Cypress Semiconductor Corporation: Uncertainty Looms Going Into Earnings

It will be a test of nerve and verve for chipmaker Cypress Semiconductor (NASDAQ: CY  ) when it reports its second-quarter results on July 17. The company had, surprisingly, reported robust results for the first quarter, and its guidance was also better than estimates. Driven by solid performance last time, Cypress shares have gained some momentum in the past couple of months.

But, Cypress is under intense pressure from Synaptics (NASDAQ: SYNA  ) in the touchscreen controller market. As such, the likelihood of a strong second-quarter performance, and a strong outlook, largely depends on adoption of Cypress products and growth of the Chinese smartphone market.

Counting on Chinese smartphones
A look at Cypress' order book at the end of the first quarter indicates that the company can come up with strong results once again. The company finished the quarter with a book-to-bill ratio of 1.08, which means that it received more orders than it fulfilled. In fact, Cypress had reported an identical book-to-bill ratio at the end of the fourth quarter of the previous fiscal year as well. As such, Cypress seems to be enjoying strong demand for its products.

The strength in demand for Cypress' products can be attributed to the smartphone boom in China. The company counts key Chinese smartphone players as clients, including ZTE and Huawei, and its products have gained traction at both companies.

For example, Cypress' TrueTouch touchscreen controller was recently chosen by ZTE to power its high-end Nubia X6 smartphone. Cypress' Gen5 TMA568 controller provides cutting-edge finger tracking and sensitivity to the Nubia X6's 6.44-inch touchscreen display, extending the company's partnership with ZTE. Cypress also provides its solutions to other ZTE devices such as Nubia Z5S, Nubia Z5S Mini, and Nubia Z5, addressing different price points. 

The ZTE partnership can be lucrative for Cypress in the long run, as the smartphone maker is aiming to double its smartphone share in the U.S. in the next three years. In addition, ZTE is a strong player in the Chinese smartphone market, and it has tied up with telecom companies such as China Mobile, China Unicom, and China Telecom to provide LTE-enabled devices. Recently, ZTE launched Qing Yang 2, one of the first 4G phones made available by China Telecom.

The Chinese smartphone opportunity is a lucrative one, as shipments of LTE devices are expected to hit 300 million by 2017, up from just 4.6 million units last year, according to iSuppli. Since Cypress has client relationships with leading smartphone players in China, it is in a good position to make the most of this growth.

The Synaptics threat
Samsung
(NASDAQOTH: SSNLF  ) is another leading player in the Chinese smartphone market that uses Cypress' chips. In fact, Samsung is a 10%-plus customer of Cypress. However, Synaptics' growing clout at Samsung is a concern. Synaptics supplied touchscreen controllers and fingerprint technology for the Galaxy S5, a spot that Cypress was probably eyeing following its design win in the Galaxy Note 3. 

Now, it looks like Cypress might lose its spot in the upcoming Galaxy Note 4 to Synaptics as well. According to rumors, Synaptics is reportedly supplying Samsung an area-type fingerprint sensor, which is closer to how Apple's Touch ID works, for the next Galaxy Note device.

Considering that the phablet market is growing at a fast pace, and the Galaxy Note series is one of the most successful phablets, this is a concern for Cypress. According to Business Insider, global phablet shipments are projected to grow at a compound annual rate of 27% over the next five years. This is almost twice the expected 15% growth rate for smartphones.

If Synaptics wins the touchscreen spot in the next Note device, Cypress will lose a major revenue opportunity.

The bottom line
It is difficult to predict Cypress' outlook when it reports its second-quarter results. While Chinese smartphones might drive sales higher, loss of share at Samsung will weigh on the company's performance. Of course, the fact that Cypress carries a handsome dividend yield of 4% is appealing, but investors need to be cautious when buying shares, as the company's prospects look uncertain.

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