Q3 results slightly better on gross margin strength
CSR reported better than expected Q3 results with revenues/EBIT of $212m/$41.1m
ahead of UBSe of $210m/$35.1m and consensus of $217m/$39.6m. Underlying core
gross margins rose to 61.3% from 59.2% in Q2 and is the equal highest ever seen
from the company (equal with Q3 '13). Within the quarter, Voice & Music was the key
outperformer, growing 41% y-o-y and benefiting from strength in underlying handset
demand and also structural growth in speaker bars and connected audio solutions.
Disappointingly however, automotive declined further in Q3 (-19% y-o-y vs -18% in
Q2) as despite seeing growth in factory-fit solutions (which is now the majority of
revenue), competitive pressure in after-market solutions in China along with continued
declines in PND solutions, more than offset this.
Strength in audio and Some Bluetooth Smart traction
In Q3, CSR also announced that it had signed a further 20 licences for its aptX audio
codec, taking the total number to nearly 300. CSR has a strong breadth of customers
now for aptX and we believe is helping to strengthen the company's position in the
emerging wireless home entertainment market. In Bluetooth Smart, it remains a small
proportion of overall revenue but CSR highlights it has seen a number of Tier 1 wins
and that revenue approximately doubled y-o-y in Q3.
Management's expectations unchanged, we increase forecasts on margins
CSR's management is highlighting that its expectations remain unchanged for Q4. We
have left our revenue forecasts broadly unchanged (c1%, although higher Voice &
Music offsetting lower Auto), but increase our gross margins leading to 8%/5%/4%
increases to our '14E/'15E/'16E EPS forecasts.
Valuation: 900p based on Qualcomm offer price
Our 900p valuation for CSR is based on the recommended offer price for the shares
from Qualcomm. The court and general meetings to approve the transaction are
scheduled for the 4th December 2014 with the acquisition targeted to be effective by
the end of summer 2015.