Is This Company Finally Back on Track?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days back, I’d written that shares of chipmaker Cypress Semiconductor (NASDAQ: CY) desperately needed a new lease on life. The stock was almost flat since the beginning of the year began and it looked as if 2013 would be another disappointing year for Cypress after a terrible time last year.

But, Cypress’ recently reported second-quarter results came to its rescue, and shares surged more than 10% as the company posted terrific results. Although revenue of $193.5 million was almost 4% down from last year, it was comprehensively ahead of the $182.8 million consensus. Similarly, adjusted earnings of $0.14 per share were also below last year’s figure, but twice the $0.07 consensus estimate.

Throw in the fact that the company witnessed improvements in most of its business segments and is looking at further improvements in the current quarter, and the reason behind the terrific jump post earnings becomes clearer. Cypress’ order book paints a very nice picture as the company exited the previous quarter with a book-to-bill ratio of 1.05, translating into a jump of 21% from the year-ago period.

Gaining strength

More importantly, the outlook for the company’s Programmable Systems Division (PSD) business, which accounts for more than 40% of revenue, finally seems to be gaining strength after a lackluster performance in recent quarters. Cypress’ flagship products, such as TrueTouch, CapSense, and the PSoC division are included in this segment, and they really took off in the previous quarter as revenue increased 24% on a sequential basis.

Ramp up of the TrueTouch touchscreen controller and design wins in China, along with a seasonal improvement in sales of CapSense to one of Cypress’ major mobile customers, helped the segment’s performance. It looks like Cypress benefited from Amazon.com’s (NASDAQ: AMZN) ramp up of the next generation of Kindle Fire tablets, which are expected to be launched just before the holiday season.

I can say this because Cypress was the supplier of the touchscreen controller for the Kindle Fire HD last time, and since Amazon is expected to release its next batch of slates before the holiday season, it would probably be ramping up production now. Amazon’s Kindle Fire tablet is the most popular slate after Apple’s iPad and hence, it’s not surprising that Cypress counts on it to provide a boost to sales.

In addition, Amazon has a lot going for it now. Firstly, rival Barnes & Noble (NYSE: BKS) recently waved the white flag and said that it’s exiting the Nook tablet business. The company found competition too tough to handle and intends to bank on third-party manufacturers to make Nook hardware going forward.

However, Microsoft, which had invested $300 million in Barnes & Noble last year, is being touted as a buyer of the Nook business. But, Microsoft’s failed history with the Surface doesn’t inspire much confidence, and a failed venture such as the Nook might not improve much with Microsoft’s backing and threaten Amazon.

Throw in Samsung’s recent troubles and the company’s strategy of pushing out a number of tablets rather than a few quality ones, and a solid upgrade to the Kindle Fire should help Amazon do well and pass on the goodies to Cypress. However, it remains to be seen how Amazon’s upcoming tablets will fare against the new Nexus 7 from Google.

However, it should be noted that Cypress also supplies components to Samsung, which is a major customer, and the Korean giant’s tablets in the future should provide further revenue growth.

Cypress’ biggest customer, which is probably Amazon, accounted for 15% of revenue in the previous quarter, but this share is expected to go down to around 10%-12% in the ongoing quarter after the initial ramp up slows down.

Other moves

Also, Cypress’ Memory Products Division (MPD) business has been doing well and increased 7% on a sequential basis in the previous quarter. The division accounts for close to 46% of overall revenue and the company’s recent moves to strengthen this business seem to be bearing fruit. Cypress is focusing on nonvolatile memory to drive revenue, and its innovation in this field looks impressive with award winning products.

In addition, Cypress had recently acquired Ramtron, and this should lead to improvements going forward as well. Moreover, PSoC 4, Cypress’ latest programmable system-on-a-chip, from which the company has high expectations, has gotten off to a good start and has created history by becoming the fastest new product ramp for the company.

It looks like Cypress’ business has already hit bottom, and going forward it might get better as its major businesses are running with good traction. The PSD business is expected to perform the most impressively as seasonal factors and new customer ramps come into play. Management guided for sequential revenue growth of 4%-7%, pegging the mid-point at $204 million, which, if achieved, would translate into slight growth from the year-ago period.

The takeaway

So, it looks as if Cypress is back on track and is close to attaining year-over-year growth in revenue. If the company manages to achieve this feat in the ongoing quarter and guides well again next time, then one can expect it to sustain its newly found momentum.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cypress Semiconductor . The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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