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Cypress (CY) Beats Estimates in Q1 Earnings, Revenues Lag

Cypress Semiconductor Corporation CY reported adjusted first-quarter 2016 earnings of a breakeven, better than the Zacks Consensus Estimate of a loss of 1 cent. Adjusted earnings exclude one-time items but include stock-based compensation expense.

Revenues

Cypress reported revenues of $425.2 million, down 6.9% sequentially. Revenues were within management’s guidance range of $410.0–$440.0 million but below the Zacks Consensus Estimate of $436.0 million.

Revenues by Business Units

Following the merger with Spansion Inc. in Mar 2015, Cypress continues to report revenues under the same four divisions: Programmable Systems Division (PSD), Memory Products Division (MPD), Data Communication Division (DCD) and Emerging Technology Division (ETD).

Revenues from the PSD segment increased 4% sequentially to $164.0 million, driven by strong growth in the automotive business. The legacy Cypress automotive business grew almost 32% year over year.

The MPD segment generated revenues of $215.1 million, down 17% sequentially due to the seasonal decline in memory, particularly in the company’s Flash business.

Revenues from DCD improved 15% sequentially to $20.1 million. The increase was driven by solid performance in the trackpad business and growth in USB Type-C.

The company continues to see strong design win momentum in the USB Type-C product.

ETD revenues were $26.0 million, up 20% sequentially, driven by strong growth in the company’s foundry business and additional revenue from Deca Tech.

Operating Results

Gross margin was 30.0%, down 180 basis points (bps) sequentially. The decrease was due to lower factory utilization as part of a lean inventory initiative, which aims to run the wafer fabs at a rate lower than actual demand capacity to burn off excess inventory.

Operating expenses (research & development + selling, general & administrative) of $148.5 million decreased 6.7% sequentially. As a percentage of sales, research and development expenses increased, while selling, general and administrative expense decreased. However, operating margin was (22.0%) versus (11.4%) in the year-ago quarter.

GAAP net income was ($104.2) million or a loss of 32 cents per share versus ($72.8) million or loss per share of 22 cents in the previous quarter. Excluding special items but including stock-based compensation expense, non-GAAP earnings per share came in at a breakeven compared with 6 cents in the previous quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $87.1 million against $227.6 million in the last quarter. Trade receivables were $297.9 million, up from $292.7 million in the prior quarter. Net inventory was $225.8 million, down 7.0% from fourth–quarter 2015.

During the quarter, Cypress’ cash flow from operations was roughly $13.7 million and capex was $13.0 million. The company also paid quarterly dividend worth $36.6 million.

Guidance

Management expects second-quarter 2016 revenues in the range of $440.0–$470.0 million. The Zacks Consensus Estimate is pegged at $455.0 million.

Consolidated gross margin is expected to be nearly 38.0%, depending on utilization, product and customer mix. Operating expenses are likely to be within $122–$124 million, while tax expense is estimated at $3.7 million.

Based on a share count of 339.5 million, non-GAAP earnings per share are expected in the range of 10 cents to 14 cents. The Zacks Consensus Estimate is pegged at 3 cents for the upcoming quarter.

Our Take

Cypress is a semiconductor company that offers high performance, mixed signal and programmable solutions. The company reported a decent quarter with the top line missing the Zacks Consensus Estimate but the bottom line exceeding the same.

During the quarter, design win momentum and market share gains continued. Cypress also announced that it will acquire Broadcom's Wireless Internet of Things (IoT) business and related assets in an all-cash transaction valued at $550 million. The deal will strengthen Cypress' position in the key embedded systems markets, namely automotive and industrial markets and high-growth IoT market.

We remain optimistic about the synergies associated with the Spansion merger. The integration remains well on track and Cypress is witnessing new opportunities at top-tier customers, particularly in the automotive and industrial markets. These markets now account for 59% of the company’s sales, bringing in more stable revenues and margins.

However, a weak and uncertain macro environment, limited visibility and intensifying competition remain as concerns. Moreover, the company revealed that its CEO, T.J. Rodgers will step down this week which could create uncertainty in the near term.

Stocks to Consider

Cypress has a Zacks Rank #2 (Buy). Investors may consider stocks such as Advanced Micro Devices AMD, GigPeak, Inc. GIG and Broadcom Limited AVGO, each of which carries a Zacks Rank #2 (Buy).

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