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Cypress Semiconductor Corporation (CY)
Q2 2010 Earnings Call
July 22, 2010 11:30 AM ET
T.J. Rodgers – President and CEO
Chris Seams – EVP, Sales and Marketing
Brad Buss – EVP, Finance and Administration, and CFO
Shahin Sharifzadeh – EVP, Worldwide Manufacturing and Operations; President, China Operations
Dana Nazarian – EVP, Memory and Imaging Division
Norm Taffe – EVP, Consumer and Computation Division
Dinesh Ramanathan – EVP, Data Communications Division
Ashish Rao – Credit Suisse
Gene – Citi
Adam Benjamin – Jefferies
Tim Luke – Barclays Capital
Doug Freedman – Gleacher & Company
Chris Danely – JP Morgan
Sandy Harrison – Signal Hill
Steven Eliscu – UBS
John Barton – Cowen
Jeff Schreiner – Capstone Investments
Raji Gill – Needham and Company
Vijay Rakesh – Sterne Agee
Charlie Anderson – Dougherty & Company
Srini Pajjuri – CLSA
Previous Statements by CY
» Cypress Semiconductor Corporation Q1 2010 Earnings Call Transcript
» Cypress Semiconductor Corporation 4Q09 (Qtr End 12/31/09) Earnings Call Transcript
» Cypress Semiconductor Corporation Q3 2009 Earnings Call Transcript
I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.
Good morning. And we’re here to report second quarter of 2010. We’ll start with our CFO, Brad Buss.
Thanks, T. J. Good morning, everybody. Thanks for attending our second quarter call. As usual, everything in our press release and on this call is based on our preliminary unaudited results and we encourage you to review out 10-K, which we’ll file in early August.
And, as usual, we make a lot of forward-looking statements. They entail a bunch of risk and we have no duty to update it so we encourage you again to look at the Risk Factors in our 10-Q. I’ll go through Q2 and give you a quick look at the guidance for Q3.
Q2 came in extremely well. I was very pleased with how we ended. We had better revenue gross margin, OpEx, net income and earnings per share than we originally expected. We exceeded my prior guidance and we also beat the average street consensus. And again, most of that was really driven by strong revenue and more importantly, the strong internal leverage in our business model that we’ve been talking about for quite a few quarters.
Revenue for Q2 was $223 million, an increase of 10% sequentially. It increased 40% on a year-over-year basis. And again, I was very pleased with that result considering that our normal Q2 seasonal growth is normally around up 2% to 5%.
We saw sequential growth in all major end-market segments led by communications and industrial military. And I know I’m going to get the question, so I just want to let you know, our PC segment was up sequentially as was our revenue in Europe, surprise, surprise, everybody.
We have finally returned to the pre-recession revenue levels that we last achieved in Q3 ‘08. However, we have substantially better financial results. So just to put that in perspective because I think it’s really important.
If you look at it in Q3 ‘08 we had relatively the same revenue levels, yet now in this quarter, our gross margin percent is 9 percentage points higher, our OpEx is 5 percentage points lower and the corresponding operating income is 14% higher.
And this isn’t really some one-off, right. This is a result of a lot of the strategic initiatives that we’ve been doing over the last couple of years, everything from the Flex Fab to the Sync SRAM conversions and a big focus on proprietary products, and a big focus on our operating expense structure. So we’re really pleased with where that’s gone. We don’t see it as a one-off and I think we’ll have continuous improvement overtime.
If you look at it by divisions, MID increased 14%, driven by strengthen our SRAM business due to market share gains and increase in communication and demand, mostly driven by wireless and wireline end customers like you’ve been seeing from the other FPGA guys. DCD increased 9%, again driven by growth in com and some end of life sales.
CCD increased 3%. Our flagship PSoC family, which is the largest revenue component of CCD had record revenue for any June quarter in its history. Our design activity there remains very strong and our current backlog for PSoC is at a record level. We expect record revenue for PSoC in TrueTouch in the third quarter and for the entire fiscal year 2010. Our PSoC based FingerNav sensor for cell phones began a shipment production late in the quarter and that helped drive our emerging tech division to 100% sequential revenue increase.
Turning to the profit line on a GAAP basis, we had another positive quarter. We had a net income of $20.6 million. That was $0.11 per diluted share. That was a 63% sequential increase versus the diluted earnings per share of $0.07 in Q1 and substantially better than the net loss per share in the year ago second quarter that was $0.32.
Our GAAP operating income increased 100% sequentially and I expect to be strongly GAAP profitable for the balance of the year. On a non-GAAP basis our net income was $48.1 million, an increase of 41% sequentially and that was the highest level since Q4 of 2000. That yielded earnings per diluted share of $0.24, which again was above my guidance of 19% to 21%.
Our operating income increased 47% sequentially and we hit a 23.4% PBT and that’s our highest non-GAAP PBT since end of Q4 of 2000. So, we’re really pleased with where that’s came in.
Another little record area was in margins. Our non-GAAP gross margin hit a record 59.3% and that’s up a full 3.7 percentage points from Q1 and up 15.1 percentage points from Q2 of 09. Our results here were above guidance as our factories and our foundry partners continue to execute very well. We had a favorable product mix. We continued on our 65-nanometer conversions and we also enjoyed lower inventory reserves.
Our core semiconductor gross margins, which excludes the impact from the emerging tech division again were another record and broke the 60% mark for the first time, it came in at 60.1%. Our utilization in our fab in Minnesota based on wafer starts for Q2 was 89%. That was up from 81% and we expect to see that move towards 92% in the third quarter.
As we’ve been discussing for the last couple years, our Flex Fab strategy continues to pay off and in Q2 we had approximately 30% of our wafers coming from our foundry partners and we see that number moving up closer to the 50-50 mix over the next year or so.
Our product margins increased nicely due to the SRAM conversion to 65-nanometers. Overall cost improvements in all of our product lines favorable yields out of our factories and we also had stable pricing and in some cases rising prices. You saw that our ASPs moved up again. We increased to $1.51 and that’s the highest in almost a decade and again, just further evidence of the move for us proprietary products that we’ve been enjoying for the last year or so.
Non-GAAP operating expenses increased $2.3 million sequentially. That totals $78 million and that included $1.8 million non-cash accounting benefit related to the deferred comp plan. As usual, my guidance does not include the deferred comp plan because it’s impossible to forecast. So if you look at it on an apples-to-apples basis, OpEx was $79.8 million up slightly from my guidance and really just due to higher revenues and profits driving a little higher variable comp expense and we also have increased travel to support our design activities.
Our headcount is being very tightly managed. We only increased in the quarter on a net basis by 24 people and most of that was offshore and it was focused on supporting our growing design wins and our emerging tech group.
Our headcount was around 3500 people and again, a decrease of 20% since our peak in Q3 ‘08 and the lowest in over a decade and more importantly our revenue per head is at the highest level in over a decade, and we’re managing OpEx extremely tightly and we will continue to do that into the foreseeable future.
The non-GAAP tax charge in Q2 was $4.4 million that was an effective tax rate of 8.4%, slightly better than my guidance of 10% due to some higher foreign tax credits.
If we look at the balance sheet it continues to remain very strong. Our cash, cash equivalents and investments totaled $278 million, decrease from Q1 due to the yield enhancement program that used a net $80.7 million of cash. If you include the $31 million of auction rates we have classified as long term we have $309 million in cash and investments, which approximates about $1.93 per outstanding share.
Over 0.3% of our assets are in cash and investments and we have no debt. We had really good cash flow performance in the quarter. In Q2 we had operating cash flow of $46 million and our free cash flow of $37.5 million increased 85% sequentially.
Inventory has gone over very well. The ops team here has done a great job. Our net inventory was $81.5 million, which decreased 3% from Q1. Our net inventory is actually down 35% since Q3 ‘08 when we actually have the same revenue level, just to put that in perspective. And more importantly, we’ve been increasing our on time delivery, which is helping us competitively.
The net days of inventory decreased of 85 in Q1 to 82 in Q2, and is down from historical average levels of around 100 plus days during 2008. If you exclude the $4.3 million related to the capitalized non-cash stock based comp and $7.5 million, due to the shutdown of our Texas fab in ‘08, the normalized inventory is down around just about $70 million or 70 days.