Cirrus Logic's recent earnings report delivered a mixed message that has caught the attention of investors, resulting in the stock moving lower.
The semiconductor company reported notable strength in its second-quarter results, but market sentiment was dampened by its concerning outlook for the upcoming December quarter.
In the second quarter, Cirrus Logic exceeded expectations with a significant earnings beat, marking its sixth consecutive quarter of outperforming analysts' EPS estimates by at least $0.20.
Revenue for the quarter grew impressively by 12.6% year-over-year and 45% sequentially, reaching $541.9 million. This figure was at the higher end of Cirrus Logic's previously provided guidance range of $490-550 million, driven primarily by robust demand for components supplied to smartphone manufacturers.
However, the focus quickly shifted to Cirrus Logic's guidance for the third quarter. The company provided revenue guidance for the December quarter in the range of $480-540 million, which was notably below market expectations.
This guidance came as a disappointment and seemed to go beyond the company’s typical conservative approach to forecasting. The unexpected downside in the revenue projection has been a primary factor contributing to the stock's decline.
Cirrus Logic's reliance on Apple as its primary customer underscores the potential challenges the company faces. Apple accounted for a significant 87% of Cirrus Logic's fiscal year 2024 sales, an increase from 83% in fiscal 2023 and 79% in fiscal 2022.
Given this dependence, trends in Apple's business have a substantial impact on Cirrus Logic's performance. Notably, Apple's most recent quarterly results were modestly positive, with iPhone sales slightly exceeding expectations. However, Apple's guidance for its first quarter (December) was lighter than anticipated, which may have influenced Cirrus Logic’s outlook.
During the earnings call, Cirrus Logic addressed the guidance issue, noting that the second quarter benefitted from an extra week of high-volume production tied to the peak ramp period, which has affected the December quarter projections.
Additionally, the company explained that the prior year's December quarter included increased production for a major Android customer that began its ramp-up earlier than usual, skewing year-over-year comparisons for the current guidance.
Cirrus Logic has made strides in its core smartphone audio business, particularly with the introduction of its latest generation custom boosted amplifier and its new 22-nanometer smart codec.
These new products provide enhancements in power efficiency and audio processing capabilities, which are key in maintaining a competitive edge in the industry.
Beyond its smartphone-focused business, Cirrus Logic has been actively working to diversify its revenue streams. The company is optimistic about its progress in the laptop market.
Although the revenue contribution from this segment is still in the early stages, Cirrus Logic secured a significant mainstream design win with its latest PC codec during the second quarter.
The company also began shipping its first power product designed specifically for laptops across multiple Tier 1 customers' devices.
Despite the robust performance in the second quarter, investors remain cautious due to the weaker-than-expected guidance for the December quarter.
This guidance raised eyebrows given Cirrus Logic’s typically conservative approach and the recent weak performance of industry peer Qorvo, which cited significant softness in its Android business.
Unlike Qorvo, Cirrus Logic's heavy dependence on Apple was expected to shield it from similar issues, making the December guidance more surprising.
In summary, while Cirrus Logic demonstrated strong results in the second quarter, its outlook for the December quarter has cast a shadow over its otherwise solid performance.
The company’s ability to manage customer dependencies and navigate market fluctuations will be critical as it moves forward.
Investors will be closely watching to see if Cirrus Logic's conservative stance on guidance proves warranted or if the current cautious outlook indicates deeper concerns.