenue increased more than its Apple revenue at 60.7% as the company diversified its business to Android smartphone customers as mentioned in its earnings briefing.

Thus, this highlights its HPMS segment as its key revenue growth driver for the company which grew at an average of 15.04% supported by its relationship with Apple which incorporated Haptic Touch for its flagship phones in 2020 and its diversification to non-Apple customers in FY2022.

Product Development and Haptics Market Growth Outlook Support HPMS Segment

Source: Cirrus Logic, Khaveen Investments

Based on the company’s presentation slides for its Q3 2022, the company highlighted its total SAM in 2021 of $3.4 bln which consists of $2.4 bln from Audio and $1 bln from HPMS products. However, its HPMS segment’s SAM is expected to be larger than its Audio SAM by 2026 at $4.2 bln which is a CAGR of 33.2% compared to $3.1 bln for Audio which is a CAGR of 5.3%.

Source: Imarc Group, Technovio, Verified Market Research, Khaveen Investments

According to the company, 80% of its SAM is represented by the smartphone end market. The remainder consists of other devices including “laptops, tablets, wearables, and AR/VR”. The smartphone market is forecasted to grow at a CAGR of 3.5% through 2025 according to the IDC. The codec market is forecasted by Imarc Group to grow at a CAGR of 3.93% which is in line with the forecasted growth of the smartphone market. In comparison, the Haptics market is forecasted by Technavio to grow at a CAGR of 11.4% through 2027. According to Technavio, one of the market drivers of the haptics market is the development and advancement of haptic technologies such as HD Haptics and ultrahaptics. Additionally, the power management IC market is forecasted to grow at a CAGR of 7.8% which is higher than the codec market. Notwithstanding, the market CAGR for haptics and power management ICs is lower than the projected SAM CAGR by management for its HPMS segment at 33.2%.

As of March 26, 2022, we held approximately 4,000 pending and issued patents worldwide, which include approximately 1,350 granted U.S. patents, 440 U.S. pending patent applications and various international patents and applications. – Cirrus Logic Annual Report 2022

Based on GlobalData, the company’s total patent publications had increased in the past 10 years rapidly at an average growth of 25.1% per year. Furthermore, the company highlighted its focus on product development for its HPMS products.

Applying our mixed-signal engineering expertise to develop solutions in new, adjacent high-performance mixed signal applications. – Cirrus Logic Investor Presentation

Source: Khaveen Investments

According to its presentation, High performance mixed-signal represented half of its total patents in 2022. However, its revenue contribution from its HPMS is only 33.4%, thus we believe this supports its strategy as explained below to develop new solutions for the growth of its HPMS segment. We based our forecast of the company’s revenue growth for the Audio and HPMS segment based on its SAM CAGR from its presentation below. Overall, we expect it to have a 5-year average growth of 19.2%.

Source: Khaveen Investments

Performance Advantage Support Market Share Outlook

Based on the chart, the company’s analog market share had been stable in the past 8 years from 2.6% in 2015 to 2.3% in 2022. The company competes against various larger players such as Texas Instruments, ADI, Infineon, STMicro (STM) and Skyworks (SWKS).

Source: Cirrus Logic, Khaveen Investments

However, based on its SAM in 2021, we calculated its market share to be 46% for its Audio segment and 27% for its HPMS segment. This highlights its strong market positioning in the codec and haptics markets. We analyzed the company and its competitors codecs in the table below to determine which company has a competitive advantage based on product breadth and performance.

Source: Mouser, Khaveen Investments

As seen in the table, Cirrus Logic has the second largest number of codec products trailing behind Texas Instruments which highlights its strong product breadth. Moreover, the company’s max resolution is on par with TI and Tempto Semiconductor. However, its resolution trails behind ADI which has the highest and is below average. Though, its number of ADCs and DACs is the highest with DACs tied with ADI. Additionally, in our previous analysis of Apple, we determined that Apple has the highest average Audio score by DXOMark at 141 which is the highest among the top 5 smartphone makers, indicating its superior smartphone audio quality.

Source: Mouser, Cirrus Logic, Texas Instruments, Khaveen Investments

Moreover, we compared the company’s number of haptic products from Mouser Electronics to compare their portfolio breadth. Texas Instruments and Dialog Semiconductor have the greatest number of products followed by Cirrus Logic.

Overall, we believe the company has a performance advantage in audio products despite its lower product breadth to larger competitors, we forecasted the company’s market share in the analog market to increase to 3.8% by 2027.

Risk: High Apple Revenue Dependency

We believe one of the risks of the company is its strong reliance on Apple at around 80% of revenues. Moreover, the company stated that it faced pricing pressure from its reliance on Apple. Moreover, from its presentation, its products’ ASP is low at only between $0.4 to $2. Thus, we believe this could pose a risk to its revenue growth outlook.

In addition, our dependence on a limited number of key customers may make it easier for them to pressure us on price reductions. We have experienced pricing pressure from certain key customers and we expect that the average selling prices for certain of our products will decline from time to time, potentially reducing our revenue, margins, and earnings. – Cirrus Logic Annual Report 2022

Source: IDC, Company Data, Khaveen Investments

In the table above, we compared Cirrus’s revenue contribution from top smartphone makers and their market share in the smartphone market in Q4 2022. As seen, Apple’s revenue contribution is 79% of revenue but only 24.1% of market share, thus this highlights the company’s strong dependency on Apple. Moreover, we believe the company could face a risk if Apple decided to design its chips in-house with examples of other companies impacted below:

• Imagination Technologies: The chipmaker was impacted in 2017 as Apple decided to design its own graphics chips instead of using the company’s products.
• Intel: Apple broke its 15-year-long partnership with Intel (INTC) in 2020 by using their own M1 chips that are manufactured by TSMC instead of Intel’s x86 CPUs.
• Qualcomm, Broadcom and Infineon: According to EPS News, Apple is also designing its own chips sourced from QUALCOMM (QCOM), Broadcom (AVGO) and Infineon (OTCQX:IFNNY) including “baseband modems and transceivers suppliers.”
• Dialog Semiconductor: Realizing that Apple wanted to produce its own power management chips, Dialog Semiconductor sold its patents and a portion of its business to Apple in 2018.

Verdict

We believe that Cirrus Logic’s HPMS segment is the primary driver of the company’s revenue growth, averaging a robust 15.04%. This growth is buoyed by the firm’s relationship with Apple, which integrated Haptic Touch into its flagship phones in 2020, and Cirrus Logic’s diversification to non-Apple customers in 2022. As per the company’s presentation, its HPMS products accounted for half of its total patents in 2022. Nonetheless, its contribution to revenue stood at only 33.4%, which, in our estimation, underscores its strategy to develop new solutions to drive growth in this segment. We also believe that despite its narrower product breadth compared to larger competitors, Cirrus Logic possesses a performance advantage in audio and haptic products. Overall, we expect it to have a 5-year average growth of 19.2% and projected a rise in the firm’s market share in the analog market to 3.8% by 2027. Notwithstanding, based on the analysts’ consensus, the company’s price target is $104.63, which represents a modest upside of 1.8% as the company’s stock had already risen by 42% YTD. As such, we have rated CRUS stock as a Hold.