Cypress Semiconductor Corporation’s (CY) third quarter earnings beat the consensus by 7 cents.

Revenue

Revenue for the quarter was $178.7 million, up 14.7% sequentially and down 19.7% year over year.

The Consumer and Computation (CCD) and Memory and Imaging Division (MID) grew sequentially, while the Data Communications Division (DCD) declined. Revenue was over the top end of management’s guidance range of $145-153 million range (up 4-10% sequentially).

The company shipped 136 million units in the last quarter (up 21.4%), and the average selling price (ASP) declined 5.0% to $1.32. The blended ASP declined 5.5% to $1.31.

Revenue by Segment

The CCD segment generated 44% of revenue (up 26.5% sequentially), DCD 14% (down 1.6%) and MID 40% (up 8.3%). The double-digit growth in the CCD segment was driven by strength in the company’s TrueTouch touchscreen products, as well as increased USB shipments into the seasonally strong computing end market. The MID segment was driven by market share gains in the SRAM business, as well as strengthening demand in the communications market.

Management stated that it was of the opinion that distributor inventories had not been restocked and channel inventories were lean all through the quarter. The company generated around 63% of its third quarter revenue through distributors.

The revenue distribution by geography was as follows—North America 23% (up 9.9% sequentially), Europe 11% (up 5.2%), Japan 10% (up 14.7%) and other Asia 56% (up 19.0%).

Orders

Total orders increased 8.4% in the last quarter, following two straight quarters of double-digit increase. CCD orders were down 1.3%, DCD down 16.6% and MID up 36.1%. The average book-to-bill ratio was 1.21.

The six-month backlog increased double-digits for the third consecutive quarter. Our calculations indicate that turns sales started increasing again in the last quarter, with lead times moderate at 4-8 weeks.

Operating Results

The pro forma gross margin for the quarter was 51.9%, up 774 basis points (bps) from the previous quarter’s 44.2%. Wafer starts and utilization rates continued to increase in the last quarter, leading to better cost absorption, and thus, higher margins.

The average utilization rate was 69% in the third quarter, compared to 59% in the second quarter an all-time low of 34% in the first quarter. The highest-margin DCD business declined, although CCD increased, as did the lowest-margin MID.

All the major segments expanded margins in the last quarter. CCD generated a GAAP gross margin of 49.5% (up 864 bps), DCD 64.2% (up 689 bps) and MID 43.4% (up 1,458 bps). Operating expenses of $75.8 million were lower than the previous quarter’s $74.7 million. The operating margin was 9.5%, up 1,325 bps sequentially from -3.7%.

All the three main heads of expenses (COGS, R&D and SG&A) decreased as a percentage of sales. However, the biggest decrease was in COGS, followed by R&D, and then SG&A.

The pro forma net income was $19.3 million, or a 10.8% net income margin compared to loss of $3.8 million, or 2.4% in the previous quarter and net loss of $18.4 million, or a 8.3% in the prior-year quarter.

Including restructuring charges, acquisition-related costs, deferred stock compensation, amortization of intangibles, loss on sale of investments, non-cash accounting charges and other charges, the fully diluted GAAP loss was $19.7 million (13 cents per share) compared to loss of $45.3 million (32 cents per share) in the previous quarter and loss of $24.1 million (16 cents per share) in the prior-year quarter.

Balance Sheet

Inventories at quarter-end were $84.6 million, yielding inventory turns of 4.1x. Around $15 million of the inventory is being held on account of last time buys to support the closure of the Texas fab. Management stated that another $6 million related to non-cash capitalized FAS 123R charges.

Days sales outstanding (DSOs) were around 53 days. Cypress ended with a cash and investments balance of $246.4 million. The company generated $24.3 million in cash from operations in the last quarter.
 
Guidance
 
Management provided guidance for the fourth quarter. Accordingly, revenue is expected to lie in the $180-185 million range (up 1-4% sequentially). The gross margin is expected to be in the 52% range (+/-½ a percentage point), helped by a higher factory utilization rate (in the 75-80% range).

Operating expenses are expected to be $74-75 million. Other income/expense is expected to come in at around $0.4 million, and taxes around $900K. The basic share count is expected to be 157-159 million and the diluted share count 197-199 million. The consolidated non-GAAP EPS is expected to be 10 to 11 cents. The fourth quarter capex is estimated at $12 million, and depreciation $12 million.
Read the full analyst report on “CY”
Zacks Investment Research