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Cypress Semiconductor Is Back in the Black Again

Nicholas Rossolillo, The Motley Fool

Cypress Semiconductor's (NASDAQ: CY) business looked precarious the last couple of years. As part of a strategy to enter the lucrative Internet of Things (IoT) industry, profits were sacrificed in order to generate sales growth and a bigger payoff down the road. After several years of running in the red, it looks like 2018 could be the year Cypress begins to reap the rewards of its gamble.

What a difference a year makes

The first quarter of 2018 was quite different from a year ago. Cypress Semiconductor showed a return to bottom-line profits in the first quarter.

Metric

Q1 2018

Q1 2017

Change (YOY)

Revenue

$582.2 million

$531.9 million

9.5%

Gross profit margin

36.5%

29.5%

N/A

Operating profit (loss) margin

6.1%

(2.6%)

N/A

Net income (loss)

$9.1 million

($43 million)

N/A

Earnings (loss) per share

$0.02

($0.13)

N/A

Data source: Cypress Semiconductor quarterly earnings.

Revenue increased a healthy 9.5% from the same period a year ago, but the real story here was margins. The big increases were driven by new product introductions that carry higher profits, as well as cost savings as the company continues to integrate and refine its IoT acquisition from Broadcom (NASDAQ: AVGO) a couple years back. Interest expense was also lower, as debt was paid down. All of that equated to bottom-line profitability, and management expects that to continue.

Connected things on the rise

The keys to Cypress' rebound were some strategic changes made a few years ago. The company consolidated its legacy memory products division, made the IoT business acquisition, and began pursuing high-growth and higher-margin business. It took a few years, but the rewards of that strategic change, dubbed Cypress 3.0, are beginning to be felt.

The reason for the shift? The future is all about the IoT, not just computers, tablets, and smartphones. CEO Hassane El-Khoury said the importance of the smartphone is fading, with growth being taken over by myriad other connected items like smart-home devices, wearables, cars, and other connected industrial gadgets. As a result of the new focus, the customer count in Cypress' connectivity division grew 36% year over year. Because of the breadth of the company's portfolio of devices, about 80% of customers purchased at least two items from different product families, demonstrating Cypress' ability to cross-sell to its customers.

It's not just about connected devices, though. Speaking to Cypress' efforts to make it as easy as possible for developers to use the company's components, El-Khoury had this to say: "In February, we announced ModusToolbox, an important software platform, to further scale our go-to-market support for developers. With ModusToolbox, customers of any size now have access to a single environment and ecosystem for creating IoT products with a great connectivity, flexible computing, smart storage and security they need to win."

Hexagonal icons showing various devices and machines capable of being connected to the internet

Image source: Getty Images.

What comes next for Cypress

Continuing to innovate in the connected device markets and making software development kits that are easy to use remains the strategy at Cypress. It's working, especially in connected autos, with year-over-year sales increasing 15% and the segment representing 34% of total business last quarter.

In the next quarter, revenue is expected to be $605 to $630 million, a 2% to 6% increase from a year ago. Gross profit margin should be about the same as the most recent period, which management expects will help the company grow profits even more.

Investors have had to be patient with Cypress the last couple of years, but the chipmaker's decision to change the business model is just beginning to pay off. With momentum on its side and profits just beginning to return, this stock looks like it has room to run higher.

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Nicholas Rossolillo and his clients own shares of Cypress Semiconductor. The Motley Fool recommends Broadcom Ltd and Cypress Semiconductor. The Motley Fool has a disclosure policy.