What to Look for When Cypress Semiconductor Reports 2016 Earnings

By Nicholas Rossolillo Markets Fool.com

It's quarterly earnings season, and it is almost Cypress Semiconductor's (NASDAQ: CY) turn to report. It was a big year chock-full of changes for the company, so the year-end update will be an exciting one. Among things to look for will be updates on the acquisition of Broadcom, further detail from the new CEO on Cypress' strategy going forward, and management's outlook for 2017.

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An expensive reboot

Cypress' buyout of Spansion will celebrate its two-year anniversary in March. The rival memory-chip manufacturer was purchased for $5 billion in stock and consolidated the two companies' similar product offerings. The goals were to reduce costs over the long term and to take advantage of growth synergy, a process that was still ongoing as of the third quarter.

Cypress Bluetooth low-energy Pioneer development kit. Image source: Cypress Semiconductor.

That merger was followed up with the purchase of Broadcom's Internet of Things (IoT) business last July for $550 million in cash. The addition helped strengthen the connected auto and industrial businesses that Cypress already had a foot in, and also paved the way for expansion in consumer products like wearables and smart home devices.

The two acquisitions helped shore up Cypress' legacy business and created a runway for future growth, but they came at a cost. Through the last reported quarter, the company was reporting higher revenue and lower operational expenses from combining the businesses, but it has slipped into the red on the year. Cash has been cut to a third of what it was, while long-term debt has simultaneously doubled.

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The good news is that the last quarter saw the bottom line return to the black. Free cash flow, or what is left over after operations and expansion efforts are paid for, is also back on the rise. Investors will want to verify that these trends continue to warrant all of the mergers-and-acquisitions activity in the last two years:

CY data by YCharts.

The new face of Cypress

Cypress' new CEO Hassane El-Khoury. Image source: Cypress Semiconductor.

The made-over chipmaker also shifted gears in another way this year: Company founder and longtime CEO T.J. Rodgers stepped aside last spring, and over the summer, Hassane El-Khoury was named the new head of the company. El-Khoury was part of Cypress' executive management and was involved in the decision-making for both the Spansion merger and the Broadcom purchase.

The last quarterly report was his first as CEO of Cypress. In it, he spoke about the beginning of the company's next transformation. Cypress had made itself into a leader in programmable chips that customers could purchase and adapt for their own purposes.

With the recent acquisitions finalized, Cypress is now making itself into one of the biggest IoT chipmakers in the world. Specifically, the focus will be on providing complete embedded solutions in a turnkey product ready to be put to use by buyers. Those systems will combine the legacy memory chips, microcontrollers, and analog devices with the more recent USB-C development and wireless connectivity platform.

Over the last couple months, a slew of new embedded solutions have been announced. For example, the company released a new lineup of memories designed for connected cars and connected industrial products; a new version of the company's software-development kit enables connectivity within minutes; and a new USB-C to HDMI connection system allows mobile devices to connect to HD and 4K TVs without the need for adapters.

The road ahead

Cypress has decided to round up IoT business very aggressively, so a lot is riding on the business being able to deliver in the quarters ahead. The last year has been sluggish, and the fourth-quarter forecast was for that sluggishness to persist. However, as the company creates new markets for its new offerings in the growing IoT space, look for that to change. Cypress reports on Thursday, Feb. 2.

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Nicholas Rossolillo owns shares of Cypress Semiconductor. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.