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  1. Home
  2. / Investing
  3. / Technology

Cypress Semi's CEO Talks to TheStreet About Chip Demand and M&A -- Tech Check

Cypress CEO Hassane El-Khoury says he's "cautiously optimistic" chip industry conditions will continue to improve. He also suggests Cypress remains on the lookout for potential acquisitions.
By ERIC JHONSA
Apr 26, 2019 Updated Apr 26, 2019 | 08:54 PM EDT
Stocks quotes in this article: ZM, MSFT, QTNA, ON, TXN

Cypress Semi's CEO Talks to TheStreet About Chip Demand and M&A

Though many chip stocks fell on Friday thanks to Intel's downbeat guidance, Cypress Semiconductor closed up 6.9% thanks to a better-than-expected Q1 report. Though its revenue fell 7% annually thanks to the current chip industry downturn, both revenue and EPS were a little better than expected.

Cypress, which supplies microcontrollers (MCUs), Wi-Fi/Bluetooth connectivity chips, memory chips and a slew of other products for everything from cars to smart home devices to industrial hardware, also guided for Q2 revenue of $515 million to $545 million, which at the range's midpoint is a little above a $528 million consensus. And on Cypress' earnings call, CFO Thad Trent said his company is "encouraged by stabilizing order patterns and booking trends," albeit while cautioning that current market conditions remain "challenged."

On Friday, I had a chance to talk with Cypress CEO Hassane El-Khoury about his company's Q1 report and earnings call comments (I previously talked with El-Khoury in January at the CES trade show). Here's a recap of notable comments he made during the talk:

  • While some chip peers have forecast a second-half demand recovery, El-Khoury would only go as far as to note that Q3 is a seasonally stronger quarter than Q2, and to say he's "cautiously optimistic" that the recent improvement seen in order trends will continue into the second half of the year. Texas Instruments (TXN) , it should be noted, was also hesitant this week to predict exactly when the current downturn will end.
  • Like many peers, El-Khoury says automotive chip demand is still soft, including in China. He noted global auto sales are expected to be flat or down this year. "Our industry is pretty much the leading indicator for end-customer manufacturing," he added.
  • Cypress' Microcontroller and Connectivity Division (MCD) is seeing order backlog growth for IoT devices across a broad set of products. El-Khoury mentioned on Cypress' call that MCD's IoT-related backlog is expected to grow about 20% in Q2.
  • Cypress is seeing strong automotive design win activity for instrument clusters, body electronics and to a lesser extent ADAS systems. The company mentioned on its call that it saw a 15% annual increase in design win activity, with its automotive business leading the way.
  • In line with remarks made in January, El-Khoury says that creating IoT solutions that pair Cypress' MCU and wireless connectivity capabilities are an R&D priority. He added that the company's Traveo II automotive MCU family, which is expected to see revenue ramp in the coming years, is also a key R&D priority. On the call, El-Khoury said Q1 design wins served to grow Cypress' design win funnel for Traveo II by about 50% to $2 billion. The company has a long-term goal of growing automotive revenue by 8% to 12% annually.
  • When asked about chip industry M&A, El-Khoury suggested Cypress, which in 2015 merged with peer Spansion and in 2016 bought Broadcom's IoT connectivity chip business, is on the lookout for attractive deals. "We're always looking. It's not a question of if, it's a question of when and how," he said, while noting Cypress continues to strengthen its balance sheet.
  • Interestingly, El-Khoury also drew attention to ON Semiconductor's (ON)  recent $936 million deal to buy Wi-Fi chip supplier Quantenna Communications (QTNA) , suggesting it drives home the scarcity of quality Wi-Fi chip assets and the value assigned to them. "We have those assets and they're very mature," he said.

Slack Is No Zoom, But Its IPO Filing Points to a Strong Debut

Zoom Video Communications  ( ZM) had a pretty unique financial story to tell for an enterprise software IPO: It managed to combine torrid sales and billings growth with positive free cash flow and budding profits. And that in turn helped Zoom skyrocket on its first day of trading.

Financially speaking, the story told by collaboration software firm Slack Technologies, which just filed for an IPO, is a lot more conventional, with strong top-line and customer growth accompanied by sizable losses. In Slack's fiscal 2019 (it ended in January), revenue rose 82% to $400.6 million, billings rose 79% to $517 million, paid customers rose 49% to 88,000...and GAAP net loss totaled $138.9 million, which in spite of strong revenue growth was just slightly improved from fiscal 2018's negative $139.3 million. Free cash flow was negative $97.2 million.

Like many other high-growth SaaS names, Slack is making giant investments to pursue large enterprise deals, build out its platform and fend off Microsoft (MSFT) , whose rival Teams product is bundled with many Office 365 subscriptions. Sales and marketing spend rose 66% in fiscal 2019 to $233.2 million; R&D spend grew only 11%, but still totaled $157.5 million, and G&A spend nearly doubled to $112.7 million.

Nonetheless, Slack, which has been valued at almost $17 billion on private markets, should get a fairly a steep IPO valuation, albeit perhaps a less steep one than Zoom. The fact that Wall Street remains very much in love with high-growth software-as-service (SaaS) clearly works in Slack's favor. So do some of the strong metrics shared in Slack's filing.

The company saw the number of paid customers producing over $100,000 in revenue rise 93% in fiscal 2019 to 575, and its net dollar retention rate, which covers how much revenue a company is now getting from the customers that existed a year earlier, was an impressive 143%. Slack, which offers a free version of its software to go with more feature-rich paid versions, also disclosed that its software is deployed at over 600,000 organizations; that spells a pretty large sales funnel. Assuming that Slack's sales teams execute well, the company's earnings and (especially) FCF should improve a lot in the coming years.

Slack's name recognition, and the cult following it has developed at companies where it has supplanted e-mail as the primary means of communicating with co-workers, also work in its favor. So might the fact that -- with multiple tech giants having reportedly mulled buyout offers in the past -- Slack is still seen as a potential M&A candidate.

All of that suggests Slack will get a rich first-day valuation -- likely rich enough that growth tech investors would be better off waiting for a better entry point.

To see Tech Check coverage from the previous trading day, click here.

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TAGS: Investing | Technology

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