CY

Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corporation (CY)

Q4 2009 Earnings Call Transcript

January 28, 2009 11:30 ET

Executives

T.J. Rodgers - President and Chief Executive Officer

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

Chris Seams - Executive Vice President of Sales and Marketing

Norm 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

Analysts

Timothy Luke - Barclays Capital, Inc.

John Pitzer - Credit Suisse (United States)

Chris Danely - JPMorgan Securities, Inc.

Doug Freedman - Broadpoint. AmTech Equity Capital Markets

Srini Pajjuri - Calyon Securities USA, Inc.

Adam Benjamin - Jefferies & Co., Inc.

John Barton - Cowen & Co.

Vijay Rakesh - ThinkEquity LLC

Suji De Silva - Kaufman Brothers LP

Jeffrey Schreiner - Capstone Investments

William Harrison - Signal Hill Capital Group LLC

Presentation

Operator

Good morning and welcome to Cypress Semiconductor Fourth Quarter Earnings Release Conference Call. Today’s conference is being recoded. (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 are going to report fourth quarter and year-end 2009 results, financial and other business results. We will start with Brad Buss, our CFO on the numbers.

Brad W. Buss

Thanks T.J. Good morning everyone. I just want to thank you for spending and boy what a difference a year makes. This call is going to be a lot more fun than the last Q4 was. Just the usual kind of preamble at the beginning. Everything we are talking about is based on our unaudited (ph) pre net results. You will see our (indiscernible) come out the first week of March. As you know in our press release, we have a lot of GAAP to non-GAAP precons. We will put it on our website and by the way we redesigned our website, a lot more information, a lot better floats that we would encourage you to check that out and get a lot of your basic information and if you have any feedback on it, please let us know. So as usual, I will go through Q4 in somewhat of a detail between the income statement and the P&L and then I will give you the guidance for Q1. So with respect to Q4, I am obviously very excited to report a very strong quarter. We closed with better revenue, gross margins, net income, EPS and cash flow than we originally expected and we obviously exceeded our prior guidance and beat the street consensus. A lot of that is due to just the internal leverage that we been talking about, it was very strong and I see that continuing well into next year and we will elaborate a little more on that during the call.

So the revenue for Q4 is 194 million and it increased 9% sequentially and 18% on a year-over-year basis. We exceeded the top range of guidance due to strengthened MID and CCD. So if you look at it by division, which we have a table in the press release, you can see it all. MID increased 18% from Q3 (indiscernible) strengthened our SRAM, a lot of that is due to market share gains that we have been talking about for quite a while and we are also seeing like everybody else an increasing (ph) COM business driven by wireless and wireline and customer CCD was up 2% and was slightly better than we expected as West Bridge was just marginally better than we predicted going in the beginning of the quarter and more importantly in CCD we increased 4% sequentially in Q4 and keep in mind that was after growing 26% sequentially in Q3 and normally CCD has a seasonal decline in Q4 of about 9 to 11%. So that was a very strong showing and I think you can guess which – what drove that. You know the seasonal declines that we normally experienced was offset quite significantly by a TrueTouch solutions portfolio which grew 50% sequentially and we set a record for revenue dollars as well as unit shift and that business is growing quite strongly. We expected it to continue to grow into Q1 and it has been meeting and exceeding our internal expectations and I am sure you will have questions for that for (indiscernible) later.

On a GAAP basis, we actually returned now to profitability, so an early present for you, Mr. (indiscernible) and we posted a net income of 2.9 million or $0.02 per diluted share and that was obviously a big improvement from a loss of $0.13 per basic share in Q3 and $2.88 on a year-over-year basis. The non-GAAP net income was 31.7 million and again that was our highest since the second half of 2004 and we resulted in earnings per diluted share of $0.16 and again that was an increase of 60% from Q3 and exceeded my initial guidance of 10 or $0.11 that I gave at the beginning of the quarter. This resulted in a profit before tax of 16.3%. Again the highest level we have had since 2001 and like I mentioned at the beginning the EPS strength was really primarily driven by really operating leverage we had great revenue with stronger gross margins and we continue to be very tight on the OpEx control. Our non-GAAP gross margin was 53.9% and that was up a whole two percentage points from the prior quarter and was above our guidance as our factories and foundry partners continue to execute very well and we also had a favorable product mix. This is the highest non-GAAP gross margins since Q4 of 2000. We have exceeded our near-term prior peak gross margins, yet we still have plenty of room to go. We can still take our utilization up quite a bit further and we expect to have higher revenue base, more business through foundries and a more favorable product mix over time.

Our core semiconductor gross margins which exclude the impacts from emerging (ph) tech division with 55.2%. Average utilization for Q4 was 73%, that was down slightly from the 78 in Q3. Again it’s due mostly to product mix. I expect the Q1 utilization to be flat to slightly up, probably no more than the high 70s. And again like we talked about 38% of our wafers that came from our foundry partners are pretty consistent with the record that we hit in Q3 and our partners are working very well and it’s having a positive impact on our gross margin. Our product margins increased slightly due to cost improvement in staple pricing as we had a record 84% of our revenue being proprietary in nature and I was very pleased with the ASP results. In Q4 ASPs increased year-over-year by 8% and they increased by 5% sequentially to $1.39.

Our non-GAAP operating expenses actually decreased by 1.1 million sequentially and so 74.7 million and again that included $0.5 million for the non-cash accounting charges related to the deferred (indiscernible) and we provided additional disclosure of that in the press release. So just to put it apples to apples with my guidance which does not assume any movement at the (indiscernible) because it’s totally unpredictable. It would have been 74.2 million versus my guidance of 74 to 75. So again very tight cost controls.

Restructuring wise, our headcount continued to decrease. We are a total about 3,550 people which is a decrease of 20% since our peak in Q3 ’08 and it’s the lowest level in over a decade. We took a small restructuring charge and (indiscernible) for Q4 related restructuring. For the fiscal year of 2009, we posted a total revenue of $668 million, that was a decrease of approximately 13% from fiscal year 2008 and again we still got a lot of room to grow back not only into those peak revenues but I think we will more than exceed the peak revenues that we have prior due to the host of new products and new multi billion dollar markets that we are moving into that we’ll talk about it further.

On a GAAP basis, we had a loss for the year of $1.03 and that was down from loss of a $1.89 in 2008. (indiscernible) we had a gain of 1.7 million due to a $1 million related to the deferred (indiscernible) which again is non-cash related and that we had a $0.5 million in interest income and remember we have no debt unless we have no interest expense.

The non-GAAP tax charge in Q4 was only 200k. It was better than the 900k expected due to some equipment tax credits and miscellaneous year-end adjustments that we made and I am sure Obama will be taking most of that away next year but we will deal with that later.

Basic shares came in at 155 million. That was down from my guidance of 157 to 159. Fully diluted shares were 194 million, again down quarter-on-quarter and we repurchased 3.7 million shares during the quarter at a price of around 950.

On the balance sheet, very strong. Our cash investments looked very good. Our cash-cash equivalents and short-term investment totaled 300 million and it increased 53 million from Q3. If you add in our total investments which include 33 million of (indiscernible) that we classify as long term. That's 333 million with a very strong operating cash flow in Q4 at 75.3 million. That increased over 200% from Q3. And again it has been the highest level in many, many years obviously due to the strong net income that we also had very tight working capital management. Our friends at (ph) Sun Power paid a tax receivable of $60 million and guess what we got $5.5 million refund from Uncle Sam as well and we obviously had various option exercises than ESP key purchases and like I mentioned we had paid out the 35 million to buy back the shares.

Inventories have been another shining spot for us. I have been very pleased with what’s going on there. Our net inventory was 91.2 million. It increased slightly from Q3 as we practically started increasing both at MID due to the strength that we just reported in Q4 and that we see continuing in Q1. The good thing is that we have shipped all that inventory in our actual inventory as we sit right now is below Q3 levels and I expect the inventory only to increase slightly in the quarter as we support the Q1 demand and get our profiles (indiscernible), our Q4 inventory dollar levels is really out again (indiscernible) at the lowest levels in years and more importantly we have increased our (indiscernible) delivery metrics to all of our major customers and just so you put inventory in perspective as I know that’s on everyone’s mind, our 91.2 million of net inventory includes 5.7 million related to capitalized non-cash stock based comp charge which is kind of nutty but it’s fair. And also $11.7 million net for the last five (indiscernible) due to the closure of our Texas lab that we completed in Q4 of ’08.

So if you exclude those thing and look at what we do called in a normalized operating inventory and that’s only about 73.8 million and again these are very, very low levels for us and that’s only to (indiscernible) days. This (indiscernible) inventory again continued to remain flat quarter-on-quarter. We are not seeing the (indiscernible) inventory. In general we see inventory levels remaining very low at us, our distributors and in the channel and we are not concerned on any issues related to double ordering or lead times right now.

If you look at AR, our accounts receivable totally is (indiscernible) down 16 million or 16% and while that was just because the (indiscernible) quarter was a very, very good quarter right from the beginning and it wasn’t back-end loaded by any stretch albeit December was our biggest month due to it being having an extra week. The DSO decreased by eight days to 44 days and our aging continues to be (indiscernible).

CapEx was 7.5 million, depreciation was 12.4. Our total CapEx for the year is 25.8 million and again that was our lowest CapEx spend since 1987, and hopefully that’s not a cycle. As a reminder we have no (indiscernible) share account 155 million of (indiscernible) I told you we repurchased 3.7 and the diluted share account was 194. When you look at the GAAP numbers now, we have a diluted GAAP number because when you make profits you got a diluted from basic and it’s a 184 million. It differs from the non-GAAP number because you get to treat the (indiscernible) stock-based comp as a further reduction of share accounts (indiscernible) if any of need a prime around that I will be glad to take the (indiscernible).

More importantly, we are managing our dilution very tightly. We actually had a negative 1% burn rate in 2009 as we have more cancellations (indiscernible) during the year. Now, to the main event, guidance, which again is on a non-GAAP basis. With a very strong book to bill of 1.13 and again it’s very important since we hardly ever have a positive book to bill to begin with, never mind one of that magnitude. All the (indiscernible) divisions are near 1 or greater with MID and DCD being the strongest and CCD is basically on parity which again is a very significant accomplishment since they are normally down significant due to consumer seasonality and obviously it’s the benefit of the strong (indiscernible) bookings helping there.

So we had a very strong sequential growth in Q2. We had very good growth in Q4 and I am happy to say that we are actually expecting to remain Q1 flat to up 2% so that’s a 194 to 198 million. Remember Q4 was the 14 week quarter and Q1 returns to a normal 13 week quarter, so if you normalize that you can kind of get through Q1 growth rate more like 8 to 10% assuming a linear 14 week quarter in Q4. And again to put that in perspective our historical Q1 sequential growth has normally been down and average of 8 or 6%.

We expect growth in MID due to the comp strength and market share gains, a slight decline in CCD which normal Q1 seasonality can be anywhere from 9 to 11% and it’s being offset by continued growth and TrueTouch and DCD should decrease just slightly. I am expecting gross margins to hold and be around 53.5 to 54% and that assuming utilization – kind of in the mid to high 70s. OpEx will move up to slightly to 78 to 79. All of the one time cuts have now been restored. There is no shutdown going on. All the pay cuts and bonuses are intact and we get the normal season reset (indiscernible) in Q1 like everyone else et cetera, et cetera. (indiscernible) of our yield above $400,000 again I am assuming no major (indiscernible) the minority interest benefit of above 300 K due to our subsidiaries and our tax rate should go back to 10% as we are solidly back in profits for the balance of the year and I expect that to hold through the rest of the year.

CapEx of about 16 million as we had some tough Q4 that didn’t get received and we are buying a few new testers to support the ramp of our new products and depreciation will be around 12.8 million. Share counts, basis share count of around 150, or 158 to 162 and fully diluted around 198 plus or minus the million as I expect our average stock price to be higher then it was in Q4. So you boil that together you end up getting non-GAAP EPS of 12, 13%, 12 to $0.13 which is 50 to 63% above the current Q1 (indiscernible) and it actually exceeded our own internal plan that we just put to that six weeks to go.

So I will just stop there. I will turn everything over to Chris and once again just I want to thank the company for posting an excellent quarter.

Chris Seams

Thanks Brad. Let me go through (indiscernible) and some color on the end markets. In the fourth quarter splits of revenue by geography where we shift to Asia-Pacific was 55%, America 22 and Europe was 13%, Japan was 10% and relatively unchanged from the prior quarter. Units were up slightly to 140 million units. Brad talked about pricing, ESP went up from $1.32 in prior quarter to $1.39 are really reflecting an increase in higher shipments of higher value products in a relatively stable pricing environment right now.

The end markets are driving our growth and Q4 were the wireless and (indiscernible) infrastructure, end market was low in the handset and the recovery in industrial market for us. Brad gave you the book-to-bill numbers I won’t go through them again. Our backlog grew to $230 million that’s a six month backlog number for us and we entered the quarter very strongly booked 75% through the guidance number that Brad gave and the booking patterns that we have seen three weeks into this quarter support that guidance as well.

If you look at the industry right now, more in the midst of our market where we get regular reports from our customers of spot shortages, not from us but from competitors and other component suppliers and we hear of lead times in excess of 20 weeks. I would like to say that we are actually very proud of the work that our operations and manufacturing groups have done. Our lead times I think remain above remain as it does in the industry with most of our proprietary products being in the four to six week range. So in a market where people are (indiscernible) 20 plus weeks, four to six is very competitive and we expect to get continued business and share growth with those competitive lead times.

As Brad talked about, we remain very vigilant checking both consumption and inventory levels that our top accounts as well as our distribution partners and right now our checks continue to say we don’t see any signs of double bookings at this point. So the market is very strong right now and we are very well positioned despite that market.

Let me turn the call back to T.J. for more details on the quarter.

T.J. Rodgers

Okay, I highlighted nine points about our financials (indiscernible) of our products. First of all to people (indiscernible) said we had a revenue increase in the fourth quarter which is pretty rare for us 8.5% quarter-on-quarter. If you wanted to take one reason for that is TrueTouch. If you look at the absolute numbers there appear to be a surge of ramps but other ramps in effect (indiscernible) growth is TrueTouch and these have really made the difference (indiscernible) through our internal plan.

We are starting to get some booking in the Q1 and Q2, we spend a long time where people are not just (indiscernible) stock markets and book-to-bill ended a third point at 1.13 for the quarter. Internally due to the surge of (indiscernible) revenue at the end of the quarter we have been our internal plan for growth margin operating spend net income and earnings per share, so we were pretty happy with this quarter and that’s (indiscernible) for the year of 2009 (indiscernible) shares went up a 136% as compared to the stocks which went up 70% and the Nasdaq index which went up 45%. Now that was true to period of December 31 ’08 through ’09 January 1, 2010. The same statement about our share price beating the indices that I quoted is also true from 2007 to 2009, 2006 to 2009 all the way back to 2003 to 2009. In other words if somebody bought our stock on December 31, 2002 and held it until January 1, 2010 they would have had more appreciation than the indices the way I stated it earlier. We are proud of that.

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