Company Overview: Cirrus Logic Inc. (NASDAQ: CRUS) is a fabless semiconductor supplier, which is involved in activities of manufacturing, developing, and marketing analog, mixed-signal, and audio DSP integrated circuits. The company’s low-power, high accuracy mixed-signal managing solutions create innovative user experiences for leading mobile and consumer applications across the world. The company has its business in various locations in the United States, the United Kingdom, Spain, the People’s Republic of China, South Korea, Japan, Singapore, and Taiwan.

CRUS Details

Geographical Expansion and Robust Product Adoption are Key Positives: Cirrus Logic Inc. (NASDAQ: CRUS) was incorporated in California in 1984 and became a public company in 1989. CRUS is a fabless semiconductor supplier, which is engaged in the development and marketing of analog, mixed-signal, and audio DSP integrated circuits (ICs). The company’s chips are used in a broad range of industrial and consumer markets, along with wearables such as smart watches, action cameras, smart bands, and VR headsets. The company reports under two segments namely, Portable Audio Products and Non-Portable Audio and Other Products. Portable Audio Products contributed ~89.5% of fiscal 2020 revenues while Non-Portable Audio and Other Products made up the remaining 10.5%. The company also sells its products through both direct and indirect sales channels.

Cirrus Logic Inc. has always endeavored to be an early entrant in delivering chips to the fast-growing technologies. Starting with providing high-end graphic chips, the company has expanded its product portfolio and now its chips are used in DVD players/recorders, disc drives, sound chips for computers, professional audio, mobile technologies, and voice transmission.  In FY20, the company revealed a range of new products linked to the flagship and mid-tier smartphones and the emerging digital headset market. Solid customer engagement across its portfolio is expected to be a tailwind.

It is worth mentioning that revenue growth is a key metric for any company as it is a vital part of growth projections and involved in strategic decision-making. The company’s organic growth story remains remarkable. The company’s revenue witnessed a CAGR of 19% over the period of 2010–2020. Higher revenues will expand margins and increase profitability in the long-run.

Historical Financial Performance (Source: Company Reports)

The company remains focused on various target markets and geographies to mitigate operating risks and reduces the exposure to volatility in any single market. We also note that the customer base has diversified in recent times. The company’s list of customers includes various top electronic manufacturers across the globe. Notably, the company’s top ten largest customers represented ~93% of fiscal 2020 revenues. Out of 10 customers, Apple Inc. is the largest one, representing nearly 79% of Cirrus Logic’s FY20 sales.

Going forward, the emerging trend of computing in smart devices is a key catalyst for semiconductor industry. Rising demand for the company’s products in the mobile market and other applications involving tablets, laptops and digital headsets is likely to be a constant boon in the near future. Buoyant demand for smart codecs boosted amplifiers and haptic drivers in the Android market remain a key catalyst.

4QFY20 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings per share of 68 cents, up from 37 cents reported in the year-ago period. Growth in the bottom-line was marked by a higher revenue base and reduced operating expenses. In 4QFY20, total revenue stood at $279.3 million, up ~16%, or from the figure of $240.2 million, reported in the year-ago period. Top-line was positively impacted by higher component shipments in smartphones and digital headsets, as well as increased content in smartphones and tablets. Segment-wise, portable audio product revenues (~89% of 4QFY20 total revenues) increased ~21% from the prior corresponding period and stood at $249.7 million. Nonetheless, revenues from non-portable audio and other products (~11% of 4QFY20 total revenues) came in at $29.6 million, down 11% year over year. Notably, the company’s largest customer, apparently Apple, represented 75% of its sales for the reported quarter.

4QFY20 Key Highlights (Source: Company Reports)

Operating Highlights: During the quarter, non-GAAP gross profit came in at $146.3 million, increased by ~17% on pcp. Non-GAAP gross margin expanded from 52% in 4QFY19 to 52.4%, mainly due to supply-chain efficiencies, favorable product mix and cost reductions on certain products. The company reported non-GAAP operating expenditure of $98.7 million, down ~4% year over. During the quarter, non-GAAP operating income skyrocketed from $22 million and came in at $47.6 in 4QFY20. Non-GAAP operating margin stood at 17.1%, up from 9.2% reported in the year-ago period.

Robust Balance Sheet and Cash Flow Position: CRUS is a cash-rich company with a strong balance sheet, which guarantees protection and rewards shareholders from its deep cash balances. The company generated $49.3 million of cash from operating activities in 4QFY20. It had $314.1 million of cash, cash equivalents and marketable securities as of March 28, 2020. Notably, the company did not have any long-term debt at the end of the quarter. The available cash can be utilized for investment in growth initiatives, engaging in planned acquisitions, and enhancing shareholders’ value.

Regularly Returns Value to Shareholders:  In 4QFY20, the company repurchased worth $24.2 million stocks. In FY20, the company bought back $120 million shares. As of March 28, 2020, $120 million shares remain available for repurchase. The share repurchases are a good way of returning cash to investors while at the same time providing a boost to the bottom-line.

Balance Sheet Highlights (Source: Company Reports)

Recent News: In a recent update, the company stated that it is leveraging its technology leadership in low-power, low-latency mixed-signal processing to build an innovative product portfolio of haptic and sensing integrated circuits (ICs). Cirrus Logic’s CS40L25 family of boosted haptic drivers will result in robust customer engagement across its portfolio.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 49.62% of the total shareholding. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum interests in the company at 12.23% and 10.59%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported FY20 gross margin at 52.6%, higher than the industry median of 50.8%. EBITDA margin during FY20, stood at 20.6%, higher than the industry median of 18.7%. Net margin in the same time span stood at 12.4%, higher than the industry median of 6.8%. FY20 debt to equity ratio stood at 0.00x, lower than the industry median of 0.28x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company faces stiff competition from semiconductor suppliers that provides standard semiconductors, fully customized integrated circuits, and application-specific standard products. A significant portion of the company’s revenue comes from its biggest customer, Apple. This implies that customer concentration risk is higher for the company. Further, adverse currency translations, volatile macroeconomic environment and global pandemic led by COVID-19 outbreak are persistent challenges to the company.

Outlook: The company is well-placed to stay afloat in this difficult time led by coronavirus crisis and emerge stronger over the long run. The company stated that with ~$600 million in cash and no debt obligations, it is well-positioned to sail through this turmoil and keep leveraging its growth opportunities. The company also opines that a robust supply chain and strong cash generation ability have been key catalysts for future growth. For 1QFY21, CRUS expects revenues to be in the range of $200 million and $250 million. Gross margin on GAAP basis is expected to be in the range of 51% to 53% and GAAP R&D and SG&A expenses together are estimated to be in the ambit of $111 million and $117 million. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology- EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CRUS closed at $66.48 with a market capitalization of ~$3.88 billion. The stock made a 52-week low and high of $43.83 and $91.63, respectively, and is currently trading below the average of its 52-week trading range. The stock gave positive returns of ~51.97% and ~1.53% in the last one year and one month, respectively. Higher adoption of artificial intelligence and machine learning capabilities like gaming, automotive and blockchain are driving demand for semiconductor stocks, which bodes well for the company. Notably, the company is set to report its 1QFY21 results on August 3, 2020. Considering the above factors, we have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Maxim Integrated Products Inc (NASDAQ: MXIM), Skyworks Solutions Inc (NASDAQ: SWKS), NXP Semiconductors NV (NASDAQ: NXPI), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $66.48, down 0.4% on 20 July 2020.

CRUS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)