Morningstar | Cypress Announces NAND Portfolio Joint Venture with Solid 3Q Results; Maintaining $14 FVE
Cypress Semiconductor announced third-quarter results which came in slightly above our expectations on the top line and brought in impressive gross margins. Automotive continued to drive strong revenue as the company focuses on the market as well as industrial and consumer Internet of Things--as manifested in a new deal to relieve some of Cypress’ NAND burden. After accounting for management’s outlook for the remainder of 2018, we are maintaining our fair value estimate of $14 for this no-moat company. We believe shares are currently undervalued following the recent broader semiconductor market sell-off.Third-quarter revenue was $673 million, an 11% increase year over year and 8% sequentially. Microcontrollers continued to grow as the microcontroller and connectivity division was up 11% year over year to $413.4 million. Memory products revenue came in at $260 million, up 12% year over year. Cypress’ automotive revenue increased 13% year over year, which surpassed management’s long-term goal of 8% to 12% growth, thanks to a pickup in content per vehicle. Impacted by slightly better than expected revenue, adjusted gross margins increased 400 basis points year over year to 47%.
As Cypress closes out its fiscal year, management expects revenue to come in at a midpoint of $600 million and non-GAAP gross margins inching up by 50 basis points sequentially to a midpoint of 47.5%. Cypress is preparing for headwinds from consumer and industrial weakness in Asia Pacific.
Along with earnings, Cypress announced a joint venture with SK Hynix in which Cypress will fully migrate its single-level cell NAND Flash memories portfolio to the venture, where portfolio offerings will be manufactured and sold. Cypress will own 40% of the venture.
We believe this deal marks a wise pivot, as Cypress’ NAND offerings are less differentiated and prone to commoditization (primarily focused on consumer applications), and the JV with SK Hynix will enable it to focus more on the automotive and industrial markets where its embedded products are more differentiated. Management expects this to have a negative impact of $0.08 to $0.10 on 2019 non-GAAP earnings.
Cypress Semiconductor manufactures and sells embedded system solutions for automotive, industrial, consumer and enterprise end markets. The company operates under two reportable business segments: Microcontroller and Connectivity Division, which focuses on connect and compute solutions for the Internet of Things and automotive solutions that improve the in-cabin user experience, as well as the company's intellectual property business; and Memory Products Division, which focuses on fail-safe storage and datalogging solutions for mission critical applications, as well as the company's nonvolatile DIMM subsidiary AgigA Tech Inc.
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