Chipmaker Cypress Semiconductor (NASDAQ:CY) has been an underperformer for the last one year, but all that could change in the coming quarters. Despite competition from peers Synaptics (NASDAQ:SYNA) and Atmel, Cypress seems to be getting more business for itself and could be a surprise package going forward. It is intent on changing the status quo and recently bumped up its first-quarter forecast, probably driven by strong sales of its touchscreen controllers to Samsung (NASDAQOTH:SSNLF).
A glimmer of hope...
Cypress now expects to post revenue between $169 million and $171 million in the first quarter, up from the prior forecast of $161 million to $168 million. The current guidance is ahead of Wall Street's $165 million expectation. Cypress was seeing some momentum in the business when it had reported its fourth-quarter results, with the book-to-bill ratio coming in at an impressive 1.08.
Samsung's Galaxy Note 3 was powered by a Cypress CapSense touch-sensing controller. The device was a strong seller and sold 10 million units in just two months. In fact, the Note 3 was giving tough competition to Apple's iPhone portfolio. According to Forbes, Note 3 sales alone accounted for around 50% of all Apple iPhones in the December quarter. Hence, Cypress managed to land a spot in a hot-selling device and is now reaping the results.
...but a difficult road ahead
However, investors shouldn't get too excited and assume that Cypress has landed a spot in the Galaxy S5 as well. A Chipworks teardown of the Galaxy S5 doesn't mention Cypress' role anywhere. In fact, it is likely that rival Synaptics has clinched the touchscreen controller spot, and it is also supplying the fingerprint technology to Samsung. In addition, Synaptics had supplied the controller for the Galaxy S4 as well, so it doesn't come as a surprise that it has won the spot once again.
This would be a concerning factor for Cypress investors as the company has missed out on a big opportunity here. Also, it won't be the first time that Synaptics has snatched away a probable design win from Cypress. Last year, Synaptics announced that it had won the touchscreen controller spots in Amazon's Kindle Fire tablets, displacing Cypress.
A checkered past and not much to show for
Cypress has a history of being inconsistent. The company had a strong book-to-bill ratio of 1.05 at the end of the second quarter last year, but it dropped significantly to 0.75 in the succeeding quarter. Hence, while Cypress might have bumped up its target for the just-concluded first quarter, a sunny outlook cannot be guaranteed when the company comes out with earnings on April 17.
Apart from a few design wins, such as at AVerMedia Technologies for a high-definition video capture card, and the above-mentioned Galaxy Note, Cypress didn't have much to show for. In fact, on a year-over-year basis, Cypress' revenue would decline in the first quarter, and given the uncertainty regarding the second-quarter guidance, investors should remain cautious.
However, one positive thing about Cypress is that it is controlling cost aggressively. Cypress' operating expenses were down to a record low in the previous quarter for a decade. As such, the company's bottom line is actually expected to more than double on a year over year basis in the first quarter. Now, keeping its bottom line in good health is important for Cypress, or else the company might be forced to cut its impressive dividend yield of 4.30%.
In addition, Cypress' debt stands at almost $250 million while its cash position is weak at $104 million. Hence, the company continuously needs to generate a steady stream of cash to maintain its eye-catching dividend and cover debt obligations, and for that, it needs to land some solid design wins in the coming quarters. Cost-cutting can take you some distance, but it will all come down to revenue growth once no more cost-cutting is possible.
Cypress has given a flicker of hope to investors that it will turn in a better performance this year, but all will come down to the outlook that it issues next week. The company has endured a tough period due to stiff competition, and it would take something special for Cypress to stage a turnaround.
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Harsh Chauhan 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.