3 Things You Need to Know From Cypress Semiconductor’s Q3 2017 Report

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Cypress Semiconductor (NASDAQ: CY) reported third-quarter results recently, letting investors know that it took in record revenue of $604.6 million in the three-month period. Revenues have been hitting records all year, and Cypress managed to report $0.03 per share of profit in the quarter after three consecutive quarters with a loss on that metric. The stock is up 64% over the past year.

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If you're a Cypress investor or considering buying shares, here are three things from the latest quarterly report that you need to know.

1. Connected devices are the new building blocks

Over the last few years, Cypress has reimagined its business primarily through a couple of big acquisitions. The first was with rival memory chip business Spansion, which effectively consolidated those legacy operations to maximize profits over the long term. The second, Cypress' purchase of Broadcom's (NASDAQ: AVGO) Internet of Things (IoT) business, made the company a major player in the burgeoning world of internet-connected devices. where end markets include automotive, industrial, and consumer products.

Speaking to Cypress' work in that new area, CEO Hassane El-Khoury had this to say on the quarterly call:

After a strong second quarter, we continued to deliver record revenue with strength across our key markets. These results demonstrate we are delivering on our Cypress 3.0 strategy of selling embedded solutions into markets growing faster than the overall semiconductor industry. Our customers are relying on us for more bill-of-material coverage, with approximately 80% of our revenue generated by customers buying more than one product family across connectivity, microcontrollers and memory.

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Revenue for the third quarter increased 2% over the second quarter to $604.6 million, led by a 4% increase in the embedded connections business. The legacy memory chip business decreased 1% compared with the second quarter. Overall, the company is well on its way to turn in record annual sales for the 2017 fiscal year.

2. Profits are coming back

Cypress' string of acquisitions, while setting it up for the future, created some problems for the bottom line in the short term. The company has been running a net loss for some time, at least when not factoring for one-time items and things like depreciation, but that situation is beginning to change.

Gross profit margin improved to 41.8% from 39.8% last quarter, and the unadjusted bottom line was positive for the first time in a while. Earnings per share came in at $0.03.

Free cash flow is also steadily on the rise. That is a good sign of the health of a business as it accounts for money left over after basic business operations are paid for, giving a clearer picture of actual profitability.

3. The outlook is getting rosier

The third quarter of 2017 was good, and management thinks the trend will continue. For the fourth quarter of the year, revenue is expected to be in the $575 million to $610 million range, and gross profit margin should improve again, to 42% to 43%. Earnings per share are expected to be anywhere from -$0.01 to $0.03.

All in all, the third quarter was a good one for Cypress investors. The solid report card justified this year's run-up in share price, and management continues to project that the company will ride the IoT wave as more devices get hooked up to the internet.

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