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Why Cypress Semiconductor Corporation Expects a Strong 2015

By Dan Caplinger - Jan 22, 2015 at 11:54AM

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The chipmaker's stock surged after announcing a planned merger, but will the company's business keep growing?

Source: Cypress Semiconductor.

Just a few months ago, shareholders in Cypress Semiconductor (CY) had grave concerns about whether the company would be able to navigate the increasingly competitive conditions in the semiconductor industry. Yet those concerns largely evaporated in December, when Cypress announced its plans to merge with Germany's Spansion (NYSE: CODE) in a $4 billion all-stock combination. Now, even as Cypress looks forward to the consummation of the Spansion merger, it still needs to demonstrate its ability to grow its core business in the interim. Cypress's fourth-quarter results, which it announced Thursday morning, should keep enough positive momentum for the company to hold its own in what investors hope will be its final months in its current pre-merger form. Let's take a look at what Cypress's quarterly financials tell about its prospects for 2015.

What Cypress said this quarter
As we've seen in previous quarters, Cypress did a good job of meeting investor expectations. Sales came in at $184.1 million, which was down slightly from the previous quarter, but up almost 10% from year-ago levels. Similarly, adjusted net income of $22.1 million fell sequentially but jumped 47% from the fourth quarter of 2013, producing adjusted earnings per share of $0.13, nailing the consensus figure to the penny.

Source: Cypress Semiconductor.

Results among Cypress's business divisions showed consistent success throughout the company. The largest division, Memory Products, suffered sequential revenue declines of 4% but still jumped 11% from year-ago levels. Data Communications, the small division that makes USB controllers, saw similar performance, with sales falling 7% from last quarter but rising 7% from the previous year. Even the high-growth Emerging Technologies unit, which nearly doubled its revenue from 2013 levels, suffered a 5% drop in sales compared to the third quarter. Only Programmable Services rebounded from its poor performance last quarter, with sales gains of 2% from the third quarter and 4% from a year ago.

On a full-year basis, Cypress produced solid results by making the most of its opportunities. Revenue was essentially flat in 2014 compared to 2013, but Cypress's initiatives to cut expenses paid off for the company, helping to reverse year-ago losses on a GAAP basis and boosting adjusted earnings per share by a third.

Cypress CEO T.J. Rodgers. Source: Cypress Semiconductor.

Spansion is the big news for Cypress
Yet even with solid earnings results, Cypress's attention is squarely on the Spansion merger. Cypress expects the combination to generate $135 million per year in cost reductions during the first three years after closing, and the company expects a boost in adjusted earnings as early as the first year after the merger. CEO T.J. Rodgers is excited about the merger, noting that it has gone through the review process by U.S. and German regulators. As Rodgers says, "We remain confident that the post-merger company will position us as a leading global provider of microcontrollers, flash and SRAM memories, and automotive components required for today's embedded systems."

At the same time, though, Cypress hasn't stopped moving forward in its own right. The company's achievements for the quarter included the introduction of Bluetooth Low Energy system-on-chip products to assist in applications related to the Internet of Things, and new TrueTouch touchscreen controllers for smartphones, tablets, and cameras, which should help provide incremental gains in its reputation for innovation. On the embedded flash front, Cypress gained a licensing win as United Microelectronics (UMC 2.69%) agreed to use Cypress's SONOS technology for its 40-nm process technology, further developing an existing partnership with the key foundry.

Will Cypress live up to shareholders' expectations in 2015?
Cypress shares initially surged after the merger announcement in early December, and the stock quickly climbed as much as 45% in the ensuing month before falling back slightly. With other chipmakers having seen the value of consolidation in the industry, Cypress will need to demonstrate that combining its manufacturing operations with those of Spansion will lead to the magnitude of efficiency gains investors want to see. In particular, many investors hope the deal will give Cypress stronger business relationships with its customers, with a greater emphasis on the automotive and industrial industries, and reaping overall economies of scale.

Cypress has set the bar high, with Rodgers characterizing the merger as combining "two smart, profitable, passionately entrepreneurial companies" into what will be "a leading provider of embedded [microcontroller units] and specialized memories." With the merger on track to close within the first half of 2015, Cypress will simply need to execute well in order to reap the most from the combination going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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