Cypress Semiconductor Corporation (CY) reported fourth-quarter 2014 earnings of 9 cents per share, beating the Zacks Consensus Estimate by a couple of cents on solid expense control.
Revenues
Cypress reported revenues of $184.1 million, down 1.8% sequentially but up 9.7% year over year. Additionally, revenues were at the higher end of management’s guidance range of $180.0–$185.0 million and slightly above the Zacks Consensus Estimate of $184.0 million. The sequential decrease was due to weakness in all divisions, except the Programmable Systems Division (PSD).
The book-to-bill ratio was 0.94 versus 0.85 in the prior quarter.
Revenues by Segment
The PSD — accounted for 38.3% of revenues — includes the old Consumer and Computation Division (CCD) comprising TrueTouch, CapSense and Ovation businesses, and the core PSoC business. The segment increased 2% sequentially and 4% year over year to $70.4 million. The increase was due to strength in the Platform PSoC and CapSense businesses, primarily offset by slight decline in the touch business.
The Memory Products Division (MPD) segment generated 48.3% of revenues, down 4% sequentially but up 11% year over year to $88.8 million. The sequential decrease was mainly due to the overall weakness in broad industrial markets. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing.
The Data Communication Division (DCD) generated 9.6% of the revenues, down 7% sequentially but up 7% year over year to $17.7 million. This division has been realigned to focus solely on USB controllers, Wireless USB and West Bridge peripheral controllers for handsets, PCs and tablets.
The Emerging Technology Division (ETD) contributed the remaining 3.8% of revenues amounting to $7.2 million, down 5% sequentially but soaring 96% year over year. The sequential decrease was due to weakness in the company’s module business. This start-up segment includes Cypress AgigA Tech Inc., Deca Technologies Inc. and all majority-owned subsidiaries of Cypress. ETD also includes the foundry business and other development-stage activities.
Operating Results
Reported gross margin was 50.9%, down 80 bps sequentially but up 530 bps from the year-ago quarter. The sequential decrease was mainly due to lower factory utilization and unfavorable product and customer mix.
Operating expenses of $77.4 million decreased 10% year over year from $86.0 million in the year-ago quarter. Both research and development and selling, general and administrative expenses decreased as a percentage of sales. As a result, reported operating margin of 4.2% compared favorably with the year-ago quarter’s margin of (6.5%).
GAAP net income was $3.5 million or 2 cents per share versus net loss of $14.2 million or loss per share of 9 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP earnings were 9 cents, flat sequentially.
Balance Sheet
Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $118.8 million versus $120.4 million in the last quarter. Trade receivables were $76.0 million, down from $105.9 million in the earlier quarter. Days Sales Outstanding (DSO) decreased 13 days to 38 days.
During the quarter, Cypress’ cash flow from operations was approximately $25.5 million, spending $3.8 million on capex. The company also paid quarterly dividend worth $17.7 million.
Guidance
Management expects first-quarter 2015 revenues in the range of $175.0–$180.0 million, representing a decrease of 2–5% sequentially at the mid-point. Management expects continued softness in the handset customers. The Zacks Consensus Estimate is pegged at $178.0 million.
Gross margin is expected to be down slightly to 51%, mainly due to product and customer mix. Operating expenses are likely to be $72.0 million and tax expense of about $1.0 million. Non-GAAP earnings per share are projected in the range of 8–10 cents. The Zacks Consensus Estimate stands at 8 cents.
Our Take
Cypress is a semiconductor company that offers high-performance, mixed signal and programmable solutions. The company reported decent earnings with both the top and the bottom line surpassing the respective Zacks Consensus Estimate driven by solid expense control.
However, management provided subdued revenue guidance, indicating weak demand trends. The softness from a few of Cypress’ mobile customers as well as in orders from its distribution channel partners are expected to impact revenue growth in the upcoming quarter.
However, we remain optimistic about the synergies associated with Cypress' merger with Spansion Inc., announced recently. Cypress inked a definite $4 billion all-stock, tax-free agreement to merge with Spansion on Dec 1, 2014. The merger is expected to create a global provider of microcontrollers and specialized memory chips for embedded systems and generate more than $2 billion in annual revenues.
We are positive about the company’s advanced technology, growth in the automotive and industrial markets and momentum in new products. However, weak macro environment and poor visibility related to demand patterns are the concerns.
Stocks to Consider
Cypress has a Zacks Rank #2 (Buy). Other stocks that are performing well at the current levels include M/A-Com Technology Solutions Holdings, Inc. (MTSI), Autobytel Inc. (ABTL) and CSR plc (CSRE). While M/A-Com Technology Solutions sports a Zacks Rank #1 (Strong Buy), both Autobytel and CSR carry a Zacks Rank #2.
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