Cypress Semiconductor Corporation

Cypress says they see a world of problems and “IT IS AWESOME” because they love creating solutions. Cypress plans to target markets growing faster than the broader industry with embedded systems solutions that combine microcontrollers (MCUs), wireless connectivity, analog, USB, and memory products not to mention software that makes them work together.  Their products/solutions are being used in automotive, industrial, and consumer markets in what is broadly called the Internet of Things (IoT).  The company has been exiting commodity-type businesses and focused on creating higher-valued solutions (sounds similar to Micron’s rhetoric).  The company’s long-term model is to return 50% of free cash flow to shareholders through a combination of dividends and share repurchases.

 

Ests:     1Q19   2Q19   FY19    FY20

Revs    535.2   528.1   2.2b     2.33b

EPS      .24       .24       1.08     1.22

 

 

P=16.16, Div=.44, yield=2.7%, D/C=21% but 7% ex converts, TTM EPS 1.36, P/E=12X  

396m in 3 Convertible notes, $11.3m 2020 (@5.05), from Spansion merger in 2015, $252m January 15, 2022 (@13.49) to buy Broadcom’s IoT business in 2016, $133m Feb 1,2023 (@$21.41) in 2017 to reduce Spansion converts

 

 

1Q19   .27 vs .27, est .24

  • Apr 25, 2019, P=16.16, TTM EPS=1.36, P/E=12X

  • Revs -7.4% to 539m, -10.8% q/q, GM 47.4% vs 45.9%, OM 21.1% vs 19.5%

  • Revs incl 31.1m from NAND flash divested Apr 1st, ex NAND, Revs 507.9m

  • MCD -7.8% to 310.4m, MPD -6.9% to 228.6m, IoT -17%, Auto -1%, Legacy -4.7%

  • Auto NOR declined but Auto microcontrollers and wireless connectivity were up 12% and 17%

  • CFO 61.2m vs 31.7m, FCF 50.7m vs 14.7m

  • Design activity increased 15% led by Auto and IoT

  • 2Q Guidance: Revs 515-545m (est 528.1) vs 574.6m ex 49.5m NAND flash, EPS .22-.26, est .24

  • Decent results, guidance for q/q improvement ex divestiture of NAND flash.  

  • Mgmt seeing some signs of stabilization in ordering and backlog patterns, MCD backlog increasing for IoT which they expect +20% in 2Q

  • >90% of 2Q revs are booked and B/B improved from 0.77 to 0.97

  • JV will be excluded from non-GAAP results, dividends will be in investing cash flows, mgmt. expects $150m in cash flow over next 5 years.

CY analyst day March 13, 2019

  • 2019-2023

  • IoT CAGR 12-14%, Auto CAGR 8-12%, Legacy CAGR -2 to -4%

  • But didn’t give 2019 guidance, looked at street average (which is down from 2018)

  • Highlighted 2017 analyst day where they targeted 7-9% CAGR and 2016-2018 delivered 13%

  • Q418 GM ws 47.8% (ex legacy Fujitsu Auto MCUs, GM was 50.6%) long term target >50%, OM >25% vs 22.8% in FY18, GM expansion from: Legacy MCUs transitioning to PSoC, improved Fab utilization, manufacturing efficiencies, ramp new/differentiated products with higher GMs, exit lower margin businesses 

4Q18   .35 vs .28. +25%, est .33 down from .35, FY18 EPS 1.36 vs 0.89

  • Jan 31, 2019, P=13.87, TTM EPS=1.36, P/E=10X, FY19 P/E=12X

  • Revs +1% to 604.5m (est 599), GM 47.8% vs 45.4%, OM 24.5% vs 20.2%

  • MCD -0.4% y/y, -13.9% q/q to 355.8m, MPD +3.5% y/y and -4.2% q/q to 248.7m despite significant q/q weakness in broad memory industry (NAND -32% q/q but NOR +7% q/q and 2/3 of NOR is under long-term price contract)

  • Industrial 20% vs 17.5%, Auto 35.5% vs 30.2%, Consumer 25.2% vs 32.1%, Enterprise 19.4% vs 20.1%

  • Channel inventory -14% while Revs -12% q/q (undershipped vs end demand)

  • 1Q19 Guidance: Revs 520-550m (-8% y/y at midpoint, -14% to -9% q/q, est 558.5), GM 46-46.5%, EPS .22-.26 (vs .27, est .26) >90% of the quarter is booked, Assumes NAND at $25-30m until it goes into the JV. Guidance is for weaker than normal seasonality (q/q) due to consumer driven by China. 

  • Mgmt commented on cautiousness in the channel especially customers serving China.  Rest of the world customers cautious around trade conflicts/tariffs and disruptions due to factory relocations.

  • Mgmt has been more cautious wrt to channel inventory, shipping against backlog when they have better visibility on end customer demand to balance sell in and sell out. Backlog for 2H appears to be stabilizing and cancellations appear normal.  

  • FY18 design wins +24%, 37% of which were from new products.  Expanding funnel and expected penetration growth of IoT demonstrates significant opportunity.

  • Divestiture of commoditized NAND to JV with SK Hynix expected to close be end of 1Q.

  • Exposure to 5G through their specialty NOR products – high density, reliability, longevity.

  • Decent beat, stock reacting positively while guidance is a bit lower than estimates, probably not as bad as feared (other stocks have rallied hard as guidance is below estimates). That MPD only slightly declined q/q is encouraging.  Stock looks very attractively priced.

3Q18   .40 vs .27, +48%, est .38

  • October 26, 2018, P=12.10, TTM EPS 1.28, P/E=9X, FY19 P/E=8X

  • Revs +11.3% to a record 673m, GM 47% vs 43%, OM 24.7% vs 19%, OpInc +44.8%

  • Automotive +12.8% y/y, +8.3% q/q

  • Seeing strong pipeline activity with design wins +23% y/y, microcontroller and connectivity portfolio were +42%

  • 4Q Outlook: Revs 585-615m (-3% to +3% y/y, -11% q/q at midpoint,), EPS .31-.35 (est .35, vs .28)

  • Have been exiting commodity parts of their business, goal to maintain OMs >20% 

  • Creating a JV with SK Hynix (40% CY, 60% SKH) for SLC NAND flash to target automotive, industrial, and IoT where their embedded solutions are most differentiated, once closed in 1Q19 NAND business will be excluded from reported results (TTM revs ~186m or ~8% of total revs) which would reduce 2019 adj EPS by .08-.10, ~3m of OpEx would transfer to JV also, earnings of the JV would reflect via equity method.

  • NOR business +4% q/q and +15% y/y due to focus on higher density differentiated storage solutions and not subject to pricing volatility like commodity products.  RAM business is priced rationally and determined by product value and not influenced by price movements in commodity products.

  • See a period of sustained growth in auto business and content per vehicle based on design wins for 2021 cars.