Company Overview: 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 involved 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. 

CRUS Details

CRUS Rides on Higher Customer Engagement: Cirrus Logic Inc. (NASDAQ: CRUS) is a fabless semiconductor supplier that 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. 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.

The company is focused on various target markets and geographies to mitigate operating risks and reduces the exposure to volatility in any single market. The company also remains focused to increase its audio content and share in smartphone market. Further, expanding share in audio beyond smartphones along with new high-performance mixed signal solutions remain the key focus areas for CRUS. High performance mixed-signal solution contributed 12% of total revenues in FY19 and increased to 13% in FY20. The company expects the same to be ~19% of total revenues in FY21.

Cirrus Logic Growth Vectors (Source: Company Reports)

The company remains on track to gain from robust demand for components in smartphones, tablets, and wearables. This increase in the demand is expected to be a positive for the company’s top-line growth, going forward. Further, robust customer engagement across its portfolio is expected to be a tailwind for the company. Adding to the positives, higher demand for smart codecs, haptic drivers and augmented amplifiers in the android market are also expected to be key growth catalysts. The company has diversified its customer base in recent times and the 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. For 2019 and 2018, Apple Inc. contributed 78% and 81% of total revenues, respectively. 

A Look at 3QFY21 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings per share of $2.13, up from $1.41 per share reported in the year-ago period. Growth in the bottom-line was mainly marked by a higher revenue base. In 3QFY21, total revenue stood at $485.8 million, up ~30%, or from the figure of $374.7 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 (~93% of 3QFY21 total revenues) increased ~30.6% from the prior corresponding period and stood at $450.3 million. Nonetheless, revenues from non-portable audio and other products (~7% of 3QFY21 total revenues) came in at $35.5 million, up 19% year over year. 

During the quarter, non-GAAP gross profit came in at $251.7 million, increased by ~27.2% on pcp. Non-GAAP gross margin, however, contracted from 52.8% in 3QFY20 to 51.8% in 3QFY21. The company reported non-GAAP operating expenditure of $105.8 million, up ~2.5% year over year. During the quarter, non-GAAP operating income skyrocketed from $94.6 million reported in 3QFY20 and came in at $145.9 million in 3QFY21. Non-GAAP operating margin stood at 30%, up from 23.8% reported in the year-ago period.

(Figures in thousands, except per share data)

Key Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 49.83% of the total shareholdings while the Top 4 constitutes the maximum holding. Fidelity Management & Research Company LLC and The Vanguard Group, Inc. are holding a maximum stake in the company at 13.47% and 10.03%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group

Key Metrics & Decent Liquidity Position: CRUS is a cash-rich company with a strong balance sheet that ensures protection and rewards shareholders from its deep cash balances. The company generated $1.3 billion of operating cash flow over last 5 full fiscal years, with $226 million in the trailing twelve months. It had $370.6 million of cash, cash equivalents and marketable securities as of December 26, 2020. Notably, the company did not have any long-term debt at the end of the quarter. Accounts receivables at the end of the quarter came in at $244.8 million, up from $181.5 million recorded in the prior quarter. The available cash can be utilized for investment in growth initiatives, engaging in planned acquisitions, and enhancing shareholders’ value. In 3QFY21, the company authorized the repurchase of an additional $350 million stocks. The share repurchases are a good way of returning cash to investors while at the same time providing a boost to the bottom-line.

In 3QFY21, the company’s EBITDA margin stood at 51.8%, higher than the industry median of 50.8%, indicating higher profitability. In the same time span, net margin and operating margin of the company stood at 23.5% and 26.7%, higher than the industry median of 12.2% and 14.5%, respectively. During the quarter, ROE of the company stood at 8.4% as compared to the industry median of 3.4%. The current ratio of the company stood at 4.35x during 3QFY21, higher than 3QFY20 figure of 4.01x, depicting decent liquidity position. In 3QFY21, debt equity ratio of the company was 0.00x, as compared to the industry median of 0.34x.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: Stiff competition, adverse currency translations and a volatile macroeconomic environment pose threat to the company’s financial postion. 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, the company’s financial performance can be impacted by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward.

Outlook: For 4QFY21, CRUS anticipates revenues to be in the range of $280 million and $320 million, depicting a rise of 7.5% year over year, at the mid-point. The company expects GAAP gross margin to be in the ambit of 50% to 52%. Combined GAAP R&D and SG&A expenses are expected to be between $121 million and $127 million in 4QFY21. The company opines that a no debt obligations places it well to sail through the COVID-19 led turmoil and keep leveraging its growth opportunities. 

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~11%. The stock made a 52-week low and high of $47.04 and $103.25, respectively. On the technical analysis front, the stock has a support level of ~$80.77 and a resistance level of ~$90.82. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer average, considering its stiff competition, adverse currency translations, volatile macroeconomic environment, and customer concentration risk. 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 a few.  Considering the company’s track record of robust liquidity postion, decent 3QFY21 performance, encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $83.33, up by 1.9% on 01 March 2021.  

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

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