Cypress Semiconductor (CY +0.00%) sprung a surprise when it reported its second-quarter results. The chipmaker's revenue came in line with consensus estimates, while its bottom line beat expectations significantly. But, Cypress' outlook wasn't up to the mark, and this doesn't come as a surprise. The company has struggled in the high-end mobile device market due to Synaptics' (SYNA +1.29%) growing clout, and the same seems to be happening in the lower-end of the market.
Taking hits
Cypress' overall book-to-bill ratio at the end of the second quarter fell below 1. This is in stark contrast to book-to-bill ratios of 1.08 posted in the preceding two quarters. As Fool contributor Adam Levy pointed out, Synaptics is landing design wins at several low-end Chinese smartphone manufacturers such as ZTE, which is a Cypress customer as well. Already, Cypress looks set to lose the lucrative touchscreen controller slot in Samsung's (NASDAQOTH: SSNLF) upcoming Note 4 phablet, and stiff competition in mid-range and budget smartphones will hurt its prospects further.
Synaptics now counts the likes of Lenovo, Huawei, Gionee, and Coolpad, apart from ZTE, as clients. Recently, the company announced that its ClearPad touchscreen controller has once again been selected by Huawei to power its flagship smartphone, the Ascend P7. Powered by Synaptics, the P7 boasts of features such as glove input, passive pen, and moisture-proofing support. In the press release, Synaptics laid stress on the fact that it has "strong relationship with leading Chinese OEMs, like Huawei, who have a global market presence and growing customer base."
For Cypress, Synaptics' moves into the high-volume Chinese smartphone market is concerning. Last year, Synaptics displaced Cypress in Amazon's Kindle Fire, and a similar story is expected this year with the Galaxy Note 4. It is rumored that Synaptics will supply Samsung with an area-type fingerprint sensor. On the last earnings call, Synaptics CEO Richard Bergman stated that the company expects to see area sensors in the market in the second half of the year, which coincides with the Galaxy Note's expected release date.
Smartwatch competition
As such, Cypress seems to be fighting a losing battle against Synaptics. However, the company does offer a few positives. For instance, its controllers are being used by Samsung in the Galaxy Gear Live smartwatch. This is not Cypress' first win in the smartwatch segment, as its TrueTouch capacitive touchscreen controller was also used by Qualcomm in the Toq, which was released last year. Cypress has been building its expertise in smartwatches for some time now, and this might help it come out of its slump.
The smartwatch market is expected to be worth $9.2 billion by 2018, according to Business Insider. However, Cypress will need to stay ahead on the innovation curve as Synaptics is expected to make its move in this market soon. Last month, it was reported that Samsung might launch a smartwatch with a fingerprint sensor in 2015. Now, Synaptics is the one supplying fingerprint tech to the South Korean giant for the Galaxy S5, so it is quite possible that it might carry its design win into Samsung's smartwatch next year.
What next?
Cypress won a number of designs at Chinese smartphone manufacturers. At Huawei, it saw five design wins, while it landed ZTE's flagship, the Nubia X6. Additionally, the company racked up enough bookings during the first three weeks of the quarter to meet 53% of its guidance. Now, it has 10 weeks to secure the remaining 47% to satisfy its guidance.
As such, there is a probability that Cypress might beat on revenue once again when it reports results next time, but this depends on the traction that it might see in the second half of the year.
Cypress shares rose 4% after the company came out with earnings, probably in anticipation of a solid performance in the next quarter. But, from a long-term perspective, Synaptics looks like the better buy in this industry. While it is true that Synaptics doesn't carry a 4% dividend yield like Cypress, innovation is on its side. It is displacing Cypress from key mobile devices, and might even snatch its smartwatch spot next year. The bottom line is that Cypress might be eclipsed by Synaptics further going forward.
