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Cirrus Logic Inc. / (CRUS-NASDAQ) / $8.34Note: All new or revised material since the last report is highlighted.
Reason for Report: Mid Quarter Update Previous Edition: May 21, 2007
Recent Events
On May 9, 2007, CRUS announced selected financial information for 4Q07 and FY07. Total 4Q07 revenue was $43.6 million, versus $45.5 million in 3Q07, down 4.2% q/q and $42.2 million in 4Q06, up 3.3% y/y. Pro forma 4Q07 EPS was $0.09, versus $0.08 in 4Q06, up 12.5% y/y.
Overview
Key investment considerations as identified by analysts, are as follows:
Key Positive Arguments / Key Negative ArgumentsMarket leadership: The Company is well-positioned in the controller and fiber channel host adapter markets. / High fixed costs: The Company’s manufacturing facilities are seen as highly complex that requires high levels of fixed costs.
Gross margin expansion: With a richer mix of products and wafer price reductions, CRUS is expected to expand gross margin. / Competitive threats: The Consumer Entertainment IC market is very competitive, resulting in continued ASP erosion. Aggressive pricing from its competitors gives Cirrus Logic little choice but to lower ASPs to gain or maintain market share.
Impressive execution: CRUS has lately achieved key design wins for its audio converter and interface products in the high growth areas of Digital TV and portable audio players. / Legal proceedings: The Company is involved in legal proceedings with Silvaco Data Systems. While the outcome is unpredictable, CRUS could suffer potential liability costs in the event of an adverse ruling.
Improving focus: The Company expects to sharpen its focus on its analog business, with higher margin potential.
Texas-based Cirrus Logic, Inc. (CRUS or the Company) is engaged in the development and supply of analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets worldwide. Its products include analog and mixed-signal audio ICs for consumer, professional, and automotive entertainment applications, as well as high-precision analog and mixed-signal ICs for industrial applications, such as industrial measurement, analytical instruments, consumer utility, digital power meters, and seismic systems. Cirrus Logic also develops embedded processor ICs, such as audio-optimized digital signal processors for consumer and professional audio applications, and ARM-based embedded processors for consumer and industrial applications. Additional information is available at the Company website: http://www.cirrus.com
NOTE: The Company’s fiscal year ends on March 31; fiscal references differ from the calendar year end.
Revenue
Provided below is a summary of revenues as compiled by the Zacks Research Digest:
Total Revenue / 4Q06A / 2006A / 3Q07A / 4Q07A / 2007A / 1Q08E / 2Q08E / 2008E / 2009EZacks Consensus / $43.0 / $49.0 / $191.0 / $213.0
Digest High / $42.2 / $182.4 / $47.0 / $43.6 / $182.3 / $45.5 / $53.0 / $200.5 / $240.1
Digest low / $42.2 / $182.4 / $45.3 / $43.6 / $182.3 / $42.0 / $46.2 / $183.0 / $201.0
Digest Average / $42.2 / $182.4 / $45.5 / $43.6 / $182.3 / $42.8 / $48.2 / $190.2 / $216.1
Digest Average YoY Growth / -6.4% / -5.8% / 3.3% / -0.1% / -5.3% / 0.0% / 4.3% / 13.6%
Digest sequential Growth / -12.6% / -5.6% / -4.2% / -1.9% / 12.7%
Total revenue in 4Q07 stood at $43.6 million reflecting an increase of 3.3% y/y as compared to $42.2 million in 4Q06. FY07 total revenue stood at $182.3 million, reflecting a 0.1% decrease, as compared to $182.4 million in FY06. Total revenue during the quarter was above the street expectations of $42.51 million.
Revenue Analysis by Segment
The Mixed-signal audio product segment focuses on home audio, home video, professional audio, automotive, portable, and console/PC applications. Revenues increased slightly q/q to $20.3M. The increase was attributable to better than typical seasonal performance of audio converter products. June quarter revenues are projected by analysts to be flat, attributable to down in legacy products. Revenues are expected to pick up in FY08 on the back of the seasonal build ahead of year-end holidays and design wins in portable audio and automotive space.
The Industrial product line targets industrial process control, analytical instruments, power meter, seismic, and consumer utility applications. Revenue for this segment was up sequentially by $0.2 million to $13.5 million. Growth is seen by analysts to be low in FY08 as seismic (energy exploration) and power meter businesses are not likely to see the same growth as last year. In particular, seismic revenues have seen a slowdown recently, attributable to inventory absorption at a lead customer. However, according to analysts, power meters and process control revenues could continue to grow at a moderate rate this year once a pipeline of new products materializes.
The Embedded product group addresses multi-channel audio, networked audio, audio consulting and communications applications. Revenues for this segment declined 19% q/q to $9.9MM as revenues were impacted from the decline in legacy products, which form the bulk of revenues. June quarter revenues are expected to be flat sequentially.
Outlook
According to analysts, weaker demand for legacy products prompted the Company to guide revenues for 1Q08 in the range of $40.0 -$44.0 million. While the guidance was seen as disappointing, one analyst (Roth Capital) views this as a near-term phenomenon wherein legacy products are phasing out and the Company’s mixed signal audio products targeted at DTV, portable players, home theater systems and automotive audio will begin to drive the overall top-line growth.
Another analyst (Longbow) believes new digital TV and portable audio products are likely to be the next growth drivers for the Company. In the DTV space, CRUS is steadily moving towards securing design wins for the new class D codec and audio processor products.
Highlights of the revenue chart above are as follows:
§ 2008 forecasts (9 analysts) range from $183.0 million to $200.5 million; the average being $190.2 million.
§ 2009 forecasts (8 analysts) range from $201.0 million to $240.1 million; the average being $216.1 million.
For more details on Sales by individual analysts, please refer to the ‘Consensus’ tab of the CRUS spreadsheet.
Margins
Provided below is a summary of Margins as compiled by the Zacks Research Digest:
Margins / 4Q06A / 2006A / 3Q07A / 4Q07A / 2007A / 1Q08E / 2Q08E / 2008E / 2009EGross / 58.1% / 56.1% / 60.2% / 60.3% / 59.8% / 59.2% / 58.8% / 59.2% / 58.9%
Operating / 11.1% / 10.1% / 11.7% / 10.3% / 12.5% / 6.2% / 11.2% / 11.1% / 15.6%
Pre-Tax / 17.1% / 14.2% / 19.8% / 18.3% / 19.8% / 14.5% / 18.9% / 19.1% / 24.0%
Net / 17.1% / 14.2% / 18.4% / 18.0% / 19.4% / 14.9% / 19.6% / 19.4% / 22.9%
Gross profit in 4Q07 was $26.3 million, a 7.3% increase, as compared to $24.5 million in 4Q06. Gross margin stood at 60.3%, reflecting an increase of 220 bps y/y. 2007 gross profit stood at $109.1 million, a 6.5% increase, as compared to $102.4 million in 2006.
Operating income in 4Q07 was $4.5 million reflecting a 4.3% decrease as compared to $4.7 million in 4Q06. Operating income in 2007 was $22.7 million, reflecting a 22.7% increase as compared to $18.5 million in 2006. Combined research and development (R&D) and selling, general and administrative (SG&A) expenses for the quarter was $25.8 million. R&D and SG&A expenses included $1.0 million in stock-based compensation expense as well as $1.6 million in expenses associated with the Company's recently concluded stock-option review. R&D and SG&A expenses also included $1.0 million in facility-related charges, and a $0.4 million charge related to an executive termination agreement. Excluding these charges, combined non-GAAP R&D and SG&A expenses stood at $21.8 million.
4Q07 operating margin stood at 10.3%, reflecting a decrease of 80 bps y/y and 140 bps sequentially.
Outlook
Management expects gross margin to range between 58% - 60% for 1Q08. Combined GAAP R&D and SG&A expenses are expected to decline to $23.0 million, attributable to reduced expenses associated with the options investigation.
According to one analyst (Thomas Weisel), management noted operating margins could grow to 20.0% in coming quarters, through either upside revenue growth, particularly from portable audio and DTV, or incremental cost control initiatives.
Another analyst (Wachovia) believes margin expansion will serve as a major catalyst for CRUS. The analyst also believes an improvement in margins will lead to a higher valuation in the stock.
Another analyst (Longbow) expects margins to be steady in the near term, as softness in lower margin products could be countered by a similar softness in high margin seismic products.
Another analyst (Zacks Investment Research) believes that with energy costs and oil-based raw material costs on the rise, CRUS is seeing an increase in freight and production costs. Going forward, management is trying to lower wafer and test costs, reduce replacement costs and improve pricing. The analyst believes that these efforts will mitigate the impact of weakening margins.
For more details on margins by individual analysts, please refer to the ‘Consensus’ tab of the CRUS spreadsheet.
Earnings per Share
Provided below is a summary of EPS as compiled by the Zacks Research Digest:
EPS / 4Q06A / 2006A / 3Q07A / 4Q07A / 2007A / 1Q08E / 2Q08E / 2008E / 2009EZacks Consensus / $0.07 / $0.10 / $0.39 / $0.53
Digest High / $0.08 / $0.30 / $0.11 / $0.09 / $0.42 / $0.09 / $0.14 / $0.47 / $0.61
Digest Low / $0.08 / $0.30 / $0.09 / $0.09 / $0.40 / $0.06 / $0.09 / $0.36 / $0.48
Digest Avg. / $0.08 / $0.30 / $0.11 / $0.09 / $0.41 / $0.07 / $0.11 / $0.41 / $0.54
Digest Average YoY Growth / 17.3% / 12.5% / 36.3% / -27.8% / -12.0% / 0.0% / 32.1%
Digest sequential Growth / -11.1% / -12.0% / -14.7% / -19.8% / 46.2%
On a pro forma basis, EPS stood at $0.09 in 4Q07, as compared to $0.08 in 4Q06, reflecting an increase of 12.5% y/y and a decline of 14.7% sequentially. 2007 EPS stood at $0.41, up 36.3% y/y. 4Q07 EPS was slightly above the street consensus of $0.08.
GAAP EPS in 4Q07 was $0.08, down 52.9% y/y. This was after the effect of stock compensation expense. According to analysts, EPS was impacted by several non recurring tax items, which lowered the tax rate, restructuring charges and an impairment charge related to Magnum investment.
Outlook
Highlights from the above chart are:
· 2008 forecasts (9 analysts) range from $0.36 to $0.47; the average is $0.41.
· 2009 forecasts (8 analysts) range from $0.48 to $0.61; the average is $0.54.
Following the earnings release, all analysts decreased their EPS estimates for FY08, attributable to weak 4Q07 results and lower FY08 guidance. According to analysts, CRUS has launched several new mixed signal audio, low power audio IC and A/D converter products in 2Q07, targeting digital TVs, portable audio, and home theater systems. One analyst (Roth Capital) believes these markets represent key earnings drivers for FY08 and FY09.
For more details on earnings per share by individual analysts, please refer to the ‘EPS’ tab of the CRUS spreadsheet.
Target Price/Valuation
Of the nine analysts presently following the stock, six provided positive ratings and three provided neutral ratings. The Zacks Digest average target price quoted by analysts ranges from a low of $7.50 (Jefferies) to a high of $11.00 (Wachovia), with an average of $9.43 (13.07% upside from the current price). Most analysts have used a combination of P/E multiples and EPS projections to value CRUS.
The analyst (Wachovia) with the highest target price based the calculation on 3-3.8x CY08 estimated EPS to arrive at the target price of $11.00.
Provided below is a summary of valuation as compiled by Zacks Research Digest:
Rating DistributionPositive Ratings / 67.0%
Neutral Ratings / 33.0%
Negative Ratings / 0.0%
Max. Target Price / $11.00
Min. Target Price / $7.50
Avg. Target Price / $9.43
According to analysts, risks to the target price include an economic scenario influencing valuation and growth, competitive dynamics, effects of prices on IT spending, and product launches.
Management effectiveness metrics are as follows:
Metrics(TTM) / Company / Industry / S&P 500Return on Assets (ROA) / -2.45% / 7.42% / 8.27%
Return on Investments (ROI) / -3.10% / 9.63% / 12.18%
Return on Equity (ROE) / -3.73% / 14.40% / 20.66%
ROA, ROI and ROE of the Company are lower than lower market averages (as measured by S&P 500) of 8.27%, 12.18% and 20.66%, respectively.
For more details on valuations and ratings by individual analysts, please refer to the ‘Valuations’ tab of the CRUS spreadsheet.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance sheet
Total cash and marketable securities at the end of the fourth quarter were $272.0 million versus $264.0 million in the prior quarter. Inventory declined 19% q/q from $20.3million to $16.5million. Days of inventory declined from 102 days to 85 days. DSO increased modestly from 33 to 40 days.
CRUS gains penetration into key growth markets
According to analysts, in addition to selling products in a wide array of consumer, professional and automotive markets, CRUS achieved key design wins for its audio converter and interface products in the high growth areas of digital TV and portable audio players. Products are currently designed into digital TVs from Sharp, Sanyo and Hitachi, and into MP3 players from iRiver and Cowon. Analysts believe these two markets represent key revenue drivers for CRUS in FY08.
Other
Cirrus Logic has completed its internal investigation of the impact of option back dating on the financial statements. These financials have been filed with the SEC and the Company is now current on its filings. The Company has been informed by NASDAQ Listing Qualifications Panel that it can continue to be listed on the NASDAQ Global Select Market.