Cypress Semiconductor (NASDAQ: CY) has been reinventing itself as a specialty chip company that focuses on two key growth areas: automotive and the Internet of Things (IoT). These are markets that are expected to deliver significant growth in the coming years and, on balance, are expected to more than offset declines in the company’s so-called “legacy” businesses. The company’s aspiration is to grow sales at a clip of 7% to 9%.
Cypress reported its earnings results for the first quarter of fiscal year 2019 on April 26. The company’s revenue dropped 7.4% year over year, though excluding the NAND flash business that it divested, sales were down 5.5% year over year. For the second quarter of fiscal 2019, Cypress is calling for sales to rise 4.4% (excluding NAND) year over year — an improvement from the prior quarter’s growth rate, but below the company’s long-term goal.
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Management provided a wealth of insight on the business during the most recent earnings call. Here are three items from the call that investors should pay close attention to.
Automotive design ramp-ups
On the call, one analyst noted that Cypress management had previously talked about “a couple of pretty significant design wins” in the automotive space and wanted management to “highlight for us when some of those start to ramp.”
Cypress CEO Hassane El-Khoury explained that the company’s new Traveo II family of 32-bit microcontroller units (MCUs) will begin to ramp up in “about the second half of this year,” but cautioned that this business “won’t be material compared to our other microcontroller business.”
This isn’t because the product isn’t good, but because of the long design and life cycles of microcontroller chips. El-Khoury explained that, with respect to Traveo II: “We’ll see the ramp get through 2020, 2021. And think about those as 10-year designs. Like I mentioned in my prepared remarks, those open up every one or two design cycles.”
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He added that once those designs begin to ramp up, they “will just layer on top of that to give that 8% to 12% growth that we’ve seen.”
A competitor’s acquisition
As you might have heard, ON Semiconductor (NASDAQ: ON), a competitor to Cypress, acquired Quantenna Communications (NASDAQ: QTNA) about a month ago. The acquisition should help ON Semiconductor strengthen its position in the automotive chip industry, as wireless connectivity is becoming an increasingly valuable capability in cars.
The same analyst who asked about the Traveo II ramp-up also asked management about the impact of ON Semiconductor’s purchase of Quantenna on the competitive landscape.
El-Khoury said the high earnings multiple that ON Semiconductor paid for Quantenna “shows the scarcity of assets” that Cypress Semiconductor already has. He went on to explain: “The Quantenna business is more focused on — think about infrastructure, or the back end. That’s going to take a lot of time, to take those high-powered processors into low-power IoT-level products and automotive.”
“We’re already halfway up [the mountain],” El-Khoury said with respect to the race between Cypress and ON Semiconductor. “So, we’ll see them at the top in a few years, maybe.”
Gaining traction in 5G
Cypress makes a type of memory called NOR flash, which is used in a variety of applications, including cellular base stations. One analyst asked management: “What makes you better-positioned in 5G than the competitors? Maybe like some color on just your competitive positioning in 5G?”
El-Khoury said that with respect to 5G base stations, “we focus on the high-density NOR” flash; he noted that Cypress’s competitive positioning in 5G base stations parallels that of its NOR flash position in other markets like automotive. In particular, he talked about the company’s advantages in both the “quality and reliability” of its products and supply, compared to its peers:
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of Quantenna Communications. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.
