For longtime investors in Cypress Semiconductor (NASDAQ:CY), the past few months have been a lot more eventful -- and positive -- than the several years that came before. Since announcing plans to merge with Spansion, Cypress has inspired hope that it can pull out of its doldrums and start enjoying the more favorable results that sent its shares to all-time highs in 2010 and 2011. Yet while investors were largely optimistic coming into the company's first-quarter financial report Thursday morning, Cypress reported a big loss, and while one-time factors were responsible for the lack of profitability, shareholders still wonder whether the post-merger Cypress will achieve all the goals the company has. Let's look more closely at Cypress's latest results and their implications for the company's future.
Big loss from a done deal
Cypress wasn't able to meet the expectations of shareholders during the first quarter. Revenue of $209.1 million was up 23% from the year-ago quarter, with almost all of the incremental gain coming from the early closing on the Spansion merger on March 12. More alarming was Cypress's lack of profitability, with the company posting an adjusted net loss of $87.9 million that equated to $0.45 per share.
Before panicking about the unexpected loss, it's important to understand that Cypress took a massive $107 million adjustment that was primarily responsible for its poor results. The charge was necessary in order to reflect excess inventory as well as older inventory that Cypress acquired from Spansion in the merger. Looking solely at what the company called "Legacy Cypress," earnings per share of $0.10 would have been slightly higher than the $0.07 per share Cypress posted in last year's first quarter.
A look at Cypress's business divisions more clearly shows the differing trends within the overall organization. Memory Products enjoyed 13% gains in revenue year-over-year to $91.5 million, but the Programmable Services division saw a big 18% drop in revenue to $56.7 million. Gains of 19% for the Data Communications unit and rapid 76% growth in Emerging Technologies sales helped lift the company's overall growth rate, even though those two segments make up only about 12% of Cypress's total post-merger sales.
From a geographical standpoint, Cypress now has less exposure to China, with the China and Rest-of-World classification seeing its share of sales drop below the 50% level. Europe and Japan were big beneficiaries from the shift, and the share of revenue from the Americas also moved upward slightly.
High hopes for Spansion
As we saw last quarter, the Spansion merger got the lion's share of attention from Cypress executives. As CEO T.J. Rodgers said, "We are pleased to have closed our merger with Spansion earlier than expected, and we are encouraged by the strategic opportunities ahead of us." In particular, with the post-merger Cypress assuming leadership roles in the SRAM and NOR Flash memory arena, Cypress now claims status as the No. 3 provider of automotive microcontrollers and memory chips, giving it preferred supplier status among large automakers.
Still, incorporating Spansion will take some time. Cypress saw its inventory level jump more than 340% in the quarter, with the bulk of that gain coming from the $305 million in Spansion inventory that Cypress absorbed in the merger. With Spansion having moved forward with initiatives like expanding its human-to-machine interface technology and several new types of memory products, getting its efforts in line with Cypress in the future will have to be handled carefully in order to keep the post-merger companies' visions aligned and to maximize potential synergies. Already, though, Cypress said that it has identified $8.4 million in synergy-related savings.
Cypress stock got off to a tough start after the report, with shares falling about 2% in the first hour of trading following the announcement, though by 3 p.m. shares were up 3.5% from the previous close. Yet as concerning as a loss might appear to be, the real test for Cypress is whether its Spansion acquisition will pay off with a greater command of its targeted industries. If the merger reaches its goals, then investors in Cypress could finally see the long-term recovery they've hoped for years that the company would make.