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."