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Will Smartphone Weakness Hit Cirrus Logic (CRUS) Q3 Earnings?

Zacks Equity Research

Cirrus Logic, Inc. CRUS is slated to release third-quarter fiscal 2019 results on Jan 30.

The company’s earnings record has been a mixed bag, beating estimates in two of the trailing four reported quarters and missing it twice, the average positive surprise being 97.22%.

Meanwhile, in the last reported quarter, the company delivered non-GAAP earnings per share of $1.08, which topped the Zacks Consensus Estimate of 74 cents but declined 20.6% year over year due to lower revenues and higher operating expenses.

Total revenues of $366.3 million surpassed the Zacks Consensus Estimate of $330 million. However, the same fell 14.1% year over year.

What to Expect in Q3

For the fiscal third quarter, the company trimmed revenue guidance to $300-340 million from the earlier view of $360-$400 million. The Zacks Consensus Estimate is pegged at $317.87 million, indicating a year-over-year drop of 34.2%.

The company also slashed operating expenses forecast to $102 million from $105 million, predicted earlier.

The Zacks Consensus Estimate for earnings stands at 78 cents, down 50.9% from the year-ago quarterly figure.

Cirrus Logic, Inc. Price and EPS Surprise

Cirrus Logic, Inc. Price and EPS Surprise | Cirrus Logic, Inc. Quote

Factors at Play

Cirrus Logic may have to pay the price of relying heavily on Apple AAPL as the company generates approximately 82% of its revenues through selling audio chips used in iPhone devices.

Recently, Apple announced a cut in its first-quarter fiscal 2019 guidance over declining iPhone sales. Waning demand for iPhone XR is a major concern. Apple warned that iPhone sales will decrease on a year-over-year basis, primarily on account of weak demand in Greater China and a fewer upgrades of its flagship device. This in turn, is likely to thwart Cirrus Logic’s top- and bottom-line results.

Notably, sluggish demand in the overall smartphone market has been hurting the company for quite some time. International Data Corporation (IDC) mentioned that one of the reasons for low growth in the third quarter of 2018 was the slowdown of smartphone shipment in China. Moreover, the market is estimated to have dipped 3% in the final quarter of 2018.

Cirrus’ management also predicts this tepid demand in the smartphone market to persist for some time now, eventually denting the company’s top line.

What Our Model Says

Our proven Zacks model clearly indicates that a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has maximum chances of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Cirrus currently has a Zacks Rank of 4 and an Earnings ESP of -2.81%.

Stocks to Consider

Here are two stocks that you may consider as our model shows that these have the right combination of elements to beat on earnings in the upcoming releases:

Twitter, Inc. TWTR has an Earnings ESP of +26.55% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here

GTT Communications, Inc. GTT has an Earnings ESP of +173.53% and a Zacks Rank #2.

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