Cypress Semiconductor Is a New Breed of Chip Stock
It hasn't been a great year for semiconductor stocks as numerous Wall Street analysts have warned about an impending slowdown in sales in the sector. Shares of Cypress Semiconductor (NASDAQ: CY) haven't been spared, yet the company's modest expansion is showing few signs of slowing. As a big beneficiary of the movement to connect everyday items to communications networks, Cypress is making more changes to improve its business results and reward shareholders.
Slow-and-steady wins the race
Though Cypress hasn't posted record-breaking sales figures, that's OK. The chipmaker has been making consistent progress in its connectivity and custom application designs with a 12.2% and 10.7% quarter-over-quarter and year-over-year increase, respectively, during the third quarter of 2018. Though sales of memory products have slowed as of late (that's the segment that has had some analysts worried), progress hasn't been to shabby there either with a 1.6% and 12.4% quarter-over-quarter and year-over-year advance, respectively.
Those sales have led to big rebounds in Cypress' bottom line after a major overhaul of operations a few years ago.
Metric | Nine Months Ended Sept. 30, 2018 | Nine Months Ended Oct. 1, 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $1.88 billion | $1.73 billion | 8.7% |
Gross Margin | 37.6% | 32.4% | 5.2 p.p. |
Operating Margin | 8.6% | 2.1% | 6.5 p.p. |
Earnings (Loss) per Share | $0.23 | ($0.14) | N/A |
p.p. = percentage point. Chart data source: Cypress Semiconductor quarterly earnings.
Leading the way this year have been chip sales to industrial and manufacturing end-markets, especially the automotive industry. Profit margins in connectivity and custom solutions are also higher than those on memory products, and have longer-term growth rates. Cypress expects its legacy memory product sales to contract by 2% to 5% a year through 2021. In response to this development, the company had a few announcements to help boost business results.
Image source: Getty Images.
Doubling down on connectivity
On the same day third-quarter earnings were released, Cypress said it will be starting a new joint venture with South Korean chip maker SK Hynix System Ic focused on NAND memory production. Cypress is offloading all of its NAND business -- a commoditized product subject to wild swings in supply and demand with low profit margins -- but will retain 40% ownership of the venture.
SK Hynix will manage the operations and pay Cypress dividends based on performance. While Cypress says it will lose about $186 million in annual revenues as a result, $3 million in annual operating expense will be transferred to the venture and the NAND divisions negative impact on overall profitability will be eliminated. Cash flow of $80 million is expected from the new subsidiary over the next two years, meaning Cypress' free cash flow will actually improve as a result. The deal should be finished by the first quarter of 2019.
That announcement complements a couple others over the last few weeks. Cypress scored a new sales win with an undisclosed automaker providing digital instrument cluster solutions; and another agreement with chip maker Arm was expanded to increase security features on Cypress' Internet of Things chipsets.
The offloading of the old memory product business will help further focus efforts on connectivity. That's part of management's Cypress 3.0 strategy -- a focus on value creation for shareholders rather than simple revenue growth. With the company's new connectivity products carrying higher profit margins and estimation that sales will continue growing around the same rates as they have been thus far in 2018, Cypress slow-and-steady top-line expansion should continue to translate to an even faster expanding bottom line.
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Nicholas Rossolillo and his clients own shares of Cypress Semiconductor. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.
