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Cypress Semiconductor Corporation (CY - Analyst Report) reported second-quarter 2013 earnings of 6 cents per share, above the Zacks Consensus Estimate of 0 cent. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Higher revenue and gross margins, together with tight operating expense control, contributed to the upside in the results.

Revenues

Cypress reported revenues of $193.5 million, up 12.0% sequentially but down 3.9% year over year. Revenues were above management’s guidance range of $178.0–$186.0 million due to broad strength across all business units, particularly in TrueTouch BU.

In the reported quarter, the book-to-bill ratio was 1.05, up 21% from the year-ago quarter and 0.7% sequentially.

Revenues by Segment

The Programmable Systems Division (PSD) segment, which generated 42.0% of second quarter revenues, consists of two divisions. The first is basically the old Consumer and Computation Division (CCD), with the TrueTouch, CapSense, and Ovation businesses under its umbrella. The second division comprises the core PSoC business. The segment increased 24.0% sequentially to $81.3 million, driven by design wins in China, ramp of TrueTouch and strong seasonality in CapSense.

The Memory Products Division (MPD) generated 45.6% of revenues, up 7.0% sequentially to $88.1 million, driven by strength in product line like nDP and Async. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing.

The Data Communication Division (DCD) generated 11.0% of revenues, down 6.0% sequentially to $21.3 million due to some customer-specific declines in USB, partially offset by strength in Trackpads. This division has been realigned to focus solely on USB controllers, Wireless USB and West Bridge peripheral controllers for handsets, PCs and tablets.

The Emerging Technology Division (ETD) generated the remaining 1.4% of revenues amounting to $2.7 million, up 21.0% sequentially. This start-up segment includes Cypress AgigA Tech Inc., Deca Technologies Inc., and all majority-owned subsidiaries of Cypress. The ETD division also includes the foundry business and other development-stage activities.

Operating Results

Reported gross margin for the quarter was 47.2%, up 150 bps sequentially but down 740 basis points (bps) from the year-ago quarter’s 53.1%. The sequential increase was mainly due to better factory utilization rates and favorable product and customer mix.

Operating expenses of $96.9 million decreased 3.0% year over year from $99.9 million in the year-ago quarter. Reported operating margin was (4.2%), down 670 bps from the year-ago quarter margin of 2.5%. Research and development (R&D) expenses increased as a percentage of sales whereas selling, general and administrative (SG&A) expenses declined.

The quarter’s GAAP net income was $3.8 million or earnings per share of 2 cents versus $5.0 million or 3 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP earnings were $9.5 million or 6 cents compared with earnings of $9.3 million or 6 cents per share in the year-ago quarter.

Balance Sheet

Cypress exited the second quarter with cash, cash equivalents and short-term investments of approximately $102.0 million versus $101.6 million in the prior quarter. Trade receivables were $114.8 million, down from $132.6 million in the prior quarter.

During the quarter, Cypress’ cash flow from operations was approximately $30.4 million, spending $7.8 million on capex. The company also paid quarterly dividend worth $16.1 million.

Guidance

Management expects second quarter 2013 revenues in the range of $201.0–$207.0 million (up 4%–7% sequentially), driven by seasonality and new customer and new programs ramps in PSD, with Touch and CapSense being the biggest beneficiaries.

Gross margin is expected to increase 53.5%, which will vary with manufacturing product mix. Operating expenses are expected in the range of $78.0–$79.0 million while non-GAAP earnings per share are likely to be in the range of 17 cents–18 cents (up 22% to 34% sequentially).

Our Take

Cypress is a semiconductor company, offering high-performance, mixed signal, programmable solutions. The company delivered solid second quarter results with earnings above the Zacks Consensus Estimate. The top-line numbers were also well above management’s guidance of $178 million to $186 million.

In the quarter, the company saw improved demand across all its business units, with bookings increasing across all divisions, indicating improving economy. Also, the company guided higher revenues due to improving demand trends.

Though a weak and uncertain macro environment and increased pricing pressure remain concerns, we are optimistic on the stock given the company’s advanced technology, momentum in new products, increased customer wins and growth initiatives.

Cypress has a Zacks Rank #1 (Strong Buy).

Investors can also consider other stocks with positive Zacks Rank and expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method)

Syntel Inc. (SYNT - Snapshot Report), with an ESP of +4.76% and a Zacks Rank #1 (Strong Buy)

InvenSense Inc. (INVN - Snapshot Report), Earnings ESP of +8.33% and Zacks Rank #2 (Buy)

Scientific Games Corporation (SGMS - Analyst Report), with an ESP of +100.0% and a Zacks Rank #3(Hold)

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