CY

Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corp. (CY)

Q3 2009 Earnings Call

October 15, 2009; 11:30 am ET

Executives

T.J. Rodgers - President & Chief Executive Officer

Brad Buss - Chief Financial Officer

Dinesh Ramanathan - Executive Vice President of Data Communications Division

Norman Taffe - Executive Vice President of Consumer & Computation Division

Chris Seams - Executive Vice President of Sales & Marketing

Harry Sim - Chief Executive Officer of Cypress Envirosystems

Analysts

Tim Luke - Barclays Capital

Jay - Citigroup

John Pitzer - Credit Suisse

Chris Danley - JP Morgan

Jeff Schreiner - Capstone Investments

Doug Friedman - Broadpoint AmTech

John Barton - Cowen & Co.

Sandy Harrison - Signal Hill

Suji De Silva - Kaufman Brothers

Adam Benjamin - Jefferies

Vijay Rakesh - ThinkEquity

Presentation

Operator

Welcome to Cypress Semiconductor third quarter earnings release conference call. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

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 report the third quarter. We’ll do it standard way, starting out with Brad Buss, CFO, talking about the financials.

Brad Buss

Thank you, T.J. Thanks, everybody for joining us today. Just a couple of quick things before I go into the details, obviously everything we’re talking about is our preliminary unaudit results. We’ll be filing our 10-Q on schedule and we encourage you to take a look at that including the risk factors that we have in that document, as well as in our press release.

One more little bit housekeeping before I kick off. You’ll notice in the table in the press release, we’ve renamed our other bucket to reflect really what the group is, called emerging technologies, there’s been no changes to the components that are in there, and there’s been no historical adjustment at all.

When we’ve also added a simple subtotal of our three reportable divisions, MID, CCD and DCD, so that you can kind of see what the core semiconductor business is doing. You can see the impact of the emerging technology group has on our consolidated results and then you can properly reflect and value each one of them as you remember, SunPower and feedstock used to be part of what we used to call emerging technologies as well.

We have a pretty good track record and that’s giving you a call option in our opinion on some future value and growth. So, if you have any questions on that, I’d be glad to follow with up, but just some simple changes there. As far as Q3 results, I’m very pleased and my body language reflects it, doesn’t. That we had better revenue, gross margins, net income, EPS and cash flow than we originally expected.

This exceeded our prior guidance and also beat the street consensus as of the end of the quarter. We, again demonstrated very strong operating leverage in our business model, and we expect that to continue well into 2010. For Q3, we reported $178.7 million, which is a 15% sequential increase and a decrease of 20% on a year-over-year basis.

Revenue for the quarter exceeded the top range of guidance due to strengthen CCD and MID, by division, MID increased 8% versus the prior quarter, to by strength in our SRAM business due to market share gains and an increase in communications and demand. DCD was basically flat, as we expected due to lower end of life military shipments.

In CCD, they grew 20% sequentially in Q2; they not did up again in Q3 and grew 26% sequentially, driven by better than normal seasonal growth, as well as continued strong growth in our TrueTouch touchscreen solutions portfolio. TrueTouch continues to grow very rapidly as we continue to add new customers and additional handset models into volume production and we expect very strong sequential growth again in Q4.

As a reminder, I’ve said that I expect TrueTouch to be our fastest growing programmable product line to reach 100 million accumulative revenue and we also expect TrueTouch to be one of our top five revenue generating product lines by the end of this year. Again, very stronger results for a very new product that’s very hot right now. In addition in the quarter, we also benefited from strong USB sales in a seasonally strong PC quarter, as you’ve been seeing from some of the earlier results.

On a GAAP basis, we posted a net loss of $19.7 million or $0.13 a share, which was driven primarily by non--cash charges for stock-based comp of approximately $31 million, another 80-ish million in additional restructuring activities and just under a million in historical acquisition-related expenses. This is down significantly from the net loss of $0.32 per basic share in Q2.

Non-GAAP net income was $19.2 million, resulting in earnings per fully diluted share of $0.10, which was better than the $0.05 to $0.07 I guided, even with a slightly higher share count. EPS strength came from internal operating leverage, which again was the higher revenue we had stronger gross margins and we continued to have very tight OpEx controls and again this was a significant increase from last quarter’s diluted net loss per share of $0.03 cents.

Margins very pleased obviously where they came in and you saw our consolidated non-GAAP gross margins at 51.9%. That’s up a full 7.7 percentage points from the prior quarter and was above our guidance. This was driven by our internal utilization moving up. We also achieved record wafer starts from our foundry partners and obviously had a favorable product mix with a higher mix of CCD revenue. This is the highest non-GAAP gross margin we’ve posted since 2004, and we’ve exceeded our 2008 peak gross margins, even on a substantially lower revenue base.

Our core semiconductor gross margins again, which includes the impacts of emerging technology division, were an impressive 53.7%. Our average utilization based on wafer starts in the quarter and our historically installed capacity, which I’ll explain later, was 69% for Q3, up a full 10 percentage points from our Q2 utilization rate of 59.

However, if you look at how we’re looking at it based on our current staffing levels, which are reduced and we’ve adjusted our equipment capacity, our real utilization in Q3 was 78%, up 12% from Q2, and I expect to be in that range again in Q4. Again, we’re going to start reporting on this adjusted utilization rate going forward, because that more properly reflects what we’re doing and what you can expect.

As we have been discussing pretty heavily over the last year or so, our move to a flex fab strategy is continuing to pay off, approximately 38% of our wafers made came from our foundry partners in the quarter, a record amount, and we expect that we’ll be at approximately a 50/50 split within the next two years, as we do not plan any substantial footprint increase in our one remaining fab.

Product margins remained relatively stable as approximately 80% of our revenue is proprietary and programmable. Our average ASPs in Q3 have increased year-over-year by 3%, which has been very encouraging in this economic environment. They decreased 5% sequentially to $1.32, and that was really mostly due to a higher level of CCD revenue in Q3. The vast majority of our main product lines had ASPs that were flat or slightly up, so we’ve been very pleased with what we call our product margins have held in.

On the OpEx front, our non-GAAP operating expenses increased by $1 million sequentially in the report and that totaled $75.8 million, but as you know, that included a $2.3 million non-cash accounting charge relate to the valuation of our deferred comp plan, and you can see the breakout of that in the face of the press release on the income statement. When I do my guidance, I don’t assume any movement in the deferred comp plan, because it’s so hard to predict.

So if you look at it on a comparable basis, we actually reported $73.5 million versus my guidance of $73 million to $75 million. So we came at the lower end of our OpEx and that’s due to our continued focus on cost containment. Just to put things in perspective, our non-GAAP operating expenses, which include any of the deferred comp charges and/or benefits, which can happen in certain quarters, decreased 18% year-on-year and we continue to push forward with a lot of our cost containment efforts well into 2010.

Just a quick note on headcount in Q3, our worldwide headcount totaled approximately 3,600 people, and that’s a decrease of 19% since our peak in Q3 ‘08. Pay cuts are coming back in Q4. In Q3, we turned our bonus plans back on and any accrual related to that was already in the reported numbers.

So even as we’re turning back some of the temporary expenses, we’re still managing to keep the OpEx very low and just as a side note, none of the executive staff are having their pay cuts restored until we hit a 15% non-GAAP PBT. So, again, another part of our demonstration of our commitment to drive the operating leverage further into 2010.

Our other operating income was a gain of $3 million, and again, the other $2.5 million for the deferred comp was a benefit in there. The real cash impact was half million dollars in interest income. The taxes were inline with my guidance of about 900K. Our basic shares came in at $152 million, consistent with my guidance. Fully diluted shares were $198 million, and that was slightly above my guidance due to a higher average stock price and some increased option exercises and I’ll go into the share count more when I give the guidance.

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