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Cypress Semiconductor Corporation (CY - Analyst Report) reported third-quarter 2013 earnings of 3 cents per share, above the Zacks Consensus Estimate of 1 cent due to higher gross margins and tight operating expense control. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Cypress reported revenues of $188.7 million, down 2.5% sequentially and 7.0% year over year. The decline was due to weakness in the mobile handset market. However, revenues were above management’s revised guidance range of $184.0 million–$187.0 million.

In the reported quarter, the book-to-bill ratio was 0.75 versus 1.05 in the prior quarter.

Revenues by Segment

The Programmable Systems Division (PSD) segment, which generated 41.4% of third-quarter revenues, consists of two divisions. The first is the old Consumer and Computation Division (CCD) comprising TrueTouch, CapSense and Ovation businesseswhile the second division includesthe core PSoC business. The segment decreased 4.0% sequentially to $78.1 million due to softness in CapSense business from a specific customer, partially offset by slight growth in the TrueTouch business.

The Memory Products Division (MPD) generated 47.0% of revenues, up 1.0% sequentially to $88.7 million. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing.

The Data Communication Division (DCD) generated 10.0% of revenues, down 11.0% sequentially to $18.9 million due to USB weakness owing to a declining PC market. 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 1.6% of revenues amounting to $3.0 million, up 9.0% 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 48.6%, up 140 basis points (bps) sequentially but down 560 bps from the year-ago quarter’s 54.2%. The sequential increase was mainly due to favorable customer mix and continued cost-reduction efforts.

Operating expenses of $101.6 million increased 7.0% year over year from $95.0 million in the year-ago quarter. Reported operating margin was (5.3%), down significantly from the year-ago quarter margin of 7.4%. Both research and development (R&D) and selling, general and administrative (SG&A) expenses increased as a percentage of sales.

The quarter’s GAAP net loss was $8.4 million or 6 cents per share versus net earnings of $3.8 million or 2 cents per share in the last quarter and $14.3 million or 9 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP earnings were $4.2 million or 3 cents per share compared with earnings of $9.5 million or 6 cents per share in the last quarter.

Balance Sheet

Cypress exited the third quarter with cash, cash equivalents and short-term investments of approximately $101.4 million versus $102.0 million in the prior quarter. Trade receivables were $108.2 million, down from $114.8 million in the prior quarter.

During the quarter, Cypress’ cash flow from operations was approximately $7.9 million, spending $10.8 million on capex. The company also paid quarterly dividend worth $16.3 million.

Guidance

Management expects fourth-quarter 2013 revenues in the range of $163.0 million–$170.0 million (down 10.2% sequentially at the midpoint) due to continued weakness in PSD business. Management also expects MPD and DCD businesses to decline sequentially in the fourth quarter.

Gross margin is expected to be approximately 52.5%, which will vary with manufacturing product mix. Operating expenses are expected in the range of $72.0 million–$73.0 million while non-GAAP earnings per share are likely to be in the range of 7 cents–9 cents (down 54.3% sequentially at the midpoint).

Our Take

Cypress is a semiconductor company, offering high-performance, mixed signal and programmable solutions. The company delivered decent third-quarter results with earnings above the Zacks Consensus Estimate.

In the quarter, the company saw greater-than-expected weakness in the mobile handset market in Asia. Additionally, lead time continues to be low, further reducing revenue visibility. Also, management provided a weak forward guidance, indicating weak demand trends.

Though we remain optimistic about the company’s advanced technology and momentum in new products, weak macro environment and poor visibility related to order patterns remain causes of concern.

Cypress has a Zacks Rank #4 (Sell). Other stocks that have been performing well and are worth a look include Freescale Semiconductor (FSL - Snapshot Report), Cirrus Logic (CRUS - Snapshot Report) and Avago Tech (AVGO - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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