Cypress Semiconductor (CY) Q3 Earnings Miss Estimates

Cypress Semiconductor Corporation (NASDAQ:CY) reported adjusted third-quarter 2016 earnings of 7 cents per share, missing the Zacks Consensus Estimate of 8 cents. Adjusted earnings exclude one-time items but include stock-based compensation expense.

During the quarter, design win momentum and market share gains continued. The acquisition of Broadcom (NASDAQ:AVGO)'s Wireless Internet of Things (IoT) business that Cypress closed in early July, contributed $62.6 million to its revenues. Last quarter, the company recognized $0.4 million of synergies from this acquisition.

Cypress also recognized $44 million of synergies associated with the Spansion merger and expects $180 million of synergy by the end of this year. The integration remains well on track and Cypress is witnessing new opportunities at top-tier customers, particularly in the automotive and industrial markets. These markets now account for a majority of the company’s sales, bringing in more stable revenues and margins.

However, a weak and uncertain macro environment, limited visibility and intensifying competition are nagging concerns.

CYPRESS SEMICON Price, Consensus and EPS Surprise

The numbers in detail:-

Revenues

Cypress reported non-GAAP revenues of $530.1 million, up 16.2% sequentially. Revenues exceeded management’s guided range of $510.0–$514.0 million and were above the Zacks Consensus Estimate of $518 million.

Revenues by Business Units

Cypress reports revenues under the following divisions: Programmable Systems Division (PSD), Memory Products Division (MPD), Data Communication Division (DCD) and Emerging Technology Division (ETD).

Revenues from the PSD segment increased 8% sequentially to $182.3 million, driven by strong growth in the automotive, microcontroller and PSoC solutions. Notably, the company’s automotive business grew almost 25% year over year.

The MPD segment generated revenues of $239.6 million, down 2% sequentially due to a decrease in NOR revenues and timing of licensing revenues.

Revenues from DCD improved a massive 248% sequentially to $88.7 million. The increase was driven by solid performance in the IoT business and growth in USB Type-C. The company continues to see strong design win momentum in the USB Type-C product.

Revenues from ETD were $19.4 million, down 2% sequentially.

Operating Results

Pro-forma gross margin was 38.9%, up 289 basis points (bps) sequentially. The increase was mainly because of increased factory utilization to 56% upon completion of lean inventory initiatives.

Operating expenses (research & development and selling, general & administrative) of $187.6 million increased 22.9% sequentially. As a percentage of sales, research and development expenses increased, while selling, general and administrative expense decreased.

GAAP net income was $9.41 million or 3 cents per share versus ($519.27) million or loss per share of $1.65 in the previous quarter. Excluding special items but including stock-based compensation expense, non-GAAP earnings per share came in at 7 cents compared with 8 cents in the previous quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $847.4 million compared with $189.3 million last quarter. Trade receivables were $349.8 million, up from $325.1 million in the prior quarter. Net inventory was $247.7 million, up from $220.9 million in the prior quarter.

During the quarter, Cypress’ cash flow from operations was roughly $105.1 million and capex was $19.7 million. The company also paid quarterly dividend worth $35.2 million.

Guidance

Management expects fourth quarter 2016 revenues in the range of $510.0–$540.0 million. The Zacks Consensus Estimate is pegged at $517.3 million.

Consolidated gross margin is expected to be roughly 40.0%, depending on utilization, product and customer mix. Operating expenses are likely to be within $141.5–$144.5 million.

Earnings per share are expected in the range of 12 cents to 16 cents. The Zacks Consensus Estimate is pegged at 6 cents for the fourth quarter.

Zacks Rank and Stocks to Consider

Currently, Cypress Semiconductor has a Zacks Rank #2 (Buy). Others stock worth considering in the wider technology sector include Electronics for Imaging, Inc. (NASDAQ:EFII) , Logitech International SA (NASDAQ:LOGI) and Stratasys Ltd. (NASDAQ:SSYS) , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For the current year, the consensus estimate for Electronics for Imaginghas gone up by 23.8% in the past 30 days. The same for Logitech and Stratasys has gone up by 4.4% and 27.8% respectively.

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