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Cypress Semiconductor (CY) Beats on Q2 Earnings and Revenues

Cypress Semiconductor Corp. CY reported second-quarter 2017 earnings per share (including stock based compensation) of 13 cents, which beat the Zacks Consensus Estimate by 4 cents.

The company reported non-GAAP revenues of $593.8 million, which comfortably beat the Zacks Consensus Estimate of $548 million. The figure also came ahead of the higher end of the guided range of $530 million $560 million. The robust top-line growth can primarily be attributed to growth in automotive, IoT wireless connectivity and USB-C solutions.

Driven by the growth of these segments, the company has been performing well for quite some time. It outperformed the industry it belongs to to on a year-to-date basis. The company returned 30.1% while the industry gained 19% 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 13% sequentially to $360.5 million, driven by strong growth in the wireless connectivity business and automotive microcontrollers. This segment accounted for 61% of second-quarter revenues. Community users in the wireless connectivity business, which includes the IoT assets acquired from Broadcom last year, increased 40% since the acquisition.

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 39% of second-quarter revenues, decreased 9% sequentially to $233.2 million.

The company’s wireless connectivity platform, WICED SDK, saw a 40% increase in download rate. Management also anticipates the recent launch of its Quicksilver platform in collaboration with Arrow Electronics to aid growth. 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 latter half of the year.

Cypress’ USB-C product continues to witness rapid penetration. Its customer base has grown almost 50% year on year in the second quarter. Notably, automotive revenues grew 7% in the second quarter. The launch of Audi R8 is also a positive for the company as it will equip the model with 802.11ac connectivity for content sharing, hotspot and rear-seat entertainment. The company also announced that Bosch, a German multinational engineering and electronics company selected Cypress flash memory and NOR flash memory for its ADAS platform.

Operating Results

Gross margin was 40.9%, up 160 basis points (bps) sequentially. Operating income of $97.2 million increased 40.2% sequentially.

GAAP net loss was $22.9 million compared with net loss of $45.8 million in the previous quarter. Non-GAAP earnings per share came in at 21 cents compared with 13 cents in the previous quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $108.8 million compared with $122.5 million last quarter. Trade receivables were $336.5 million, up from $317.3 million in the previous quarter. Net inventory was $311.8 million, down from $325 million in the previous quarter.

During the quarter, Cypress’ cash flow from operations was approximately $32.4 million and capex was $15.6 million. The company also paid quarterly dividend of $36.2 million or 11 cents per share.

Q3 Guidance

Management expects third-quarter 2017 revenues in the range of $585–$615 million. The Zacks Consensus Estimate is pegged at $578.1 million.

Consolidated GAAP gross margin is expected to be roughly in the range of 40–41%, depending on utilization, product and customer mix. Pro forma gross margin is expected in the range of roughly 41% to 42%.

On a GAAP basis, the bottom line is expected to be in the range of a loss of 5 cents to break even. Pro forma earnings per share are expected in the range of 21 cents to 25 cents. The Zacks Consensus Estimate is pegged at 14 cents.

Management noted that the third quarter will be a peak quarter for wireless connectivity due to the holiday season. The company targets annual revenue growth from the segment to be in the range of 35% to 40%, up from the previous target of 23% to 27%.

Zacks Rank and Other Stocks to Consider

Currently, Cypress carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Other stocks worth considering in the industry are Alibaba Group Holding Limited BABA, and Applied Optoelectronics, Inc. AAOI, both sporting a Zacks Rank #1, and Symantec Corporation SYMC with Zacks Rank #2.

Long-term earnings growth rates for Alibaba Group, Applied Optoelectronics and Symantec Corporation are projected to be 30.4%, 18.7% and 10.3%, respectively.

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