Cypress Semiconductor (NASDAQ:CY) will report its second quarter earnings on Thursday. The company's touchscreen business will be in focus once again as its SRAM division is likely to continue struggling in the face of market pressures. Whereas Cypress dominates the SRAM market, it faces stiff competition for touch controllers in Synaptics (NASDAQ:SYNA), which has been steadily taking share of Cypress's biggest customer -- Samsung Electronics (NASDAQOTH:SSNLF).

Nonetheless, Cypress has been able to diversify well beyond Samsung, turning to the growing Chinese market for smartphones and tablets. With Samsung struggling to compete with Chinese OEMs, this strategy has paid off well as seen in Cypress's first quarter results. Can Cypress continue its momentum into the second half of the year?

What should investors expect going into the company's second quarter earnings report?

Stats on Cypress Semiconductor

Consensus Analyst EPS Estimate


Year-Ago EPS


Revenue Estimate

$183.82 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance

Will Cypress pick up where it left off?
Cypress's first quarter results met expectations on both the top and bottom line. The company surprised investors, however, with its outstanding book-to-bill ratio of 1.08, which means the company is seeing increased order volume. Nonetheless, the companies guidance was roughly in line with analysts' estimates for the second quarter.

Since Cypress's last earnings report, the stock has climbed 2.32%. Comparatively, the S&P 500 is up 5.11% in the same period. Shares jumped after its positive report, but fell soon thereafter. Shares have steadily moved sideways throughout 2014 with less than 20% difference between the high price and low price.

Focus on Asia
Cypress continues to invest heavily in Asia, where it's winning share of domestic OEMs in China. The company added five new distribution partners in the region in May. The expanded presence will help Cypress fulfill demand and win new designs.

Cypress is seeing a lot of volume in China. It has won designs with ZTE and Coolpad, as well as multiple white-box Chinese smartphone OEMs. With the low-end of the market growing faster than the high-end market, Cypress is well positioned to see a continued increase in demand for its touch controllers from China. This low-end volume, along with declining sales in the SRAM market, is leading to pressure on Cypress's gross margin.

Cypress still has to compete with Synaptics for share of even the mid-range OEMs. Synaptics has won designs at several of Cypress's low-end customers, including ZTE. Synaptics solution to lower costs is display integration, decreasing the number of layers used for the screen and touch controller. As such, the overall costs for OEMs declines.

Winning the smartwatch market
There's one area of the high-end touchscreen market Cypress is doing quite well -- smartwatches. A recent teardown revealed Cypress Semiconductor won the socket in Samsung's Galaxy Gear Live smartwatch. This is a switch from Melfas, which won the socket in the Gear 2. If Samsung picks up Cypress for its future smartwatch iterations, it should bode well for the company as the wearable market picks up. Cypress also has several other notable design wins in the smartwatch market.

Recognizing the future with fingerprints 
Meanwhile, Cypress is attacking the fingerprint sensor market that Synaptics breached last year with the acquisition of Validity Sensors. In May, Cypress agreed to partner with IDEX to develop fingerprint recognition solutions.

Fingerprint sensors are in two high-end smartphone designs -- the iPhone and Galaxy S5 -- and may find their way into several more designs over the next year or two. Fingerprint recognition has the potential to provide a huge opportunity for Cypress, but Synaptics is in a position that's tough to overcome with its Validity property and partnership with Samsung in the Galaxy S5.

What to watch for
When Cypress Semiconductors reports earnings, watch for the impact its revenue streams have on its gross margin. CEO T.J. Rodgers said in the first quarter release, "Our Q2 earnings will grow much faster than revenue." The earnings growth will come mostly from operational efficiencies, however, not from improved sales prices or cost of goods sold. As always, investors can expect Rodger to provide some excellent and colorful commentary on the conference call.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Cypress Semiconductor. The Motley Fool owns shares of Apple. 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.