What to Expect When Cypress Semiconductor Reports

Cypress Semiconductor (CY) will report its fourth-quarter earnings on Thursday. The company's touchscreen business is generally the focus of most investors, and it's facing significant pressure from weak smartphone orders as well as strong competition from Synaptics (SYNA 1.93%). A poor preliminary report from Samsung (NASDAQOTH: SSNLF) should be evident when Cypress reports, as the Korean device maker is its biggest client.

Aside from a weak mobile device market, the PC market will continue to weigh on the company in the fourth quarter. Cypress' product lines in USB, trackpads, and SRAM are all tied to the PC market. Synaptics was able to improve its PC division revenue in the third quarter of calendar 2013 while Cypress saw declines in its data communication division (USB and trackpads) and SRAM sales. Let's take a look at what Cypress has done to turn things around after a rather poor third quarter, and what we're likely to see in its report.

Source: Cypress Semiconductor.

Stats on Cypress Semiconductor

Source: Yahoo! Finance.

Can Cypress get back on track?
Analysts haven't changed their outlook for Cypress' earnings for the fourth quarter, but have dropped the current quarter's estimate by a penny since the company last reported. However, when the company pre-announced its third-quarter earnings, revising its estimates downward, it did the same for its fourth quarter outlook as well. Since its last report, the stock has matched the return of the S&P 500, climbing 6%.

Cypress' third quarter report was rather disappointing. The company missed early revenue estimates by about $16 million. It said 80% of that missed revenue was due to weak handset sales -- a problem the company expected to persist through the fourth quarter as two major customers pushed out their projects by a couple quarters.

One bright spot, however, was that the company reduced its OpEx 4% sequentially to $76.4 million, which helped improve profitability despite the revenue decline. CFO Brad Buss expects OpEx to continue its decline in the fourth quarter (4% to 6%) as the company focuses on bringing down costs.

Fourth quarter developments
Cypress Semiconductor's position in touch-enabled devices continues to lag that of Synaptics. In the fourth quarter, Cypress lost its position as a supplier to Amazon.com for its Kindle Fire devices. Meanwhile, Synaptics has garnered design wins for the touchscreens in more flagship devices such as Samsung's Galaxy S4 and Google's Nexus 5.

Still, Samsung is Cypress' (and Synaptics') biggest customer, and its weak quarter has weighed on both companies. Samsung pre-announced that its revenue will be weaker than expected. The revision is likely due to better than expected sales of Apple's newest round of iPhones, as well as increased pressure from Chinese low-end smartphone manufacturers.

One such Chinese manufacturer fending off Samsung in the Chinese market has been Huawei. The company gave Cypress Semiconductors four design wins for its Ascend line of smartphones. These are all mid-range devices, however, and Cypress is still pushing to get its newest touch technology into more high-end flagship devices.

Aside from touch, the company is also looking to ramp up USB 3.0 adoption, but doesn't expect to see an increase until fiscal 2014. The fourth quarter should bring seasonal declines in its DCD and MCD segments, but nothing more than usual.

What to watch for
When Cypress reports, watch to see if OpEx is continuing to come down, and pay attention to ensure that it's due to operational efficiency -- as management proclaims -- and not due to lower sales. The company expects the fourth quarter to be its trough, so earnings are going to be rough. Look at the company's outlook and its book-to-bill ratio, to see if its starting to come out of the decline.