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Cypress Trims Q3 Guidance

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Recently, Cypress Semiconductor Corp. (CY - Free Report) slashed its revenue and earnings guidance for the third quarter of 2013 and also provided a preliminary guidance for the fourth quarter.

The chip maker now expects sales of $184 million–$187 million, down from its previous guidance range of $201 million to $207 million, to account for the reduced demand from its major handset customers. The earnings per share outlook has also been lowered to 10 cents–12 cents from the previous guidance of 17 cents –18 cents.

Management had previously projected revenues to improve as a result of seasonality and new customer and new program ramps in Programmable Systems Division (PSD).

However, now, the company is seeing greater-than-expected weakness in the mobile handset market in Asia. Management said that the guidance cut was on account of purchase delay of certain new handsets until the first quarter and order reductions due to inventory adjustments at various end customers in China. Additionally, lead time continues to be low, further reducing revenue visibility.

However, for the third quarter, the company increased its gross margin guidance to 53.5% to 54.0%, higher than the previous expectation of 53.5%. Operating expenses are also expected to decline to $77 million–$78 million, down from the prior guidance of $78 million–$79 million, owing to tight expense control measures.

Going into the fourth quarter of 2013, management expects revenues to decrease in the range of 9%–11% sequentially. Management believes that continued weakness in TrueTouch touchscreen controller, expected inventory corrections at certain end customers and lower communications revenues impacting Memory Products Division (MPD) will continue to impact revenues in the fourth quarter.

Though the company did not specify gross margin decline in absolute terms, it expects gross margins to decrease sequentially on lower factory utilization rates. However, operating expenses are expected to decline 4% to 6% sequentially due to lower variable compensation expense and continued tight operating expense management.

Cypress is a semiconductor company, offering high-performance, mixed signal, programmable solutions. The company reported revenues of $193.5 million in the second quarter, up 12.0% sequentially and above management’s guidance range of $178.0 million–$186.0 million due to broad strength across all business units. Earnings were also above our expectations driven by higher revenues, higher gross margins and solid operating expense management.

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 remains a cause of concern.

Currently, Cypress has a Zacks Rank #3 (Hold). Other stocks that are performing well include Micron Tech (MU - Free Report) , International Ltd (CTRP - Free Report) and Supernus Pharmaceuticals, Inc. (SUPN - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).

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