Smart Watch Im

Touchscreen controllers are of vital importance in smartwatches. Source: Cypress.

Mixed-signal semiconductor maker Cypress Semiconductor (NASDAQ:CY) just reported results for the second quarter of 2014. Shares opened 1.2% lower on the news.

Second-quarter sales increased 8% sequentially but fell 8% year-over-year, landing at $183.6 million. Adjusted earnings came in at $0.16 per diluted share, up from $0.14 per share in the year-ago period.

Revenue was in line with Wall Street projections, and analysts would have settled for earnings of $0.12 per share.

Cost of revenues dropped by 13.5% year-over-year. Gross margins increased to 54%, up from 53% a year ago, thanks to a favorable product and customer mix. The core semiconductor gross margin was 55.8%, the highest level seen since 2012. Cypress also cut operating costs by 15%.

Cypress saw weak orders of touchscreen controllers as the consumer electronics market showed "mild, but broad softening" in the second quarter. However, management remains confident in existing full-year revenue goals due to strong order volumes in the company's much larger automotive and industrial segment.

Reflecting a shift in Cypress' sales strategy, sales via distributors declined 9% while direct sales jumped 28% higher.

Operating cash flows increased 50% year-over-year and free cash flow doubled to $39.5 million. In a prepared statement, Cypress CEO T.J. Rodgers said that the surging cash flows demonstrated "the fall-through leverage in our current model."

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Anders Bylund has no position in any stocks mentioned. 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.

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