Cypress Semiconductor Corporation CY reported adjusted fourth-quarter 2015 earnings of 6 cents per share that came in line with the Zacks Consensus Estimate. Adjusted earnings exclude one-time items but include stock-based compensation expense.
Revenues
Cypress reported revenues of $450.1 million, down 2.9% sequentially but surging 144.5% year over year. Revenues were within management’s guidance range of $430.0–$460.0 million and above the Zacks Consensus Estimate of $445.0 million, driven by more-than-expected demand from customers in the Asia-Pacific region.
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 decreased 12% sequentially to $157.8 million due to seasonal weakness in the consumer and microcontroller (MCU) business. However, automotive microcontroller business grew sequentially and the legacy Cypress automotive business went up almost 30% year over year.
MPD generated revenues of $259.4 million, down 1% sequentially due to the challenging macro environment. However, the company witnessed better-than-anticipated sales in the Asia-Pacific region. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing.
The DCD revenues declined 1% sequentially to $17.5 million. However, the company continued to see strong design win momentum in the USB Type-C product. This division has been realigned to focus solely on USB controllers, Wireless USB and West Bridge peripheral controllers for handsets, PCs and tablets.
ETD revenues were $21.7 million, up 66% sequentially, driven by the ramp-up in three start-up businesses in this division. These include Cypress AgigA Tech Inc., Deca Technologies Inc. and all the majority-owned subsidiaries of Cypress. The segment also includes the foundry business and other development-stage activities.
Operating Results
Non-GAAP gross margin was 4.1%, down 446 basis points (bps) year over year. The decrease was due to lower factory utilization as part of 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 of $152.1 million increased 95.4% year over year. Both research and development, and selling, general and administrative expenses decreased as a percentage of sales. However, operating margin of 4.1% was down 446 bps year over year.
GAAP net income was ($77.3) million or a loss of 23 cents per share. In the year-ago quarter, Cypress reported a net income of $3.5 million or earnings per share of 2 cents. Excluding special items but including stock-based compensation expense, non-GAAP earnings per share came in at 6 cents compared with 9 cents a year ago.
Balance Sheet
Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $227.6 million as against $194.6 million in the last quarter. Trade receivables were $292.7 million, down from $293.8 million in the prior quarter. Net inventory was $243.6 million, down 12.7% from the third quarter.
During the quarter, Cypress’ cash flow from operations was roughly $42.1 million, and $9.2 million was spent on capex. The company also paid quarterly dividend worth $36.9 million and bought back $56.5 million shares.
Guidance
Management expects first-quarter 2016 revenues in the range of $410.0–$440.0 million, higher than the Zacks Consensus Estimate of $421.0 million at the mid-point.
Consolidated gross margin is expected to be nearly 36.0%, depending on the utilization, product and customer mix. Operating expenses are likely to be within $124–$126 million for the upcoming quarter, while tax expense to be $3.0 million for the combined company.
Based on a share count of 358 million, non-GAAP earnings per share are expected in the range of 4 cents to 8 cents, slightly higher than the Zacks Consensus Estimate of 5 cents at the mid-point.
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 exceeding the Zacks Consensus Estimate but the bottom line matching the same.
During the quarter, design win momentum and market share gains continued.
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 55% of the company’s sales, bringing in more stable revenues and margins.
However, weak and uncertain macro environment, limited visibility and intensifying competition remain the concerns.
Stocks to Consider
Cypress has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are eBay Inc. EBAY, Mercadolibre, Inc. MELI and Amazon.com Inc. AMZN. While eBay and Mercadolibre sport a Zacks Rank #1 (Strong Buy), Amazon carries a Zacks Rank #2 (Buy).
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