Is Cypress Semiconductor Falling Prey to the Competition?

Is Cypress Semiconductor Falling Prey to the Competition?

Chipmaker Cypress Semiconductor has flattered to deceive this year. Whenever it looks like Cypress' business is back on track, the company drops a bomb. That's what it did in late September by reducing its third-quarter guidance as demand for its touchscreen controllers weakened. Cypress supplies its touchscreen controllers to the likes of Samsung and Amazon , but it looks like competition from peers, such as Synaptics has hurt the company.

Under pressure
Cypress had to cut down its guidance due to weakness in its mobile business, particularly in Asia. The company also suffered as a result of reduction in orders by some of its customers in China. But, at the same time, peer Synaptics has been riding smartphone growth in China quite successfully. Synaptics posted better-than-expected fourth-quarter results in August, and its outlook was also decent.

Synaptics' net income grew almost four times from the year-ago quarter to $45 million in the reported quarter, as the company successfully transitioned its business to mobile from PCs. Revenue growth was also impressive at 67% on a year-over-year basis. Synaptics' impressive product development moves are probably the reason why it has been doing well. Its ClearPad display integration solution powers Samsung's latest phones, allowing for features such as Air View.

According to Needham, Synaptics is also supplying its touch controllers to Amazon for the Kindle tablets, taking business away from Atmel. Its programmable systems division, which accounted for 41% of revenue in the recently reported third quarter, declined 14% from the year-ago period.

The drop in this segment was a result of a decrease in orders from a particular customer for its CapSense touch screen controller. The contribution from Cypress' only "disclosable" customer -- probably Samsung -- was 10% of revenue, down from 15% in the previous quarter. The reason behind this drop was, apparently, Samsung's decision to cut production of its flagship phone.

Reading between the lines
Investors would have expected that Amazon's latest Kindle Fire tablets -- the 7-inch and 8.9-inch Kindle Fire HDX -- would lead to better revenue for Cypress, as it had previously supplied the controller for the Kindle Fire HD. Amazon's latest Kindle Fire HDX comes with impressive features and the 7-inch model is expected to retail at $229, still cheaper than the older iPad mini that now sells for $299.

The 7-inch model of the HDX started shipping on Oct. 18, while the 8.9-inch version is expected to start shipping next month. But, Cypress' weak book-to-bill ratio of 0.75 indicates that it probably won't benefit much from these new tablets.

A book-to-bill ratio above 1 is considered good, since it indicates that a company received more orders than it could satisfy. The ratio stood at an impressive 1.05 in the second quarter, but weakness in end markets has led to a massive drop in this metric in the third quarter. Looking forward, Cypress expects the weakness in its business to continue, which is why it guided below consensus estimates for the fourth quarter as well.

More downside ahead
Management expects revenue between $163 million-$170 million in the ongoing quarter, while analysts had originally expected revenue of $207 million. Hence, Cypress' guidance is way off the mark and the company might continue to suffer as lower lead times limit revenue visibility.

Analysts, according to Yahoo! Finance, aren't expecting much from Cypress in the next five years either, as the bottom line is expected to grow at a rate of just 4.5% annually. In comparison, Synaptics' earnings are expected to grow at a rate of 11.70% over a similar time frame. Moreover, Cypress isn't profitable on a GAAP basis either, while Synaptics is, and Cypress trades at an expensive 17 times forward earnings, compared to Synaptics' 13.5.

The bottom line
It is clear that Cypress' business is under pressure and the company continues to perform inconsistently. In fact, the stock has lost 2% in the last four years and, considering the current situation, might not be able to break out of its mediocrity anytime soon.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends and Cypress Semiconductor. The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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