There was a lot to like about the way Cypress Semiconductor (NASDAQ: CY) finished off its 2017 fiscal year. Sure, the record-breaking top line was nice, as were its soaring earnings per share (EPS), but it was the manner in which Cypress beat expectations that should really have growth investors smiling.
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By virtually every estimate, the market for Internet of Things (IoT) “gadgets” has already become gigantic. There are an estimated 23 billion IoT devices already in use, and that figure will more than triple by 2025. Connecting all those gadgets is Cypress’ forte, and not coincidentally, CEO Hassane El-Khoury cited strength in the automotive and connectivity segments as key components behind its record year.
First, the good news
Not only was last year’s $2.33 billion in revenue a new record, but it was also a stellar 21% improvement over 2016. For the quarter, Cypress’ sales were up 13% to $597.55 million, and its loss of $0.10 a share was less than half last year’s negative-$0.21. It should be noted the EPS loss was due entirely to a one-time charge of $56.9 million to account for a loss from a Cypress subsidiary.
Excluding one-time charges — a more realistic metric considering such a significant negative impact — Cypress reported quarterly per-share earnings of $0.28, a whopping 87% improvement over a year ago. For fiscal 2017, adjusted EPS climbed a jaw-dropping 81% to $0.89, obliterating 2016’s $0.49 per share.
One reason for the strong bottom-line growth is that Cypress continues to increase efficiency, and combined with a strong product mix, gross margin rose again. A year ago, Cypress’ margin was a sound, if not spectacular, 38.1% in the fourth quarter. Cypress ended 2017 with margin rising to 44.6%, and similar improvement applies to the fiscal year as well.
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Another feather in Cypress’ cap is that it’s becoming a more efficiently run company. Operating expenses were shaved again last quarter, and down 11% for the year. Considering its consistent revenue growth and new product development efforts, the notion that Cypress is simultaneously becoming leaner is pleasantly surprising.
Cypress IoT mobile connectivity competitor CalAmp (NASDAQ: CAMP) is more typical of a high-growth company. While CalAmp also manages expenses well, its cost of revenue climbed 15% to $55.48 million last quarter, though to its credit, operating expenses were flat. CalAmp’s spending increase, albeit moderated, is what investors would normally see from a company ramping up to meet new market demands, which is why Cypress’ expense management success is so remarkable.
Now, the really good news
There’s every reason to believe Cypress will keep its positive momentum going in 2018. Cypress introduced a number of new products recently, including a Bluetooth-enabled infotainment mesh solution for IoT-enhanced cars. In conjunction with its Bluetooth offering, Cypress also unveiled a new, high-end automotive fingerprint sensor along with a microcontroller for smart home, wearable, and other consumer products.
Connecting IoT devices is not only Cypress’ mission; it’s also behind its outstanding performance. Last year, the memory products division generated $918.5 million in revenue, down 1% year over year. Not a problem, thanks to the microcontroller and connectivity division’s stellar 42% rise in sales to $1.4 billion in 2017.
And to think Cypress didn’t even dive headlong into IoT until 2016, when it implemented its Cypress 3.0 initiative, marking its shift in focus to the automotive, industrial, and consumer IoT markets — each of which represents limitless opportunities.
For investors in search of growth, don’t let Cypress’ 46% jump in stock price the past year dissuade you. Yes, Cypress stock has performed admirably, but it remains a bargain relative to its peers. Priced at a mere 14 times forward earnings, and as measured by almost every other metric, Cypress stock is an outstanding value — not to mention that at 2.6%, its dividend yield is considerably higher than most.
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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool recommends CalAmp and Cypress Semiconductor. The Motley Fool has a disclosure policy.
