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Cypress’s Q1 2019 Guidance Reflects Weak Demand Environment

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Cypress’s strategy to deal with the demand slowdown

Cypress Semiconductor (CY) enjoyed strong growth in 2018 driven by demand from the automotive, industrial, and 5G (fifth generation) sectors. The unexpected slowdown in the 2018 holiday season sales, especially in China (FXI), created excess inventory in the semiconductor channel. The channel is cutting orders to absorb the excess inventory.

Cypress will likely report an above-average seasonal decline in 2019 as the US-China trade tension continues. The company intends to tackle the demand slowdown through cautious inventory management in the channel. At the fourth-quarter 2018 earnings call, Cypress CEO Hassane El-Khoury stated that the company will fulfill the order backlog when it gets “more visibility on end customer demand.” He expects the order backlog to stabilize in the second half of 2019 as the excess inventory is absorbed and demand picks up.

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First-quarter 2019 guidance

For the first quarter of 2019, Cypress expects revenue to fall 8% YoY and 11.5% sequentially to $535 million at the midpoint, which is below the analyst estimate of $562 million. The sequential decline is higher than the normal seasonal decline in the low to mid-single digits.

The lower revenue guidance comes as Cypress becomes cautious with its inventory management amid a slowing demand environment. The $535 million revenue guidance includes full-quarter NAND (negative AND) revenue, as the divestiture of this business is slated to take effect in the second quarter.

Even though Cypress’s revenue guidance shows a YoY decline of 8%, its profit margins are expected to remain flat or rise YoY as the company controls costs. It expects non-GAAP (generally accepted accounting principle) gross margin to rise 60 basis points YoY to 46.5%. The company expects its EPS to fall 11% YoY to $0.24, missing the analyst estimate of $0.25.

Cypress stock is currently trading at $14.79. Wall Street analysts expect the stock to reach a median price target of $16.25 in the next 12 months, representing an upside of 9.9%.

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