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What to Look for When Cypress Semiconductor Reports Q2 2017 Results

By Nicholas Rossolillo - Jul 26, 2017 at 8:35PM

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The company will report its latest quarter on July 27. Here are the key points you’ll want to hone in on.

Cypress Semiconductor (CY) has had a great 2017, as it rebounds from a tough couple of years. When the company reports second-quarter earnings on Thursday afternoon, investors will want to look for updates on Internet of Things (IoT) product progress, new sales initiatives, and the path back to profitability.

CY Chart

Data by YCharts.

Cypress 3.0 yielding results

A few months back, Cypress outlined its new product lineup during an investor presentation. After a couple of mergers over the last couple years, the company's legacy memory-chip business has been consolidated with former competitor Spansion, and a presence in the IoT was purchased from Broadcom (NASDAQ: AVGO).

Combined with Cypress' USB-C connectivity products -- technology that enables a single connection for data and power transmission on electronic devices -- the company now has access to growing industries that it expects to lead to 7% to 9% overall growth through 2021. The company has dubbed its new look and growth initiatives Cypress 3.0.

A graphic showing that Cypress sees connectivity growing 16%-18% in compound annual revenue growth, IoT-related chips 5%-7%, and memory chips 2%-5% through 2021, providing total growth of 7%-9%.

Cypress Semiconductor's estimated growth by segment. Data source: Cypress Semiconductor Q2 2017 investor presentation.

USB-C, connected cars, and other new IoT-focused offerings focused on industrial and consumer use helped drive a successful first quarter of the year. Investors should look for a progress report on the connectivity and IoT segments, how they performed during the quarter, and how management sees sales unfolding for the balance of 2017.

A new relationship to boost sales

USB-C and connected autos have helped Cypress achieve 10.5% revenue growth over the past year. To keep that momentum going, a new sales and distribution partnership was announced with Arrow Electronics (NYSE: ARW) back in March.

More recently, both sides of that partnership doubled down on the relationship. A new development platform for developers and engineers looking for quick-to-market IoT- and cloud-based devices was released. The still fresh relationship with Arrow may not have yielded results yet, but look for clues that it's starting to pay off.

The new Cypress is still trying to scale its new businesses, so another rise in revenues will be an important key metric. Management has given a target of $530 million to $560 million in revenue, a quarter-over-quarter rise of as much as 5.6%.

An illustration of devices and data connected around the world.

Image source: Getty Images.

The bottom line

Increasing the top line isn't the only concern. Cost cuts that began after the Spansion merger back in 2015 continue, and doing so is imperative for Cypress to return to profitability. The digital memory business still makes up a big chunk of revenue, but growth from the segment is the slowest. Saving on costs is the name of the game here.

In the past couple of quarters, progress on that front has begun. In the first quarter, total net losses were at $0.14 per share, compared with $0.22 the previous quarter. Guidance was for that loss to narrow again, from $0.13 to $0.09.

More important, though, is that the company's free cash flow -- money left over after basic expenses are paid for -- has been on the rise.

CY Net Income (TTM) Chart

Data by YCharts.

As with any company that's trying to mount a rebound or undergoing a significant facelift, a lot is riding on this quarter for Cypress. If the diversified tech supplier misses its forecasts or issues guidance that casts doubt on its forward progress, the stock could drop.

However, the company is well positioned for the future, with exposure to the growing IoT movement and a wide portfolio of products to meet the needs of electronic device makers. Barring a disastrous development in the report, the future looks promising for Cypress.

Nicholas Rossolillo owns shares of Cypress Semiconductor. The Motley Fool recommends Broadcom Ltd and Cypress Semiconductor. The Motley Fool has a disclosure policy.

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