Did Everyone Get It Wrong?


April 17, 2013 (11:00 pm)

Shares of Apple dropped precipitously today, and have officially erased over a year’s worth of gains. An announcement by Cirrus Logic, an important supplier of components for Apple products, spooked investors.

Cirrus “announced that it will record a total net inventory reserve of $23.3 million of which approximately $20.7 million is due to a decreased forecast for a high volume product as the customer migrates to one of Cirrus Logics newer components. The $20.7 million inventory reserve is expected to result in a decrease in gross margin for the quarter of slightly more than 10 percent to approximately 40.4 percent… the company expects margins to return to the 50 to 52 percent range on revenue of $150 to $170 million in the first fiscal quarter.”

A) This doesn’t affect Apple. Of course, that “customer” is expected to be Apple. And it seems that the only part of the announcement that was read by investors today was the phrase “decreased forecast for a high volume product.” They (and we, until later this afternoon) didn’t read the rest of the passage. When taken in whole, Cirrus makes it clear that a large customer (yes, it is very likely Apple) is shifting from Cirrus’ highest volume product to a newer component. This affects Cirrus’ margins. As we’ve all learned from watching Apple, product transitions are not cheap. They cause margins to decline for a period of time. As economies of scale kick back in and the company becomes more proficient at manufacturing the product, margins begin to rise again. And Cirrus explains that they exactly that to happen.

So this announcement makes it clear that Cirrus’ margins are going to decline while they transition to this newer component. But why does this necessarily affect Apple? Nowhere do they state that they are receiving less orders. Only less orders for their largest volume product, which are to be substituted for the new product. While in the near-term, Cirrus will take a hit on margins, their revenue should not be affected. And Apple really shouldn’t be impacted at all.

B) This could be great news for Apple investors. One aspect that hasn’t been reported on (that we’ve read so far, at least), is easily understood if you take a step back. So Cirrus Logic is taking an inventory reserve and pre-announcing weak margins due to a new product transition during the March quarter. Clearly, they did not expect this transition to take place in the March quarter when they initially issued guidance just ten weeks ago. So what happened? The first thing that comes to mind is that their largest customer (Apple) requested to push up the transition to a newer component. It’s not hard to connect the dots. Apple may have pushed up their time frame for the launch of the next generation iPhone, and requested that Cirrus Logic ship their latest generation components early. Does this announcement actually hint that Apple will release the iPhone 5S (or iPhone 6, whatever it may be called) earlier than expected at WWDC in June? The timing may be right.

So while Apple shares got pummeled today due to this announcement, we don’t believe it actually affects the company financially. It may, in fact, be great news for Apple investors. It could be that everybody got this news completely wrong.

  • gmatija

    nicely writen! thank you for the inside
    M