CY

Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corporation (CY)

Q2 2009 Earnings Call

July 16, 2009 11:30 am ET

Executives

T. J. Rodgers - President, Chief Executive Officer, Director

Brad W. Buss - Chief Financial Officer, Executive Vice President - Finance and Administration

Christopher A. Seams - Executive Vice President, Sales and Marketing

Norman P. Taffe - Executive Vice President - Consumer and Computation Division

Dana Nazarian - Executive Vice President, Memory and Imaging Division

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Harry Sim - Chief Executive Officer of Cypress Envirosystems

Shahin Sharifzadeh - Executive Vice President - Worldwide Wafer Fabrication and Technology; President, China Operations

Analysts

Suji De Silva - Kaufman Brothers

Tim Luke - Barclays Capital

Uche Orji - UBS

John Pitzer - Credit Suisse

Doug Freedman - Broadpoint AmTech

Analyst for Glen Yeung - Citi

Sandy Harrison - Signal Hill

Sirini Pijirri - Analyst

John Barton - Cowen

Chris Danely - J.P. Morgan

Jeff Schreiner - Capstone Investments

Adam Benjamin - Jefferies

Presentation

Operator

Good morning and welcome to Cypress Semiconductor’s second quarter earnings release conference call. (Operator Instructions) I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. J. Rodgers

Good morning. We’re here to present the second quarter 2009 to investors. We’ll start out as usual with CFO Brad Buss and market comments by marketing VP Chris Seams. I’ll make a few comments and we’ll get quickly to questions. Brad.

Brad W. Buss

Thanks, T.J. I want to thank everybody for attending our second quarter call. Again, just a quick reminder that everything in our press release and on this call is based on preliminary unaudited results and we encourage you to go through our 10-Q once it’s filed in early August and as usual, we’re making a lot of forward-looking statements, obviously a ton of risk. Again, see our press release and our public filings for a discussion of all those risk factors.

We talked about non-GAAP and GAAP -- there’s full recons in the press release and we also have them available on our website as well.

So I’ll go through the Q2 results and then I’ll do a quick review of guidance and then turn it over to Chris.

So I was really pleased with where Q2 ended up. We ended up with better revenue, more importantly better gross margins and better or smaller loss, I should say, than we originally expected and it exceeded our guidance as well as the average street consensus.

Revenue for Q2 was $155.8 million, a 12% sequential increase and it was a decrease of 26% on a year-over-year basis. We exceeded the top end of guidance due to a steady business pick-up throughout the quarter, really across all of our product lines. It was led by strength in Asia and Japan, which offset continued weakness in Europe that, like other semiconductors, we continue to see as well.

If you look at it by division, MID was basically flat, which was consistent with what our guidance was. BCD increased 25% sequentially and benefited by certain end-of-life military related shipments and increased sales of Westbridge into the handset market. CCD, which has the most consumer PC and handset exposure increased 20% sequentially and it was driven by [PSOC], which just as a data point grew much faster than the CCD 20% average, and we also benefited from strong USB sales as PCs continue to perform well.

True touch, our new touch-screen product, continued to grow rapidly and we’ve more than doubled its revenue in Q2, as we added additional customers and handset models into volume production. We continue to see a very strong design win and many of the handset vendors and we expect to see a multi-year growth coming out of that. And we expect it again to probably be our fastest programmable product to hit $100 million in our history.

Turning to earnings, on a GAAP basis, we had a net loss of $45.3 million, which was $0.32 a share, and that was primarily driven by the 123R charges, a little bit of restructuring, and the impact of our operating loss. That was more than cut in half from the $0.66 loss in Q1.

Our non-GAAP net loss was $3.8 million and that led to a loss per basic share of $0.03, which is again far better than the $0.08 to $0.12 we originally guided and it was higher than the street estimate, that was around $0.10.

And more importantly the EPS strength all came from internal operating leverage. We had the higher revenue, we had better gross margin, and we continue to have very tight OpEx control. And again, that $0.03 loss was down significantly from the prior quarter where we clocked in at a $0.22 loss.

Non-GAAP gross margins were 44.2%. It was up 10 percentage points from the prior quarter and above guidance as our wafer starts activities and utilization all rebounded from an all-time low in Q1. The average utilization in Q2 was approximately 59%, which again was up 25 percentage points from our average of 34, and we expect to see our utilization move up in Q3 to probably the high 60s to low 70s.

And if you look at what we call our adjusted equipment capacity, i.e. where we’ve resized the fab from a variable cost structure, that will start bringing us up to a range of high 70s.

We’ve taken a lot of proactive steps to manage our cost structure and we’ve decreased our variable costs by over 25% in Q308 to Q309 and we still remain very committed to our Flex Fab strategy and I look for further margin improvement as we continue to load the fabs in the future.

One of the positive things that we’ve continued to see is that our product margins remain relatively stable, as almost 80% of our business is proprietary in nature. Our corporate average ASPs decreased slightly to $1.39, mostly due to mix. You have to remember in Q1, our ASPs cranked up 11% sequentially due to a higher mix of SRAM. If you look at it on a year-over-year basis, our ASPs have actually increased, which is very nice, especially in this economic time. And I think if we continue to look at where we are going with gross margins, we are very comfortable that we will hit our 50% target in the second half of this year.

Turning to expenses, our non-GAAP operating expenses decreased by $2.1 million sequentially, totaled $74.7 million, and included in that was a $2.3 million accounting charge related to our deferred comp plan, so I think as you all know and we showed in the press release, as that plan moves up or down, it goes through OpEx, you get the benefit or the hit in OIE and net net, it has no impact on EPS.

But just to put it in perspective, when I gave the guidance of 75 to 77, I always assume no movement in the plan because it’s very hard to predict. So we really came in at $72.4 million on an apples-to-apples basis versus my guidance. Again, you know, very tight cost controls. We’ve had lower selling expenses and we’ve had reduced take out in [mask] expenses.

From a restructuring standpoint, in Q2 our headcount continued to decrease. We hit approximately 3,700 people. That was a 5% sequential headcount decrease and approximately 16% since our peak in Q308. We’ll have a small reduction continuing into Q3 and then I think we’re finished from that perspective.

I expect the bonus plans to turn back on in Q3 and Q4, as we’ll be returning to profitability and we had tiered pay cuts that we talked about before that are still in place and we’re currently evaluating when we’ll turn those around. But needless to say, we are very committed to managing OpEx and a lot of our cost control actions are going to continue into 2010.

OIE came in at $2.6 million, which again that��s the other side of the deferred comp, which was $2.3 million. So if you take that out of the equation, it was pretty consistent with my guidance. Basically everything going through that is about $0.5 million in interest income and then there’s about $100,000 related to the bond that goes through there.

Our non-GAAP tax charge was within the guidance at 800K and the basic shares actually came in almost spot-on at 141 million.

If I look at the balance sheet, again another source of pride here at Cypress -- I think we have a very solid balance sheet. Our cash, cash equivalents and investments total $246 million. It increased $22 million or 10% from Q1. If you add in the $34.5 million of auction rate securities that we have classified as long-term, we have $280 million. We continue to remain a pretty conservative portfolio and we will see where rates take us going forward but I wouldn’t expect any big increases in OIE.

We generated positive non-GAAP EBITDA in Q2 of almost $10 million, which is really the highest level since this downturn began in Q4 of ’08. More importantly, we had positive operating and free cash flow, again sooner than we expected, and I expect to see increasing levels of operating and free cash flow into the second half and continuing into 2010.

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