3 Brilliant Ways Cirrus Logic Is Investing in the Future

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Cirrus Logic (NASDAQ: CRUS) is known primarily for the audio chips it supplies to smartphone manufacturers. This has long been the company's biggest source of revenue, with Apple alone contributing 76% of sales in the most recent quarter. As Cirrus looks to the future, however, it's eyeing a trio of large opportunities that are right in its wheelhouse. At a pair of recent conference appearances, CEO Jason Rhode provided insight into the bets the company is making in digital headsets, microphones, and voice biometrics.

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Digital headsets are set to skyrocket

Although Apple introduced its wireless AirPods last year, the Android market has not adopted digital headsets as quickly as Cirrus had originally expected. However, Rhode noted that with Android OEMs now transitioning from micro-USB to USB-C connectivity, the trend toward digital headsets is accelerating.

That's great news for Cirrus, as the USB-C interface opens the door for headsets and other accessories with enhanced audio and richer features like noise cancellation. The USB-C connection will allow these headsets to be powered directly by the phone and not by an internal battery that needs to be continually charged.

Cirrus announced on its second-quarter earnings call that it had already released its first device for USB-C headsets -- a self-contained single chip solution that simplifies the end-design process for headset manufacturers. Rhode said he was surprised this didn't get more attention, and that Cirrus is seeing great uptake on that device already.

Of the 1.5 billion headsets sold each year, Rhode noted that just a small fraction are noise-canceling. But Cirrus expects that percentage will increase as the cost to include the feature drops dramatically. Rhode also said Cirrus is targeting the larger Android OEMs that have the potential to include these headsets "in-box" with the purchase of a phone.

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Taking the drama out of microphones

Microphones represent a relatively new market for Cirrus, which entered the business when it acquired Wolfson Microelectronics in 2014. Historically, mics have been a commodity product that carry lower margins than Cirrus' other products. But Rhode said he's more bullish on Cirrus' prospects in microphones today than he was at the time of acquisition, and believes the opportunity is a large one relative to the current size of the company.

For one thing, adding microphones to Cirrus' product mix makes it the company that can provide solutions for the full audio signal chain. On the input side, Rhode thinks microphones are "a good jelly bean product line -- everybody's going to need one."

Rhode said that producing reliable mics isn't easy, noting that the largest manufacturers seem to regularly make news -- the bad kind -- by "blowing up somebody's production." Cirrus sells tens of millions of mics per year, but that's a drop in the ocean when the biggest customers buy a billion mics or more each year. Cirrus is investing to increase its production capacity, believing that its customers would prefer to give their microphones business to a company already known for its reliability. Rhode noted:

... we probably would not go into microphones if we were not already the thing that the microphones are all connected to. But in a lot of these systems, there's 4 or 5 microphones connected to one of our smart codecs. That's $1.50 worth of content that's right next to our devices. And so if we can do what our customers are asking, which is take the drama out of it, which I'm increasingly confident we can do, then we can go and really change these devices and what they ought to be in the first place ... So, step one, really define ourselves as an exemplary microphone supplier. And then, step two, really create a system -- a chip set with microphones, smart codecs, etc. -- that really solve some major system problems for our customers. And at that point, I think it'll be a really valuable product line for Cirrus.

Voice ID is a huge market in the making

The market with the largest long-term potential for Cirrus is probably voice biometrics. Cirrus has developed a chip that uses a person's voice as a means of identification. The applications for this type of "voiceprint" ID are immense. Rhode explained:

If you think about it, anything that has a voice interface to it, it really should know that you're the enrolled user ... and if you're going to let it do things like read your email, I don't know about you, but I want it to be really, really sure it's me. Like fingerprint-level sure that it's me and not somebody else.

Voice biometrics are already used widely for things like voice-based internet search and fraud-prevention during calls to banks, but Cirrus' voice ID solution is not cloud-based and would instead be embedded on individual devices. The initial target for this technology would be phones -- not as a replacement for fingerprint ID, but as a complement for times when the user wants to remain in hands-free mode. And beyond phones, it's easy to envision a future where cars, as well as smart devices in the home -- from thermostats to TVs -- require a positive ID before carrying out voice-based commands.

None of these efforts is expected to contribute significantly to Cirrus' revenue picture this year. In fact, after revenue growth of 32% in fiscal year 2017, and 24% in the first quarter of fiscal 2018, Cirrus is now expecting a substantial slowdown for the remainder of this year, saying it anticipates only "modest revenue growth" over last year. But if any one of the investments above takes off in a major way, Cirrus should be able to find plenty of growth again in the years ahead.

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Andy Gould owns shares of AAPL and CRUS. The Motley Fool owns shares of and recommends AAPL. The Motley Fool recommends CRUS. The Motley Fool has a disclosure policy.