Cypress Semiconductor Expands Its Scope, Delivers As Promised

Cypress' new CYLKIT-E02 solar-powered BLE sensor beacon reference design Kit. Image source: Cypress Semiconductor.

Cypress Semiconductor Corporation (CY +0.00%) released second-quarter 2016 results late last week. And -- similar to last quarter -- though shares of the semiconductor specialist initially jumped more than 8% on the report, they once again settled to close to roughly even on the day. To understand why, let's put Cypress Semiconductor's latest quarter under the microscope.

Cypress Semiconductor results: The raw numbers

*Adjusted (non-GAAP) revenue includes $6.25 million in revenue from intellectual property licensed to Samsung, which was excluded from GAAP revenue because of purchase accounting for the Spansion merger. YOY: year over year. Data source: Cypress Semiconductor. 

What happened with Cypress this quarter?

• These results were in line with guidance provided last quarter, which called for adjusted revenue of $440 million to $470 million, and adjusted earnings per share of $0.10 to $0.14.
• Revenue climbed 7% sequentially from last quarter on typical seasonality. Adjusted earnings per share rose 71.4% sequentially. 
• Based on generally accepted accounting principles, Cypress turned in a net loss of $519.3 million, primarily because of a non-cash goodwill impairment charge of $488.5 million related to its Programmable Systems Division. This charge resulted from decreases in forecasted operating results compared with expectations for the division at the time of the merger, primarily in consumer markets as Cypress increased its focus on automotive and industrial segments.
• Management was careful to point out that the charge has no effect on Cypress' cash balance or operating cash flow, and its long-term outlook for revenue and earnings remains unchanged.
• Gross margin continued to expand per Cypress' gross margin improvement plan, climbing 90 basis points sequentially, to 37.8%. Excluding Cypress' emerging-tech division, core margins were 38.1%, as Cypress continued to maintain low factory utilization as part of its lean inventory initiatives.
• Inventory at the end of the quarter was $220.9 million, down 26.6% year over year.
• Cypress Semi has realized $165.5 million in annualized synergies from its merger with Spansion in last year's second quarter, up from $150.4 million in Q1. Cypress remains well ahead of its plan to achieve $180 million in synergies by the end of 2016.
• Adjusted revenue by business segment broke down as follows:
• Programmable systems grew 2% sequentially, $166.8 million.
• Memory products climbed 14% sequentially, to $244.4 million.
• Emerging technologies declined 24% sequentially, to $19.7 million.
• Data communications increased 27 sequentially, to $25.5 million.
• Adjusted revenue by geography broke down as follows:
• Japan represented 20% of total sales, down from 27% last quarter.
• Europe represented 15% of sales, flat with last quarter.
• Americas represented 13% of sales, down from 14% last quarter.
• The China/rest-of-world division represented 52% of sales, up from 44% last quarter.
• The company repurchased a negligible number of shares in Q2. Cypress has used $239 million of the $415 million repurchase authorization it approved in the fourth quarter of 2015.
• Subsequent to the end of the quarter, Cypress closed on its $550 million acquisition of Broadcom's wireless Internet of Things (IoT) business.
• Through the acquisition, Cypress now offers state-of-the-art Wi-Fi, Bluetooth, and ZigBee IoT product lines, as well as supporting intellectual property and the WICED brand SDK, developer ecosystem, and community.

What management had to say 

Thad Trent, Cypress CFO and member of the office of CEO, added:

The acquisition of Broadcom's wireless IoT business marks another key milestone in Cypress's evolution and underscores our strategy to invest in high-growth markets. In the third quarter, we expect more than half our revenue will come from markets growing faster than the overall semiconductor industry. The expansion of Cypress' leadership position in embedded systems will accelerate our progress toward our target financial model. Best-in-class wireless technology from Broadcom -- combined with our standard and programmable microcontrollers, analog ICs and USB connectivity solutions -- provides Cypress with a stake in some of the most exciting innovations in the automotive, industrial, and IoT markets.

Looking forward 

For the third quarter, Cypress expects adjusted net sales in the range of $510 million to $540 million, up from $470.1 million in the same year-ago period, reflecting its base business growing on a seasonal basis and including $55 million to $60 million in revenue from the Broadcom IoT business acquisition. That should translate to adjusted earnings per diluted share of $0.12 to $0.162, down from earnings of $0.17 per share in last year's third quarter.

As it stands, this was a solid report from Cypress with no big surprises, as the company continues to position itself to capitalize on higher-growth markets going forward. So while it's no surprise that shares are little changed following this performance, long-term investors should be more than pleased with where Cypress Semiconductor stands today.