We are maintaining our fair value estimate and moat rating for Apple (AAPL) after one of its tightest chip suppliers, Cirrus Logic (CRUS), issued an earnings warning that included a dismal outlook for the June quarter and a hefty inventory write-off that points to soft demand for the iPhone 5. On the surface, Cirrus' announcement can only be construed as a negative for Apple, but perhaps not a catastrophe. Cirrus' comments also may indicate that an Apple iPhone refresh might come in the summer months.
Cirrus' revenue for the March quarter of $207 million was modestly below the midpoint of the company's forecast range of $200 million-$220 million announced in late January. We view these sales levels as another data point that indicates that Apple will be hard-pressed to report a blowout March quarter as in years' past, but since sales levels were not out of Cirrus' forecast range, we also don't think that iPhone sales unexpectedly fell off a cliff in the March quarter, either. The bigger news came from Cirrus' write-off of $20.7 million of inventory pertaining to Apple components in the March quarter, as well as dreadful revenue guidance for the June quarter, expecting $150 million-$170 million versus Street estimates of $195 million.
If Apple's product mix were to stay the same through the summer, we'd be highly disappointed by these comments. However, we view Cirrus' remark that the customer (that is, Apple) is migrating to newer components as an indicator of Apple's product mix changing, which may mean that a summer iPhone 5S launch is on the way and would understandably reduce demand for the iPhone 5. If these new parts carry lower prices, Cirrus' sales may take a more pronounced hit that has less to do with Apple's unit sales. Furthermore, as Apple prepares to sell the iPhone 5 at lower prices once the 5S is launched, the company may use cheaper Cirrus parts in the iPhone 5 going forward in order to cut costs and still earn solid gross margins on the device. Thus, Apple may have failed to sell as many iPhone 5s as initially expected (hardly surprising), but we're hesitant to declare that Cirrus' warning is a sign that iPhone 5 sales are continuing to fall at an even faster pace.
Sentiment: Strong Buy
I think Apple should have alerted CRUS earlier to permit a better tactical execution and reduce inventories. Did Apple say "Make all the chips you can" and CRUS complied and then 6 months later Apple said "Wait a minute, not so fast and not so much."
I read where Samsung spent $1 billion in advertising to make it competitive to the iPhone. There have been other technical reports that claim Samsung products are not as reliable as Apple. I think Apple did not fully anticipated the fierce competition from Samsung.
Post Steve Jobs, Apple really seems to have had a short-term stumble. All this harkens back to the high anxiety people have had over Apple providing 45 percent of CRUS's business. This is a knock against CRUS management that they were unable to diversify.
If there were no inventory write down by CRUS it would either denote a flawless execution between Apple and CRUS to change over to new products or absent the flawless execution, the write down signifies new Apple products in the pipeline. Essentially a fumbled hand off.
Just about no company executes flawlessly.
IBM stumbled going from computers to services; Intel is stumbling going from PC to mobile; Dell and Hewlett-Packard appear to have stumbled and can't get up. AOL has never really recovered, Yahoo still struggles, and Microsoft continually stumbles.
So if / when Apple and CRUS recover, it will say a great deal. Just as the recovery of IBM said a great deal about it.
As far as theinventory charge, I can not speak. My guess is Apple sold 8 10 million units of a whole bunch older products. Cirrus does not know how much to write off yet but it will not be more because that is what they likely have in stock. But as for the Apple only issue , that was not an execution error. They had to ale care of 80 of the revenue for sure and then develop new products. They are coming and I think big starting Sept quarter.
Go look at the job sheets, read the cc notes, put the two together, major new vendors start in Sept Quarter enough to make a difference to more than one customer. They got this right. We should still be trading at 40 plus today based on future growth.
dg you make valid points but hindsight is 20/20 and we can only hope that this 20 mill will be made up to CRUS in a long term business parnership with new innovative products that continue to wow users. And I believe it will continue, if you dont then its time to sell and move on, but after all these years I have come to believe that it is cyclical like autos.........and this off cycle is the BUY CYCLE!! mk is right am waiting to hear the cc after earnings which should be really interesting
ps......man we never got so much press on CNBC when we were doing GREAT!! what clowns those guys are.........
Sentiment: Strong Buy
Where did you find that. Interesting. Still MK is probably right as you would not write that much stuff if the chips were the brand new ones #$%$ will be around longer it is the 4 and old pads that have technology that is going away. The 21 m is the high end estimate. What it looks like right now is that Apple had a OK quarter and is expecting some modest softest that is normal has they announce new products in June and start selling in July. We went thought on June quarter when Apple did great Cirrus did bad but the sept quarter for CRUS was way ahead. This looks like the same thing all over again.
hi grade, we be getting the smack down again! CRUS needs to give us a bonus or something!! morningstar said it today at noonish it was posted on etrade and it makes sense this is WAY WAY OVERDONE as always
Sentiment: Strong Buy
Grade, you sounded extremely weary in your earlier post. Are you overly exposed to this stock?
Do you believe in 'selling down to your sleep level' or have you held on to all your holding?