Morningstar | Cypress Sees Signs of Stabilization; Maintaining $14 FVE
Cypress Semiconductor's first quarter-results were solid, with revenue declining as expected while the firm realized better-than-expected adjusted earnings. Similar to other suppliers, Cypress experienced a tough environment for automotive sales while "Internet of Things"-related products also experienced headwinds amid an uncertain macroeconomic environment. However, guidance indicates strong demand for the firm’s suite of microcontroller and connectivity products in certain markets. We are maintaining our $14 per share fair value estimate and shares of this no-moat and very high uncertainty name remain in 3-star territory.Revenue in the first quarter declined by 7.4% year over year to $539 million. Excluding the impact of NAND revenue, after the firm completed its NAND joint venture at the beginning of the month, sales declined by 5.5% over the year-ago quarter. As a reminder, the JV has effectively removed Cypress’ core operations from the NAND market, leaving them exposed only to the NOR flash business, where we believe the firm has an edge, both in market share and technology. By end market, automotive sales declined by roughly 1% year over year and 8% sequentially to $198 million while Internet of Things revenue experienced severe declines, 17% and 19%, over the same periods.
Adjusted gross margins showed signs of progressing to the firm’s goal of 50%, as laid out in the company’s recent earnings day, delivering 47.4% during the quarter. However, management was quick to note that margin expansion may take time in the current macro situation. For the upcoming quarter, management expects revenue to grow by around 4% sequentially to $530 million at the midpoint of guidance after excluding the $31 million in NAND revenue recognized in the first quarter. The revenue growth is expected to be a result of solid Internet of Things revenue growth, after indications of improved bookings being offset by continued weakness in legacy and automotive end markets.
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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