Cypress Semiconductor Hones Its Focus After Another Strong Quarter

Cypress Semiconductor Corporation (CY) announced third-quarter 2018 results on Thursday after the market closed, detailing yet another quarterly revenue record and expanding margins -- both happy consequences of its enviable product portfolio and strategy for gaining ground in the industry's most profitable high-growth markets. Cypress also unveiled a compelling new joint venture for the disposition of its NAND business that should allow the company to better focus on those important markets.

Let's dig deeper in order to get a better idea of how Cypress started the second half and examine what investors should be watching toward the end of the year.

IMAGE SOURCE: CYPRESS SEMICONDUCTOR.

Cypress Semiconductor results: The raw numbers

DATA SOURCE: CYPRESS SEMICONDUCTOR QUARTERLY FILINGS. GAAP = generally accepted accounting principles.

What happened with Cypress this quarter?

• On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and restructuring charges, Cypress' earnings grew 54.3% year over year, to $152.7 million. Adjusted earnings per share climbed 48.1%, to $0.40.
• These results were near the high end of Cypress' guidance ranges provided in July that called for revenue of $655 million to $685 million and adjusted earnings per share of $0.36 to $0.40.
• Adjusted gross margin increased 400 basis points year over year, to 47%, right at the midpoint of guidance for 46.5% to 47.5%.
• By business segment:
  • Memory products division (MPD) revenue increased 12.4%, to $259.6 million.
  • Microcontroller and connectivity division (MCD) revenue increased 10.7%, to $413.4 million.
• Cypress introduced a number of promising new products and partnerships, including:
  • A new Bluetooth audio offering for robust connections in wireless earbuds.
  • A collaboration with Arm to integrate Cypress' PSoC 6 microcontrollers and Bluetooth combo radios into Arm's Pelion Internet of Things (IoT) platform.
  • A collaboration with Alibaba Group to strengthen its sales presence in China via an online store in Alibaba's TMALL. Cypress also expanded its cloud connectivity offerings for IoT solutions with Alibaba's embedded IoT operating system, AliOSThings.
• Earlier today, Cypress also announced a new five-year joint venture with SK Hynix System IC to manufacturer and sell Cypress' current single-level cell NAND products and to continue investing in next-generation NAND flash memory products. The joint venture will be 60% owned by SK Hynix System IC and 40% owned by Cypress.

What management had to say

Cypress CEO Hassane El-Khoury stated:

Cypress delivered another record quarter for revenue while continuing to expand gross margins, operating margins and cash flow due to our uncompromising focus on execution. Our strategy and investments to advance our portfolio of highly differentiated connect, compute and store solutions are paying off. We are seeing a strong design pipeline leading into the fourth quarter with design activity increasing 23% year-over-year. Our continued commitment to sharpen our focus, with moves such as today's announcement of entering into a joint venture for our NAND Flash business, are positioning us well in our target high-growth markets of Automotive, Industrial and IoT.

Regarding the NAND joint venture, El-Khoury elaborated:

This joint venture provides a path to a continued and stable supply to customers longer term. A key aspect of our Cypress 3.0 strategy is to focus on our core technology targeting growth markets. We will continue to sharpen our focus on differentiated Connect, Compute and Store solutions that target the automotive, industrial and IoT markets, which have longer design cycles. Our NAND customers will now be supported by the joint venture, and the joint venture will continue to support their future needs while allowing Cypress to participate in the success of the joint venture.

Looking forward

For the fourth quarter of 2018, Cypress expects revenue in the range of $585 million to $615 million (compared to $597.6 million in the same year-ago period), with adjusted gross margin expanding further to a range of 47% to 48% and adjusted earnings per share of $0.31 to $0.35. By comparison -- and though we don't usually pay close attention to Wall Street's targets -- most analysts were modeling fourth-quarter earnings near the high end of that range on revenue of $644.2 million.

It remains to be seen, then, how the market will react to that seemingly conservative forward outlook. But when you couple Cypress' relative outperformance in Q3 and the impending fruits of its joint venture (i.e., allowing the company to increase its focus on high-value markets while still benefiting from its NAND portfolio), I think this quarter should leave long-term investors more than happy with Cypress' position today.