Detailed Small Cap Idea

CEO Interview: CRUS CEO Gets Serious with Money McBags

CRUS’s CEO Jason Rhode sat down with Money McBags for a detailed phone interview the other day to help Money McBags better understand CRUS’ competitive advantage, relationship with Apple, and energy business.  And in the course of the discussion, Money McBags counted only eight awkward moments of silence, four “I’d like to punch you in the nuts” harumphs, three “moans of annoyance,” and a partridge in a pear tree, so it went better than for what Money McBags’ had hoped.

Money McBags was going to post the interview as a podcast since it would save him time and allow you all to finally answer the question “if a dick joke is made in the woods, does anyone make a sound” (and apparently the answer is no.  Look, Money McBags isn’t saying it was a tough audience, but he’s heard more laughter coming from a viewing of Schindler’s List.  And shit, he didn’t even use his reverse Milli Vanilli joke that set new lows for bad puns), but the jackhole press *9 and enter passcode to record DIDN’T FUCKING WORK.  No really, the fucking thing recorded about as well as Moammar Qaddafi governs or about as well as Lindsay Lohan uses a credit card, so fuck Money McBags, really, so now he has to recreate the whole fucking thing from his notes.

Here’s the point, Money McBags has written about this company many times on the award winning When Genius Prevailed and has been banging it since it was less than 8 (dollars that is).  That said, he got nervous as fuck after their quarter in October as trends seemed a bit squishy and there were rumors of Apple dropping them (and Apple is ~54% of revenues) and as we all know with momentum names, once shit hits the fan, put the ponchos on and run for cover because they tend to turn quicker than Money McBags’ head when Elle Liberachi walks by him.  And as Money McBags didn’t have access to management to find out the real story, he chose to follow his gut and get the fuck out which was a good decision at the time as the stock dropped from the high teens to the low teens, but after another solid quarter they rocketed back up and once again piqued Money McBags interest like Jame Polk’s presidency or people who touch your junk.

After their last call, Money McBags had many questions for CRUS management to try to better understand what the fuck is going on with Apple, how strong that relationship is, what the possible new opportunities in LED can be, and if they ever ran in to the titriffic (and of age) Aimee Teegarden when she was in Austin filming Friday Night Lights.  Fortunately, CEO Jason Rhode agreed to come on the award winning When Genius Prevailed (and notice how Money McBags is letting that easy pun go) and answer Money McBags’ questions to help him get refreshed on the story.  Below is what Money McBags learned:

1. They win deals because of their custom chips, they are not interested in producing off the shelf, easily replicable chip sets.  This point can’t be stressed enough.  They want to be in “meaningfully differentiated” products where they work with the customers to get ingrained in their technologies as an integral part of the solution.  And with their Apple and Itron relationships, that is evident.  An example CEO Jason Rhode used to show the uniqueness of their product is that it’s not really all that easy to get a chip that will lower the volume of the music on you smart phone when you get a phone call and this is the kind of shit CRUS does best (and brief digression, but Money McBags isn’t sure if he should refer to the CEO as Dr. Rhode, Jason, or “career limiting move” for agreeing to this interview, so he’ll go with fewest lettered Jason from now on).

2.  They only have one smart phone customer because only one smart phone maker values the type of audio quality CRUS’ chips provide.   Money McBags knew Apple chose CRUS because they were interested in the audio quality given their ginormous music business, but it was interesting to hear Jason’s explanation as to why they haven’t won other smartphone deals.  Basically, the iPhone is the only smartphone with real docking capabilities that people can use as a stereo replacement etc. to push music out through larger speakers.  Given that, it makes sense that Apple would want to make sure the audio in their smart phones was higher quality than Roberto Bolano’s writing or Brooklyn Decker‘s vagina.  As other handhelds don’t give a shit about sound, they have no interest in paying the higher ASP for a CRUS product so there currently isn’t much of another smartphone audio market for CRUS to sell in to (that said, since they are in the biggest player in the market, it sort of isn’t all that important to win more smartphone deals, but the explanation does really help to understand why they have not won any deals other than the iPhone).

3.  If you keep saying “iPhone” and “Apple” on a call with Jason, his eyebrow twitches loud enough to hear it on the other end of the call.  Wow, saying Apple to Jason is almost like asking Newt Gingrich about his scumbaggery. Money McBags gets that Apple likes to keep things hushed and CRUS needs to keep Apple happier than Charlie Sheen’s taint, but the continued charade of calling them “our largest customer” is a bit Stepford-ish.  It’s really an irrelevant point, and Money McBags gets it, but should you ever run in to Jason at a cocktail party, first of all tell him Money McBags sent you, and secondly, just say “apple apple apple apple apple apple apple apple apple apple apple” and see if you can induce an ischmetic seizure (a transient unharmful one of course).


4.  Leading with: “taking Apple out of your revenues, you’re kind of the same company you were 3 years ago” is the quickest and easiest way to cause the CEO to Hulk out.  Logic bad, company good, Jason Rhode want smash.  Money McBags admits that the way he phrased the question couldn’t have been more dickish (and if the fuckers at had perfected the *9 record function, you all could have heard it) and he appreciates Jason’s logical response which he gave after mumbling a healthy dose of what was likely “fuck you and eat a bag of dick.”  Yes they have a big customer concentration, and yes Apple has been the bulk of their growth, but that’s because THEY HAVE FOCUSED ON APPLE (and Money McBags capitalized that on purpose to get CRUS’ very valid point across).  A company always has to make choices and when choosing between growing faster than Money McBags’ support of the Femen movement even if it is with just one customer and trying to grow in areas that aren’t experiencing industry changing growth just to diversify, it is best to choose the one customer.  So pointing to lackluster non-Apple growth is a stupid way of looking at shit and that is mainly because….


5.  They are ingrained in Apple products and not easily replaceable. And honestly, if you take one thing away from this write-up, it should be that Hillary Fisher is hot, but if you take two things away from this write up it should be that Hillary Fisher is hot and CRUS has a fucking hella tight relationship with Apple.  They aren’t an off the shelf chip, they are an integral part of the architecture and replacing them in current models is more difficult than replacing LeBron James on the Cavaliers or replacing hydrogen in a water molecule.  All the shit they do is proprietary and Apple would need to redesign how all of the other shit is connected and works together if they wanted a different chip.

The stuff CRUS does is custom and they have built a good rapport with their customer(s), developed unique products, and both companies have made big investments in the current architecture.  So while there might not be a long-term contract per se, and while there is no guarantee CRUS will be in future Apple products, they aren’t providing a commodity that can just be replaced with any Qualcomm, Dick, or Harry.  This point really can’t be stressed enough because it makes Money McBags feel much fucking better about CRUS’ positioning and their ability to keep growing with Apple.  Additionally, given the rapid smart phone refresh cycle, there is a constant demand for product.

When Money McBags relayed to Jason what a few portfolio managers have told him about not wanting to invest in CRUS because Apple has dropped other suppliers so there is no guarantee they won’t drop CRUS, Jason basically called those portofolio managers a bunch of asshats (ok, he said nothing of the sort, but there was a distinct change in the tone of his voice over such narrow thinking).  Jason’s point was that Apple has never dropped a supplier who had developed as deep of a relationship as they have with CRUS (and it is so deep that they actually complete each other’s sentences sometimes), the suppliers who have been dropped by Apple in the past were commodities or just fucked up the relationship (something those companies have admitted), and while he can never say never, CRUS is too ingrained in current devices to be replaced.  And Money McBags will say this once again, this is a huge fucking point of which to be aware (while this is a huge fucking joint of which to be aware).

6.  The number of chips they currently have in Apple products is “go fuck yourself.” Seriously, CRUS must have signed a stronger NDA with Apple than Elin Nordegren signed in her divorce.  When Money McBags asked Jason the simple question of how many chips they have with Apple, Jason referred Money McBags to the slide in their investor presentation on the website which Money McBags is pretty sure said 5 chips, but fucking a.  Perhaps Money McBags should have asked Jason to cough once for every chip they had but to be honest, at this part of the interview Money McBags had already toggled over to get his NSFW muff guessing in for the day so wasn’t thinking quickly enough.

7.  CRUS can win tablet business because most tablet devices are new and tablet makers give more of a shit about sound quality.  As noted above, CRUS has basically been given the Heisman by other smart phone makers who don’t give a fuck about sound, but with tablets obviously having bigger speakers and more integration opportunities with audio devices, tablet makers are more interested in getting high quality audio.  Also, as tablets are just starting to be produced and are in an immature market (though not as immature as the whoopie cushion market), their architectures are still in the early stages of being designed so it gives CRUS the opportunity to build their custom solutions before final designs have been made.

On the the last earnings call, CRUS announced that they won a tablet deal and when Money McBags asked Jason how big of an opportunity this could be, he smartly said something to the effect of “we like the opportunity, think it could be interesting, but there is basically one tablet that people buy so it’s not clear getting in to another tablet will move the needle.”  And that was all paraphrased thanks to’s recording feature sucking more dick than Carmella Bing in Welcome to Boobsville.

8.  No one at CRUS is clairvoyant.  When Money McBags asked about growth projections, Jason basically said “we don’t give full year guidance because it depends on the economy and I have no idea where the economy is going to be in 12 months.”  And while that answer is perfectly fair, it does concern Money McBags a bit that there is so little visibility in to CRUS’ future.

Money McBags did ask about the difference between their 15% long-term growth target and the $500MM revenue goal from their strategic plan that was mentioned on their last earnings call and the answer was that they are unrelated and pretty much meaningless to investors.  Basically revenue is going to grow as Apple grows right now so there is no fucking way they only grow 15%, it’s just not happening (Money McBags words, Jason’s subtle inference).  The public line is they are comfortable they will hit the 15% topline target and that is it.

Jason did say management is compensated on both that 15% annual growth target and getting operating profits in the top 1/3 of their peers and there were only two companies who hit on both those metrics, so CRUS is incented (which may not be a real word) to be a top performer.

9.  The LED opportunity could be really big, but honestly, who the fuck knows.  Jason said this is the coolest thing the company is doing (which means the company isn’t selling designer t-shirts or waiting to get in to see the Clock) and every semiconductor company is going after this because the market could be as much as 2B units in ~5 years.  Their chips should start shipping in the next 12-18 months and they basically help make LED lightbulbs dimmable (and “dimmable” also may or may not be a word, like “yingus” and “cockamole”).  While it is possible that another technology wins out like compact fluorescent light bulbs or matches, CRUS thinks LED is the disruptive technology as it brings digital technology to an analog world (and when Money McBags hears the buzz words “disruptive technology,” he gets more of a stiffy then when Kevin Federline hears the buzz words “Filet-O-Fish”).

Money McBags asked for some help in trying to gauge this opportunity and Jason said it is not unheard of for semi companies to get ~30% market share and the revenue could be $.40 to $.50 per device so if the market can scale to 2B units in a few years, it could be a $300MM opportunity on the high end, so yeah, that is pretty fucking interesting.  But to be clear, Jason was not saying that is what CRUS will get or that they will even get anything, he was just helping to size what an opportunity might look like.  It will remain a zero in Money McBags’ model for many Qs, but longterm it could provide some icing on the proverbial cake or some some saran wrap for the Louisiana Hotplate.

10.  They are looking at acquisitions with their cash, but not in a rush to do anything.  Jason was pretty adamant that if they buy anything, it has to have real synergies and not just be a bolt on acquisition for the sake of doing something with their ~$200MM cash.  He said he’d love to find something on the energy side coming from a power savvy angle but he is not going to buy a shitty company (and Money McBags believes those were his actual words, so once again, fuck you just because it might be cheap and the probability of finding something that adds value and is actionable is very low.  It sounds like before this management team took over, CRUS had a bunch of shitty acquisitions so they are now being very careful.

Money McBags also asked about just dividending the cash out to investors and Jason indicated that he preferred buybacks if anything and they bought a bunch of shares back after the stock fell last Fall (and the great lepidopterist and linguaphile Vladmir Nabokov might appreciate the last part of that line).  Basically they are happy to keep their cash and wait for growth opportunities which is certainly a reasonable strategy, but when Money McBags pointed out that they could forget the acquisitions and dividends and buybacks and just purchase ~10MM lap dances (and Austin does have a delightful Rick’s Cabaret), that seemed to set off a light bulb (and yes, Money McBags really made that suggestion).

11. CRUS has a huge deck. Yeah, we went there.  After ~40 minutes of talking business and Money McBags’ jokes falling flatter than an Olsen twin, Jason brought up the company’s outsized jutting appendage at the back of their building.  Apparently they use the deck for concerts and shit like that as Jason spoke quite fondly of the culture of CRUS which has a buzz due to the pace of hiring and the growing industry they are serving.  Jason said the fondest memories you have of work are when you are working hard on (and yes Money McBags typed hard on) something in which you believe, and as a company, CRUS is there right now.  People are motivated and enjoy each other and the company hosts happy hours where employees bring their kids and spouses while they also provide both air hockey and foosball tables (and thanks to the delightful and phonetic Jo-Dee Benson for confirmation of that).

That said, even though they are moving in to a new building (which by the way will cut their occupancy costs in half), Jason assured Money McBags that it will also have a huge deck to which Money McBags suggested they name it the “Lexington Steele.” which surprisingly met with a bit of a chuckle (hey, it only took ~43 minutes, but Money McBags knew once he buttered them up a bit, he could both figuratively and literally close with the big dick joke).  Money McBags also suggested they erect a statue of the guy who closed the Apple deal and put it in front of their new building but it sounded like that might get buried down on the suggestion list somewhere between “tell Apple to fuck off” and “fellate a condomless Magic Johnson.”

12. Ain’t nothing about which to worry. Money McBags closed the call by asking what Jason worries about most and he said he gets that question often and has no real answer for it.  For him the key is making sure CRUS is helping customers to be successful and he is looking forward to the next couple of years.


First of all, Money McBags wants to thank Jason and Ms. Jo-Dee Benson for their time (as well as Jeremy Allen, Bill Schnell, and himself for setting up the call).  While Money McBags may be just a simple dick joke writer, he is easily one of the top 4 small cap analysts in the world and he always appreciates when people can recognize the quality of his analysis through the Double Ds.

That said, Money McBags has a shitton more confidence in this company after talking with them as he has a better grasp on how critical/unique their chip is in Apple products, how deep that relationship goes, and why they haven’t been able to win other smartphone business and yet can win tablet business.  The message that Money McBags got out of this is that audio will grow inline with the growth of Apple products for at least the next few product launches while energy kind of is what it is.

So shit, their audio business is going to go from ~$152MM to ~$270MM in revenue this fiscal year (and their fiscal year ends in March) and there is no reason Apple isn’t going to grow at least as much in handhelds/tablets this upcoming fiscal year as last (ok, maybe the recession hits or Steve Jobs dies and the worst CEO in history takes over the company, but unlikely), so Money McBags will start the bidding at ~$390MM in audio revenue next year which is 44% audio growth (alright, that is a bit on the aggressive side since iPhones were up only 86% last Q, but the iPad is still crushing it, so there is upside in the products CRUS is in, but even if AAPL hits only 60% of their previous absolute $ growth in those products, CRUS would still reach ~$340MM top line).

Anyway, keeping energy flat at ~$100MM gets to ~$490MM revenue in the upside scenario and then throwing on a 55% gross margin and bumping operating costs 10% gets us to ~$1.90 of non-GAAP earnings and the company is trading at ~12x that right now with ~$2.50 per share of cash on the balance sheet so that is pretty fucking cheap for the growth (CRUS will earn ~$1.55 per share in the lower revenue growth scenario).  They should easily be trading at 15x and one could make the case for 20x which means the stock should trade at at least $29, so fuck, if you think the market is done selling off, Money McBags once again thinks this is a name to own (assuming Apple feels the way about CRUS Jason says they feel).  You just don’t find this kind of growth in many places trading at such a cheap multiple with a clean, cash heavy balance sheet.

And this is why small, individual investors really have no chance.  Without talking with Jason, Money McBags would have ~10% of the confidence he now has in this company and wouldn’t be buying it here, but because Money McBags is not just some random dick bag (he is some random dick bag writing dick jokes that people read), he was able to get access to management which is the only way to feel comfortable about investing in small companies.