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What’s Cypress’s Plan for Broadcom’s Internet of Things Business?

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Jun. 28 2016, Updated 1:10 p.m. ET

Cypress benefits from acquisition of Internet of Things business

In the previous part of this series, we discussed how Broadcom’s (AVGO) wireless IoT (Internet of Things) business could strengthen Cypress Semiconductor’s (CY) position in the high-growth areas of the automotive, consumer, and industrial IoT. While the acquisition brings synergies, effective integration is integral to the success of the acquisition.

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Cypress to integrate IoT business into its Data Communications Division

Cypress will integrate the IoT business into its DCD (Data Communications Division). The DCD offers flexible connectivity solutions in the form of USBs (universal serial buses) for all types of embedded systems. Broadcom’s IoT business would also add other wireless connectivity solutions such as Wi-Fi, Bluetooth, BLE (Bluetooth low energy), and ZigBee products.

Cypress already has its own BLE, which is a PSoC (programmable system on chip) with a radio. Cypress stated that its current BLE has an average-quality radio whereas Broadcom’s BLE has a high-quality radio.

In regards to products, the IoT business integrates well with Broadcom’s DCD. Cypress could benefit from Broadcom’s reputation in the wireless market. Broadcom is a leader in the communications semiconductor market and sits on the boards of many committees.

How will the DCD benefit from the integration?

In fiscal 1Q16, the DCD’s revenue stood at $20 million, accounting for 4.7% of Cypress’s revenue. While the division has a good gross margin, it has been posting operating losses. The low revenue is unable to bear the high operating expense. The division’s operating loss grew to $8.5 million in fiscal 1Q16 from $2.5 million in fiscal 4Q15.

The addition of the IoT business would increase the division’s revenue tenfold, giving it the necessary scale to become profitable. The company expects the IoT business to break even by the end of fiscal 2016 and make the DCD profitable in fiscal 2017.

Apart from the acquisition, Cypress’s growth would be fuelled by growth in the IoT space, especially in automotive. The company could face tough competition from NXP Semiconductors (NXPI) and Texas Instruments (TXN) in this space. We’ll discuss this in the next part of this series. The VanEck Vectors Semiconductor ETF (SMH) has holdings in 26 semiconductor stocks, including 5.3% in TXN, 4.7% in NXPI, and 5.2% in AVGO.

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