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What Is Cypress’s Strategy to Improve Profitability?

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Cypress’s profitability

Previously, we saw that Cypress Semiconductor’s (CY) Cypress 3.0 business model has been accelerating its growth over the last two years. The model also aimed at improving its profitability by optimizing cost and improving its product mix to higher margin specialized products. The results of the business model are reflected in the company’s margins.

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Gross margin

Cypress’s non-GAAP (generally accepted accounting principle) gross margin rose 240 basis points YoY to 47.8% in the fourth quarter of 2018. The gross margin improved as the company shifted from two plants to one plant, thereby improving the utilization of its Fab 25 to 85%. It also improved its product mix to higher-margin specialized products. In dollar terms, gross profit rose 10.5% YoY.

The above efforts improved Cypress’s full-year 2018 gross margin by 460 basis points to 46.8%. The company is looking to improve its margin further by divesting its low-margin commoditized NAND (negative AND) business through a JV (joint venture) with SK Hynix, which is expected to be completed in the first quarter of 2019.

Under the JV, SK Hynix will cater to Cypress’s commoditized NAND customers, allowing the latter to focus on its more stable, high-margin specialty storage products for the automotive, industrial, and enterprise markets. Even Micron Technology (MU) is shifting its product mix to specialty memory to stabilize its earnings.

Operating margin

The benefits of higher gross profit trickled down and increased Cypress’s non-GAAP operating profit by 22.6% YoY to $148 million in the fourth quarter of 2018, equating to an operating margin of 24.5%. The company improved its operating margin by reducing its expenses in line with slowing demand. It also improved its non-GAAP EPS (earnings per share) by 25% YoY to $0.35, beating the analysts’ estimate of $0.33.

Like the entire semiconductor industry, Cypress will likely also feel the pinch of slowing demand in 2019. Next, we will look at the company’s guidance for the first quarter of 2019.

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