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Microcontroller and Connectivity Business: Cypress’s Growth Driver

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Cypress’s Microcontroller and Connectivity Division

Cypress Semiconductor (CY) is maximizing its earnings from its Memory business. However, the real growth would come from the company’s MCD (Microcontroller and Connectivity Division) business, which includes low-power PSoCs (programmable system-on-chips), Broadcom’s (AVGO) Wi-Fi, Bluetooth and Bluetooth0Low Energy, and WICED (Wireless Connectivity for Embedded Devices) solution. 

The WICED solution offers interoperability with leading cloud services and systems integrators like Amazon (AMZN), IBM (IBM), Microsoft (MSFT), and Alibaba (BABA).

Cypress offers these solutions to the automotive, industrial, and consumer sectors. A major portion of these revenues comes from industrial and consumer. Automotive currently accounts for a small portion of the segment’s revenues, as the design win cycle is lengthy.

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MCD earnings

Cypress’s MCD revenues rose 8% sequentially to $317.9 million in 1Q17, accounting for 59.8% of the company’s revenues. These revenues were largely driven by 30% sequential growth in its Wireless Connectivity business, which it acquired from Broadcom. 

Cypress’s wireless IoT (Internet of Things) connectivity business only includes Wi-Fi, Bluetooth, and Bluetooth Low Energy, and contributes its 29% toward its MCD revenues.

What is driving the Wireless IoT business?

Cypress’s Wireless IoT connectivity business rose 30% sequentially to $93 million in 1Q17 as the company expanded the breadth of the product across various applications. It also leveraged its distribution channel to increase its consumer base. Hence, the Wireless IoT Connectivity segment’s customer base increased 70%, community users increased more than 25%, and design wins increased 57% sequentially in 1Q17.

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Broadcom’s Wireless IoT Connectivity business generated $189 million in annual revenues before it was acquired by Cypress in 2016. Now, this business is generating quarterly revenues exceeding $90 million. Even if the business remains stable at this level, its annual revenues would be $360 million in fiscal 2017, representing an increase of 90% before the acquisition.

Cypress expects its Wireless IoT Connectivity business to grow 23%–27% YoY (year-over-year) in fiscal 2017 and 17% YoY in the long term.

Cypress’s competitive advantage

Cypress (CY) is integrating these connectivity solutions with its MCUs (microcontrollers), memory, and analog products to offer a complete embedded solution. In the IoT and automotive space, Cypress would compete with NXP Semiconductors (NXPI), which has a better MCU, by making its connectivity solutions compatible with third-party MCUs.

Cypress also faces competition from Qualcomm (QCOM), which has competitive connectivity solutions but a concentrated customer base. Cypress is looking to address this competition by bringing connectivity solutions to the fragmented market. Its WICED software, which allows even the smallest of the developers to connect their IoT devices to the cloud, would help the company capture a broader customer base.

Next, we’ll look at Cypress’s three growth drivers.

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