Cypress Semiconductor Keeps Innovating Through a Soft Market

On Thursday, Cypress Semiconductor Corporation (CY) delivered a slightly better quarter than its pre-announcement last week indicated, but guidance shows it's not immune to seasonal softness in the semiconductor market. But before we dive deeper, let's take a closer look at Cypress' headline numbers.

Cypress Semiconductor results: The raw numbers

*Includes $6.25 million in revenue from intellectual property licensed to Samsung, which was excluded from GAAP revenue due to purchase accounting for the Spansion merger. YOY: year over year. Data source: Cypress Semiconductor.  

What happened with Cypress this quarter?

• Keeping in mind year-over-year growth was primarily due to Cypress' merger with Spansion last year, revenue fell 2.9% sequentially from last quarter due to the continued "softening" semiconductor market.
• Revenue came in at the high end of Cypress' pre-announced guidance from last week, while earnings were right at the midpoint of expectations.
• Gross margin decreased sequentially from 41.2% to 39.8%, in line with expectations given Cypress' "lean inventory initiative," which involves running wafer fabs at lower rates than demand to reduce excess inventory.
• The company realized $137.7 million in annualized synergies so far -- up from $120.3 million last quarter and $51.6 million two quarters ago. Cypress remains well ahead of its three-year plan to achieve annualized synergies of $160 million.
• Revenue by business segment:
• Programmable systems down 12% year over year to $157.8 million.
• Memory products down 1% to $259.4 million.
• Emerging technologies up 66% to $21.7 million.
• Data communications down 1% to $17.5 million.
• By geography:
• Japan represented 29% of sales, compared to 33% last quarter.
• Europe comprised 14% of sales, unchanged from last quarter.
• Americas comprised 16% of sales, up from 14% last quarter.
• China/rest-of-world division represented 41% of sales, up from 39% last quarter.
• Repurchased $56.5 million in common stock, under the $450 million repurchase authorization approved last quarter.
• Introduced 12 new products, mostly in targeted automotive and industrial markets, notably including:
• the first Traveo automotive microcontrollers in an advanced 40-nm process;
• the industry's "most compact, highly integrated automotive power management ICs";
• the industry's first PSoC-based Bluetooth low energy devices to be qualified for latest Bluetooth 4.2 security, privacy, and data throughput standards;
• and a PSoC-based BLE solution for wireless Internet of Things beacons that eliminates the need for batteries by using heat, vibration, or light for power -- named one of the "10 best technologies" at CES 2016 by VentureBeat.

What management had to say 
Cypress Semiconductor CEO T.J. Rogers pledged his company will continue to return capital to shareholders through dividends and stock repurchases, while at the same time improving its leadership in growth markets:

Cypress remains committed to the task of building on our position as a leading provider of high-performance embedded solutions for the automotive and industrial markets and other promising markets such as Home Appliances and the Internet of Things. Our revenue in automotive and industrial continues to grow: Revenue from these segments increased to 55% of our total revenues in the fourth quarter, up from 52% in the fourth quarter of 2014. We continue to be a source of technology leadership in these markets.

Looking forward 
For the first quarter of 2016, Cypress expects adjusted net sales in the range of $410 million to $440 million, and diluted earnings per share of $0.04 to $0.08. By contrast, analysts' consensus estimates predicted higher first-quarter earnings of $0.11 per share, but came in slightly less optimistic on the top line calling for revenue below the midpoint of Cypress' guidance at $420.4 million.

A Cypress energy harvesting PMIC. Image source: Cypress Semiconductor Corporation

As of this writing, Cypress currently sits more than 20% lower than it started this year -- albeit not just due to its mixed forward guidance and soft semiconductor market, but also on the heels of the broader market's steep year-to-date decline. But its share price notwithstanding, I think investors today should be pleased with Cypress Semiconductors position given its continued focus on innovation, progress in post-merger synergies made long ahead of schedule, and intention to continue rewarding patient shareholders through dividends and repurchases as they wait for the market to turn in the company's favor.