Cypress Beats Earnings on Higher Gross Margin, Cost Control

Cypress Semiconductor Corporation CY reported second-quarter 2014 earnings of 8 cents per share, exceeding the Zacks Consensus Estimate by 5 cents per share on the back of higher gross margins and solid expense control.

Revenues

Cypress reported revenues of $183.6 million, up 7.8% sequentially but down 5.1% year over year. Additionally, revenues were within management's guidance range of $181.0–$186.0 million and almost in line with the Zacks Consensus Estimate of $184.0 million. The sequential improvement was backed by improvement in all divisions, especially continued higher demand for TrueTouch products and strength in automotive and industrial markets.

In the quarter, the book-to-bill ratio was 0.99 versus 1.08 in the prior quarter. The sequential decrease was due to softness in the consumer electronics sector.

Revenues by Segment

The Programmable Systems Division (PSD), which generated 40.7% of second-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 increased 8.0% sequentially due to strong growth in TrueTouch and CapSense businesses. However, revenues were down 8% year over year to $74.7 million.

The Memory Products Division (MPD) generated 46.6% of revenues, up 5.0% sequentially but down 3.0% year over year to $85.6 million. The sequential increase was mainly due to strength in the Mb RAM division which focuses on automotive and 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 9.8% of the revenues, up 15.0% sequentially to $18.0 million due to USB strength owing to an improving 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 2.9% of revenues amounting to $5.4 million, up 33.0% sequentially. The strength in the quarter was due to increase in new customers and design wins. 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 52.0%, up 640 bps sequentially and 480 bps from the year-ago quarter figure of 47.2%. The increase was mainly due to favorable product and customer mix.

Operating expenses of $84.8 million decreased 14.9% year over year from $99.6 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 5.8% compared favorably with the year-ago quarter's margin of (4.2%).

The quarter's GAAP net income was $9.5 million or 6 cents per share versus $3.8 million or 2 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP earnings were 8 cents compared to 6 cents in the year-ago quarter.

Balance Sheet

Cypress exited the second quarter with cash, cash equivalents and short-term investments of approximately $113.8 million versus $111.5 million in the prior quarter. Trade receivables were $115.8 million, down from $118.2 million in the prior quarter.

During the quarter, Cypress' cash flow from operations was approximately $45.3 million, spending $5.8 million on capex. The company also paid quarterly dividend worth $17.4 million.

Guidance

Management expects third-quarter 2014 revenues in the range of $185.0–$191.0 million, representing an increase of 1–4% sequentially at the mid-point. The Zacks Consensus Estimate for third-quarter revenues is pegged at $186.0 million. Management expects emerging tech and MPD segments to grow sequentially in the third quarter.

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 $1.7 million. Non-GAAP earnings per share are likely to be in the range of 15–17 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.

In the quarter, the company introduced several products which are expected to drive revenue growth in the near future. Also, management provided a strong forward guidance, indicating robust demand trends.

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 stocks that are performing well at current levels include Broadcom Corp. BRCM, FormFactor Inc. FORM andOmniVision Technologies, Inc. OVTI. All these stocks sport a Zacks Rank #1 (Strong Buy).