Cypress Semiconductor Corporation CY reported first-quarter 2015 loss of 53 cents per share, significantly disappointing the Zacks Consensus Estimate of earnings of 1 cent.
Revenues
Cypress reported revenues of $209.1 million, up 13.6% sequentially and 22.8% year over year. It includes the results of the legacy Spansion operations for the period of Mar 12 to Mar 29, 2015.
Excluding the Spansion results, Cypress’ revenues for the first quarter were $173.9, slightly lower than management guidance of $175.0–$180.0 million.
Revenues by Business Units
Following the merger, the new Cypress will continue to report its revenues under the same four divisions: Programmable systems (PSD), Memory Products Division (MPD), Data Communication Division (DCD) and Emerging Technology Division (ETD).
The PSD — accounted for 27.1% of revenues — includes the old Consumer and Computation Division (CCD) comprising TrueTouch, CapSense and Ovation businesses, and the core PSoC business. The segment decreased 19% sequentially and 18% year over year to $56.7 million due to declines in CapSense and PSoC 1, partially offset by growth in PSoC 3, 4 and 5. Management has combined PSoC and the Spansion microcontrollers into this division.
The MPD segment generated 43.8% of revenues, up 3% sequentially and 13% year over year to $91.5 million. The sequential increase was mainly due to the overall strength in broad industrial markets. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing. This division will now include the new flash business unit.
The DCD generated 8.9% of the revenues, up 5% sequentially and 19% year over year to $18.6 million due to continued strength in the USB products. This division has been realigned to focus solely on USB controllers, Wireless USB and West Bridge peripheral controllers for handsets, PCs and tablets.
The ETD contributed the remaining 3.4% of revenues amounting to $7.1 million, down 1% sequentially but soaring 76% year over year. 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.
The new Legacy Spansion unit contributed the remaining 16.8% of revenues amounting to $35.2 million.
Operating Results
Reported gross margin was (19.9%) versus 45.6% in the year-ago quarter.
Operating expenses of $101.5 million increased 15.5% year over year from $87.9 million in the year-ago quarter. Both research and development and selling, general and administrative expenses decreased as a percentage of sales. The net result was a reported operating margin of (117.5%) versus (6.5%) in the year-ago quarter.
GAAP net income was $229.8 million or $1.17 per share versus net loss of $7.9 million or loss per share of 5 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP loss was 53 cents as against loss of 1 cent in the year-ago quarter.
Balance Sheet
Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $157.2 million versus $118.8 million in the last quarter. Trade receivables were $192.1 million, up from $76.0 million in the earlier quarter. Net inventory was $389.0 million, up from $88.2 million in the fourth quarter. The increase was primarily backed by inventories acquired from Spansion, which totaled roughly $305 million, including the fair value adjustment mandated by purchase accounting.
During the quarter, Cypress’ cash flow from operations was approximately $12.3 million, spending $6.5 million on capex. The company also paid quarterly dividend worth $17.9 million.
Guidance
Management expects second-quarter 2015 revenues in the range of $475.0–$500.0 million. This revenue guidance excludes roughly $15–$20 million of revenues through Spansion's distribution channel lost due to the purchase accounting treatment.
Consolidated gross margin is expected to be 41%, plus or minus, varying due to utilization, product and customer mix. Operating expenses and synergies are expected in the range of $143–$145 million for the upcoming quarter, while tax expense is expected to be $3.3 million for the combined company.
Our Take
Cypress is a semiconductor company that offers high-performance, mixed signal and programmable solutions.
We remain optimistic about the synergies associated with Cypress' merger with Spansion Inc. (CODE), which closed on Mar 12. The merger was a tax-free transaction valued at approximately $5 billion. The new company is now a global provider of microcontrollers and specialized memory chips for embedded systems. The integration remains well on track and Cypress has already achieved $8.4 million in annualized synergies in the first quarter.
We are positive about the company’s advanced technology, growth in the automotive and industrial markets and momentum in new products.
Stocks to Consider
Cypress has a Zacks Rank #2 (Buy). Other well-ranked stocks that are performing well at the current levels include Broadcom Corp. BRCM, NeoPhotonics Corporation NPTN and Nitto Denko Corporation NDEKY. While Broadcom sports a Zacks Rank #1 (Strong Buy), both NeoPhotonics and Nitto carry a Zacks Rank #2.
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