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Cypress (CY) Q3 Earnings Beat on Strong Auto & IoT Growth

Cypress Semiconductor Corp. CY reported third-quarter 2017 earnings per share of 27 cents, which beat the Zacks Consensus Estimate by 4 cents.

The company reported non-GAAP revenues of $605 million, which came in line with the Zacks Consensus Estimate. The figure was within the guided range of $585-$615 million and up 1.8% sequentially.

The robust top-line growth can primarily be attributed to improvement in automotive, IoT wireless connectivity and USB-C solutions.

Driven by growth of these segments, the company has been performing well for quite some time.

Following the strong third-quarter earnings release on Oct 26, share price is up 4.1%. Also, the company outperformed the industry it belongs to on a year-to-date basis. The company returned 42.7%, while the industry grew 31.1% over the same time frame.

Quarter Details

Last year, the company reorganized its reporting structure into two divisions. These divisions are Microcontroller and Connectivity Division (MCD) and Memory Products Division (MPD).

Notably, MCD includes Microcontroller and PSoC product lines of the former Programmable Systems Division, Wireless Connectivity/IoT and USB product lines of the former Data Communications Division, the foundry business from the former Emerging Technologies Division (ETD) and the Intellectual Property Business Unit, which was formerly part of the Memory Products Division.

Revenues from MCD increased 4% sequentially to $373.6 million, driven by strong growth in both wireless and wired connectivity. This segment accounted for 62% of third-quarter revenues. The company’s IoT wireless connectivity increased 6% sequentially and 80% from the year-ago quarter.

The other division, MPD, includes Flash, SRAM and specialty memories, as well as the AgigA Tech subsidiary, which was formerly part of ETD. Revenues from this segment, which accounted for the remaining 38% of third-quarter revenues, decreased 1% sequentially and 4% year over year to $231.0 million.

The company’s wireless connectivity platform performed well in the third quarter. Its WICED SDK, saw an increase of 30% sequentially in download rate. Moreover, its low-power wireless MCUs are gaining a lot of traction as they are connecting new products like LEDVANCE's HomeKit-enabled BLE lighting. It also noted that the adoption of 802.11ac and Bluetooth into emerging IoT platforms will bode well for the company’s growth in the near term.

Cypress’ USB-C product continues to witness rapid penetration. Its customer base grew more than 50% on a year-over-year basis in the third quarter.  Its USB-C registered record revenues in the third quarter as design wins went into production in the mobile and PC segments. Coming to the numbers, 78 unique models of PCs are expected to ship with Cypress USB-C in 2017, which is expected to further grow above 120 by 2018.

Notably, on a year-to-date basis, automotive revenues grew 17% in the third quarter. The increase was driven by content in ADAS, gateway, wireless and infotainment with advanced coexistence and additional requirements for cyber security and functional safety.

Operating Results

Gross margin was 43.0%, increasing 210 basis points (bps) sequentially. Operating income of $114.8 million increased 25.9% sequentially.

GAAP net loss was $11.0 million compared with net loss of $22.9 million in the previous quarter. Non-GAAP earnings per share came in at 27 cents compared with 21 cents in the previous quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $488.0 million compared with $108.8 million in the last quarter. Trade receivables were $356.5 million, increasing from $336.5 million in the previous quarter. Net inventory was $287.0 million, decreasing from $311.8 million in the previous quarter.

During the quarter, Cypress’ cash flow from operations was approximately $143.8 million and capex was $17.1 million. The company also paid quarterly dividend of $36.3 million or 11 cents per share.

Q4 Guidance

Management expects fourth-quarter 2017 revenues in the range of $575-$610 million, declining 2%. The guidance reflects continued growth in PSoC, USB-C and memory, offset by seasonal declines in the consumer segment. The Zacks Consensus Estimate is pegged at $597.8 million.

Consolidated GAAP gross margin is expected to be roughly in the range of 42-43%, depending on utilization, product and customer mix. Pro forma gross margin is expected in the range of roughly 43- 44%.

On a GAAP basis, the bottom line is expected to be in the range of a loss of 1 cent to earnings of 3 cents per share. Pro forma earnings per share are expected in the range of 23 cents to 27 cents. The Zacks Consensus Estimate is pegged at 24 cents.

Zacks Rank and Other Stocks to Consider

Currently, Cypress carries a Zacks Rank #1 (Strong Buy). A few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA and Applied Materials, Inc. AMAT, both  sporting a Zacks Rank #1 (Strong Buy), while FactSet Research Systems Inc. FDS, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings per share growth rate for Applied Materials, NVIDIA Corporation and FactSet Research Systems is projected to be 17.1%, 10.3% and 10.8%, respectively.

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