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Cypress (CY) Up 13.7% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Cypress Semiconductor Corporation . Shares have added about 13.7% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Cypress reported first-quarter 2015 loss of 53 cents per share, significantly disappointing the Zacks Consensus Estimate of earnings of 1 cent.

Revenues

Cypress reported revenues of $209.1 million, up 13.6% sequentially and 22.8% year over year. It includes the results of the legacy Spansion operations for the period of Mar 12 to Mar 29, 2015.

Excluding the Spansion results, Cypress’ revenues for the first quarter were $173.9, slightly lower than management guidance of $175.0–$180.0 million.

Revenues by Business Units

Following the merger, the new Cypress will continue to report its revenues under the same four divisions: Programmable systems (PSD), Memory Products Division (MPD), Data Communication Division (DCD) and Emerging Technology Division (ETD).

The PSD — accounted for 27.1% of revenues — includes the old Consumer and Computation Division (CCD) comprising TrueTouch, CapSense and Ovation businesses, and the core PSoC business. The segment decreased 19% sequentially and 18% year over year to $56.7 million due to declines in CapSense and PSoC 1, partially offset by growth in PSoC 3, 4 and 5. Management has combined PSoC and the Spansion microcontrollers into this division.

The MPD segment generated 43.8% of revenues, up 3% sequentially and 13% year over year to $91.5 million. The sequential increase was mainly due to the overall strength in broad industrial markets. This division continues to focus on four SRAM business units, general-purpose programmable clocks and process technology licensing. This division will now include the new flash business unit.

The DCD generated 8.9% of the revenues, up 5% sequentially and 19% year over year to $18.6 million due to continued strength in the USB products. This division has been realigned to focus solely on USB controllers, Wireless USB and West Bridge peripheral controllers for handsets, PCs and tablets.

The ETD contributed the remaining 3.4% of revenues amounting to $7.1 million, down 1% sequentially but soaring 76% year over year. This start-up segment includes Cypress AgigA Tech Inc., Deca Technologies Inc. and all majority-owned subsidiaries of Cypress. ETD also includes the foundry business and other development-stage activities.

The new Legacy Spansion unit contributed the remaining 16.8% of revenues amounting to $35.2 million.

Operating Results

Reported gross margin was (19.9%) versus 45.6% in the year-ago quarter.

Operating expenses of $101.5 million increased 15.5% year over year from $87.9 million in the year-ago quarter. Both research and development and selling, general and administrative expenses decreased as a percentage of sales. The net result was a reported operating margin of (117.5%) versus (6.5%) in the year-ago quarter.

GAAP net income was $229.8 million or $1.17 per share versus net loss of $7.9 million or loss per share of 5 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP loss was 53 cents as against loss of 1 cent in the year-ago quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $157.2 million versus $118.8 million in the last quarter. Trade receivables were $192.1 million, up from $76.0 million in the earlier quarter. Net inventory was $389.0 million, up from $88.2 million in the fourth quarter. The increase was primarily backed by inventories acquired from Spansion, which totaled roughly $305 million, including the fair value adjustment mandated by purchase accounting.

During the quarter, Cypress’ cash flow from operations was approximately $12.3 million, spending $6.5 million on capex. The company also paid quarterly dividend worth $17.9 million.

Guidance

Management expects second-quarter 2015 revenues in the range of $475.0–$500.0 million. This revenue guidance excludes roughly $15–$20 million of revenues through Spansion's distribution channel lost due to the purchase accounting treatment.

Consolidated gross margin is expected to be 41%, plus or minus, varying due to utilization, product and customer mix. Operating expenses and synergies are expected in the range of $143–$145 million for the upcoming quarter, while tax expense is expected to be $3.3 million for the combined company.

Our Take

Cypress is a semiconductor company that offers high-performance, mixed signal and programmable solutions.

We remain optimistic about the synergies associated with Cypress' merger with Spansion Inc. (CODE), which closed on Mar 12.  The merger was a tax-free transaction valued at approximately $5 billion. The new company is now a global provider of microcontrollers and specialized memory chips for embedded systems. The integration remains well on track and Cypress has already achieved $8.4 million in annualized synergies in the first quarter.

We are positive about the company’s advanced technology, growth in the automotive and industrial markets and momentum in new products.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

VGM Scores

At this time, the Cypress' stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with a 'D'. The stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than value investors.

Outlook

The stock has a Zacks Rank #2 (Buy). We are expecting a above average return from the stock in the next few months.

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