NEW YORK – With almost 60 percent of its business is coming from a single customer – in this case Apple, Inc., it’s not quite kosher to call Cirrus Logic an independent fabless chip company any more. For many in the electronics industry, Cirrus Logic today walks like a captive and talks like a captive company of Apple.
It’s clear that Cirrus Logic has little choice at this point but to do everything it can – from supply-chain management to specific investment choices – to satisfy its biggest customer’s wishes.
Cirrus is predicting its September quarter revenue to shoot up more than 70 percent sequentially – thanks to Apple. At a time when the rest of the industry will be grateful for single-digit growth in the third quarter, Cirrus’ projections are a gift horse that no company would look in the mouth.
Wall Street expects Cirrus Logic, come September, to get design wins in what could be Apple’s biggest product release in years – iPhone 5 or iPad Mini.
The Austin, Texas-based chip company has been gradually adding new technologies to advance its audio codec and secure its Apple design wins. This includes adding in its DSP package features like audio amplifiers and noise suppression and echo cancellation technology for the iPhone.
Cirrus’s chips are also believed to be a shoo-in for Apple’s highly anticipated mini iPad, a smaller-screen media tablet. Apple is reportedly looking to add a 7-inch screen tablet to complement its existing 9.7-inch iPads.
Getting ready with a steep product ramp -- without a hitch -- for the single biggest customer is no easy task. Jason Rhode (left), Cirrus Logic's CEO, talked about the importance of getting the device ready far in advance, securing capacity with fab partners, working with a number of back-end assembly partners and readying a broad array of advance packaging. However, Cirrus is no stranger to such meticulous preparations, noted Rhode. “Cirrus has been a fabless company since 1984 before fabless was cool,” he added.
Why such an intrigue?
Curiously enough, Cirrus Logic’s CEO and a cluster of financial analysts participating in a Cirrus Logic conference call Monday (July 30th) managed not to utter the word “Apple” even once during the Q&A session that lasted almost an hour. They danced around the topic by vaguely referring to “the biggest customer.”
Cirrus Logic would have been a good acquisition target for Apple if not for its current market valuation of 2.4B which is 10 times its 2009 valuation. The current valuation is basically because of its Apple business and the day Apple finds another vendor, Cirrus logic stock will nose dive, which will again make it a good acquisition target for Apple. Convoluted hah?
Except that Apple used a different audio vendor for Gen 1, maybe also Gen 2, and Cirrus beat them out of that socket for successive generations.
Could Cirrus be displaced in the future? Anything is possible, but once you're this deeply entrenched and making custom ICs for your biggest customer, I think you'd have to really screw up badly to lose the business at this point.
OK. I got the logistics of how Apple can buy Cirrus at a reasonable price.
What I don't understand is the reasons why Apple would every want to buy any perifpheral chip companies (including Authentic acquisition announced yesterday: http://www.eetimes.com/electronics-news/4391386/Apple-to-acquire-fingerprint-chip-firm-Authentec)
Would anyone care to walk me through its pros and cons?
Apple would want to acquire chip/other companies for several reasons.
1) it has 100B cash in Bank and investors are pestering them to use it somehow :D
2) Block access to key & uncommon tech to competition (Anolbit,Authentec)
3) Bring inhouse the key and high value components (CPU, maps) so that there dependency on others are reduced. (PAsemi, integrity, C3 ,Placebase)
Actually Cirrus logic doesnt fall into key tech/uncommon/high value components. Hence Apple will have less motivation to acquire them.
I agree with your assessment -- especially on Cirrus front. But then, here's the thing. That means, while Apple has everything to win, Cirrus will everything to lose, once it gets designed out. Shouldn't Cirrus get compensated for this very lopsided position they are now in?
OK, fair enough, Cirrus is compensated by getting an incredible revenue growth. But isn't it true that Cirrus is putting its life on the line by being Apple's captive? Once Cirrus loses Apple's account [which could happen], I can't imagine how possibly Cirrus can recover from such a devestating damage.
"But isn't it true that Cirrus is putting its life on the line by being Apple's captive? Once Cirrus loses Apple's account [which could happen], I can't imagine how possibly Cirrus can recover from such a devestating damage."
I can't either, but what *can* Cirrus do? I'm sure they'd be happy to get more customers and diversify their revenue stream, but such efforts will be constrained by the need to take care of Apple first.
Apple is the majority of their business, and they have every possible incentive to retain it. You may assume that they are talking to Apple daily about what it wants and what Apple plans to do in the future, and are actively working on designs intended to address Apple's expressed future needs.
Can they lose the account? Sure. But given their current position, what would it take for someone else to take it away from them? What incentive would Apple have to switch? The most likely would be a significantly component lower cost, but I'm not sure any other player could undercut Cirrus enough to tempt Apple and still make money and provide the sort of quality Apple will demand. I don't see Apple being dumb enough to switch without a very good reason. Moves that will kill a key supplier aren't ones that help you longer term.
I don't see any reason for Apple to buy them, either. Cirrus isn't doing anything proprietary that Apple would acquire them for to keep it out of other's hands. Right now, Apple has the best of both worlds - a captive subsidiary, for practical purposes devoted to them, but which they do not own and have no financial ties to save as a customer. If Cirrus suffers reverses and books large losses, Apple may need to qualify a different supplier, but is otherwise unaffected.
I agree. Cirrus may be in a precarious situation having so much revenue come from one customer, but on the other hand, at least they are getting that revenue. Is it guaranteed to last? No. But what is? I am sure they are trying hard to get more customers, but in the meantime, might as well keep riding this cash cow all the way to the bank.
I have another separate question for everyone.
i wrote in this story: Cirrus Logic’s behavior -- jealously guarding the name of its biggest customer -- and the financial community compliance strikes an odd note, especially since Cirrus Logic on Monday filed Form 10-Q with the SEC.
In fact, in the 10-Q, Cirrus Logic reported: “We had one end customer, Apple Inc. that purchased through multiple contract manufacturers and represented approximately 59 percent and 53 percent of the Company's total sales for the first quarter of fiscal years 2013 and 2012, respectively.”
So, I am still scratching my head why NOBODY in the conference call would NOT mention the name Apple at all.
Apple does not like its suppliers mentioning possible design wins and has penalized suppliers in the past for jumping the gun with announcements. Cirrus is also sworn to secrecy which seems to have scared them into not mentioning Apple at all.
Exactly. But the thing is that Apple already released its major supplier list in January this year. Cirrus Logic's name is on the document Apple released to public. Further Cirrus also disclosed Apple as its biggest customer in its 10-Q filed to SEC.
Clearly Apple is scaring every chip supplier because they can!
Fear has long been a management tactic in Apple's playbook. Fear of litigation is a huge one. Only a company like Samsung has deep enough pockets to take them on and even in their case its looking somewhat marginal.
Because it is an incredibly risky thing for stockholders. Regulations require them to report it in the 10-Q, but the execs are still hoping to downplay the risk. After all, their own stock and options have seen a 10x gain since 2009.
You asked previously what's in it for Cirrus. Well, the major shareholders and execs were handed what amounted to a 10x gain. No doubt exec bonuses have been nice since 2009. You're right. There doesn't seem to be much in it for Cirrus at this point, but that's because the major shareholders and execs have already been paid in advance. They just have to maintain for a while in order to slowly cash in. BTW, another method to get the price down for a takeover is for the major shareholders to dump their stock and cash out.
I think this is an interesting dynamic in the analyst calls, and it's not just with Cirrus. Executives at many companies bend over backwards not to mention specific companies, even when it's clear to everyone involved who they are talking about. Texas Instruments has at least a few times blamed declining wireless chip sales on "lower demand from a major customer." That customer is Nokia, and everyone knows it. But TI most of the time avoids mentioning this major customer by name. And most analysts, for whatever reason, seem to play along with it. It's all wink, wink, nudge, nudge.
The LED lighting is a big market but it is also very crowded and the profit margin is quite thin now. Anyway, it is necessary for Cirrus to expand the market base. Having Apple helps to boost their revenue but sooner it can become a big risk and big hole in business is always waiting ahead.
Like Dylan, I was going to point to TI. I think they show that losing a large customer does not equate to bankruptcy/irrelevance/etc. I think as long as Cirrus plans appropriately and continues to invest in new arenas then if they lose Apple they'd be fine. Sure they'd lose that massive revenue, but I think Cirrus would still be Cirrus. In the end, it was Cirrus that attracted Apple anyway. I would think they could land another lucrative deal, even if much smaller.
True...but I was thinking more in line with PortalPlayer. At one point, 90 percent of PortalPlayer's revenue came from Apple's iPod design win.
Imagine how devestated they were when they lost that socket. The company, however, was sold to Nvidia in 2007 at about $357 million -- so...may be it wasn't the end of the world...
We are all speculating but I'm sure both Apple and Cirrus are working hard to not to overly dependent on each other when at the same time they are in a hard embrace. They both know the rules of the market, I hope Cirrus has got parallel design teams churning out other products which can then replace with Apple's when and if they eventually divorce. In that case, IMO, they would see a dip for some time but should still hold on well.
I remember back in 1995, Cirrus was talking very big and touting themselves as the next $1 billion semiconductor company. Their stock went over $60 that Spring before ending the year around $20. It basically spent the next ten or so years declining all the way to $4 and that was before further losses during the 2008/2009 crash. On the good side, Jason Rhode was still toiling at UMD during that period.
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