Cypress Semiconductor Still Faces Huge Challenges Despite Solid Earnings

Source: Cypress Semiconductor

Coming into this morning's third-quarter earnings report, Cypress Semiconductor had its investors worried about its future prospects. With a decline of more than 20% just since early September, Cypress stock had fallen prey to the same concerns that have hit many of its industry peers. Although Cypress' third-quarter results generally met investor expectations, they still point to the ongoing battle among players in the industry, and Cypress will have to keep working hard to demonstrate an advantage over its rivals.

The numbers from Cypress 
On the whole, Cypress produced results that were close to what most investors wanted to see from the company. Revenue of $187.5 million was only slightly below the $188.25 million consensus figure, and adjusted earnings per share of $0.16 matched investors' expectations. Although sales were down slightly from year-ago levels, Cypress managed a 2.1% sequential gain from the second quarter.

Margin figures for Cypress were mixed. At the gross margin level, Cypress' product mix led to a drop of 0.3 percentage points from the year-ago quarter to 53.5%. But the company's efforts to keep expenses under control were successful in driving Cypress' bottom line higher, with profit margins climbing 2.5 percentage points from year-ago levels to 15%. Cypress managed to reduce its adjusted operating expenses by 7% as a result of its cost-cutting initiatives.

Source: Cypress Semiconductor

Looking at Cypress' different business units gives a clearer picture of the crosscurrents occurring within the company. The Memory Products Division, which produces nearly half of the company's overall revenue, saw sizable sales growth of 8% sequentially and 4% from year-ago levels. In doing so, the division managed to overcome sluggish conditions in the key handset market.

On the other hand, Cypress' other major unit, the Programmable Services Division, saw substantial drops in sales, with revenue for the unit declining 12% year over year and 8% from the second quarter. The unit makes touchscreens for smartphones, tablets, and wearable technology, as well as creating products for the automotive industry and other industrial applications. The smaller Data Communications Division, which primarily makes USB controllers and related products, saw sales rebound 6% from the previous quarter.

But where Cypress seems most optimistic is in its tiny Emerging Technologies Division. The unit, which includes Cypress' foundry business as well as subsidiaries AgigA Tech and Deca Technologies, has seen revenue soar more than 150% over the past year. CEO T.J. Rodgers said that he expects that Emerging Technologies will "contribute significantly to revenue growth in 2015." With just $7.5 million in sales, Emerging Technologies is still just a tiny part of the overall business, but it also holds a lot of promise for future growth that could eventually grow large enough to have a much larger impact on Cypress as a whole.

Cypress highlights for the quarter

Source: Cypress Semiconductor

Cypress provided a laundry list of accomplishments in its earnings release. On the design-win front, Cypress noted that Huawei used a TrueTouch Gen5 touchscreen controller for its MediaPad X1 tablet, with Huawei taking advantage of hover support and gloved-finger tracking. Perhaps of greater note was Cypress' presence in the Samsung Galaxy S5 Mini smartphone, with a teardown showing another model of the TrueTouch Gen5 controller included in the overall design. Given that Samsung had used rival controllers in earlier versions of the Galaxy Mini, the news was particularly good for Cypress. Further down the price spectrum, Cypress made moves to make its Gen4X controllers less expensive, encouraging their use in lower-end mobile devices. In the USB space, camera-maker Raytrix selected a Cypress controller for its new 3D camera.

Elsewhere, Cypress made advances on the cost-cutting front in other areas. The company will allow designers using CapSense controllers to replace mechanical buttons for just $0.025 each, and Cypress also introduced a $49 kit to help designers make USB 3.0 implementation more affordable.

Initiatives in emerging technologies also produced solid results. AgigA Tech showed success with memory chips designed to survive power outages without losing their data, and Cypress' foundry business made a deal with Shanghai Huali Microelectronics to help it produce memory cells using proprietary Cypress technology.

Should Cypress investors still be worried?
Despite its successes, Cypress wasn't able to convince investors to stop worrying entirely. The stock didn't make any dramatic moves immediately after the earnings announcement, failing to regain any ground from its recent swoon. Looking forward, it's clear that shareholders want to see stronger growth from Cypress as evidence that it's winning its battle against its numerous competitors in the chip and controller space. If Cypress can find its way into more cutting-edge products, though, then the stock could finally start behaving the way longtime investors have wanted.

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