Is it Time to Buy Cypress Semiconductor After a Sluggish 2013?

Cypress' fourth-quarter earnings results and 2014 outlook should encourage investors.

Jan 27, 2014 at 10:45AM

Cypress Semiconductor (NASDAQ:CY) reported better-than-expected earnings on Thursday, beating on both the top and bottom lines. The company's non-GAAP EPS came in at $0.09 on revenue of $167.8 million. Investors rewarded the company, which makes capacitive touchscreen chips for Samsung (NASDAQOTH:SSNLF), with a 6% increase in its stock price. Its competitor in the touchscreen business, Synaptics (NASDAQ:SYNA), posted underwhelming earnings results after the bell.

It's been a tough ride for Cypress investors over the last three years, but this most recent earnings report is encouraging and indicates that the company has reached its trough.

CY Chart

CY data by YCharts

Improved operational efficiency
Operating expenses at Cypress reached a 14-year low in the fourth quarter. The company reported non-GAAP operating expenses of just $68.3 million for the quarter, which led to better operating profits in the fourth quarter, despite a decline in revenue. Although some of these expense cuts are temporary, the company has focused on improving its operational efficiency to drive down costs.

Cypress nearly doubled its non-GAAP operating margin year-over-year to 10.3%, but still trails Synaptics, which posted a 17.8% operating margin last quarter. The company's ability to keep costs low will be crucial going forward as it ramps up revenue.

Utilization has been very low, according to CFO Brad Buss. The company doesn't keep inventory through down periods, either, so as it ramps up, margins should get better. Buss expects revenue for the current quarter to come in between $161 million-$168 million, down slightly from the year-ago period's $172.7 million.With improved operational efficiency, however, earnings ought to improve.

What will drive revenue growth?
Cypress operates four main divisions: programmable systems, data communications, memory products, and emerging technology.

Although management expects its emerging technology division to double revenue in 2014, it won't meaningfully drive revenue growth going forward. Instead, Cypress will focus on stabilizing its exposure to the PC market, while getting its touchscreen business back to the levels it saw in 2011.

Synaptics is ahead of Cypress in regard to recovering from the decline in PC sales. The company grew its PC division sales sequentially in the last two quarters, and it was up 20% quarter-over-quarter in its most recent earnings report.

Meanwhile, Cypress' data communications division hopes that it can improve its position in the PC market, which primarily consists of USB and trackpads, through a couple of initiatives. First, it's creating new products around USB 3.0 and expects demand for the high-speed transfer platform to pick up steam with things like 4K video. Second, it has a monopoly on trackpads in Chromebooks, and while that market is small, indications are that it's growing well.

Moreover, Cypress is relying less on Samsung than previously. In fact, the company didn't contribute enough revenue in the fourth quarter to qualify for disclosure. (A customer must contribute 10% or more of total revenue for disclosure.)

Samsung faced some pressure last quarter from Apple's new iPhones, as well as low-end Chinese manufacturers, but Cypress expects the Korean electronics maker to return to 10% or more of revenue this quarter. Nonetheless, Cypress is finding more design wins with Chinese manufacturers and diversifying away from Samsung. Last quarter, the company won four designs for Huawei's mid-tier line of phones.

The company is also making progress in the wearable technology market, with design wins at Qualcomm and Sony for their smartwatches. Cypress' low-power touch technology and waterproof designs are extremely valuable in the market for smartwatches. If the market takes off, Cypress could benefit greatly.

Down, but not out
Cypress pays a whopping 4.4% dividend. Of course, it got to that high dividend the hard way, as shares tanked over the last three years. After a first-quarter beat on both the top and bottom, and overhauling its operational structure to improve costs, Cypress looks poised to start rebounding.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor. 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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