Cypress Semiconductor Corporation (CY) reported third-quarter 2014 earnings of 9 cents per share, exceeding the Zacks Consensus Estimate by a penny on the back of higher volumes and solid expense control.
Revenues
Cypress reported revenues of $187.5 million, up 2.1% sequentially but down 0.6% year over year. Additionally, revenues were within management’s guidance range of $185.0–$191.0 million and almost in line with the Zacks Consensus Estimate of $188.0 million. The sequential increase was backed by improvement in all divisions, except the Programmable Systems Division (PSD).
In the quarter, the book-to-bill ratio was 0.85 versus 0.99 in the prior quarter. Average selling price was $1.2, slightly better than the second quarter due to a higher mix of Memory Products Division (MPD) products.
Revenues by Segment
The PSD, which generated 36.7% of third-quarter revenues, consists of two segments. The first is the old Consumer and Computation Division (CCD) comprising TrueTouch, CapSense and Ovation businesses,while the second includesthe core PSoC business. The segment decreased 8% sequentially and 12% year over year to $68.8 million. The decrease was due to declines in the Touch and CapSense businesses, primarily at the company’s handset customers.
The MPD segment generated 49.2% of revenues, up 8% sequentially and 4% year over year to $92.2 million. The 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.
The Data Communication Division (DCD) generated 10.2% of the revenues, up 6% sequentially to $19.1 million due to USB strength owing to an improving overall PC market. 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) generated the remaining 3.9% of revenues amounting to $7.5 million, up 40% sequentially and soared 153% year over year. The strength in the quarter was due to strong sales in USB 3.0 products. This start-up segment includes Cypress AgigA Tech Inc., Deca Technologies Inc. and all majority-owned subsidiaries of Cypress. The ETD division also includes the foundry business and other development-stage activities.
Operating Results
Reported gross margin for the quarter was 51.7%, down 20 bps sequentially but up 310 bps from the year-ago quarter figure of 48.6%. The sequential decrease was mainly due to unfavorable product and customer mix.
Operating expenses of $81.2 million decreased 20.1% year over year from $101.6 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 8.4% compared favorably with the year-ago quarter’s margin of (5.3%).
The quarter’s GAAP net income was $12.8 million or 8 cents per share versus net loss of $8.4 million or loss per share of 6 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP earnings were 9 cents compared with 8 cents in the prior quarter.
Balance Sheet
Cypress exited the third quarter with cash, cash equivalents and short-term investments of approximately $120.4 million versus $113.8 million in the prior quarter. Trade receivables were $105.9 million, down from $115.8 million in the prior quarter. DSO decreased 6 days to 51 days in the third quarter.
During the quarter, Cypress’ cash flow from operations was approximately $8.3 million, spending $5.8 million on capex. The company also paid quarterly dividend worth $17.4 million.
Guidance
Management expects fourth-quarter 2014 revenues in the range of $180.0–$185.0 million, representing an increase of 1–4% sequentially at the mid-point. Management expects continued softness in the handset customers and seasonality in the distribution channel.
Gross margin is expected to be down slightly to 53%, mainly due to product and customer mix. Operating expenses are expected to be $71.0 million and tax expense of about $1.6 million. Non-GAAP earnings per share are likely to be in the range of 13–15 cents, well above the Zacks Consensus Estimate of 8 cents.
Our Take
Cypress is a semiconductor company, offering high-performance, mixed signal and programmable solutions. The company reported decent earnings with bottom-line figures surpassing the Zacks Consensus Estimate driven by solid expense management.
However, management provided weak revenue guidance, indicating weak demand trends. The softness from few of Cypress’ mobile customers and the softness in orders from its distribution channel partners are expected to impact revenue growth in the upcoming quarter.
Though we remain optimistic about the company’s advanced technology, growth in the automotive and industrial markets and momentum in new products, weak macro environment and poor visibility related to demand patterns remain causes of concern.
Cypress has a Zacks Rank #3 (Hold). Other better-performing stocks that are worth considering include Ambarella, Inc. (AMBA) and Avago Technologies Limited (AVGO) sporting a Zacks Rank #1 (Strong Buy), while Diodes Incorporated (DIOD) carry a Zacks Rank #2 (Buy).
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