CY

Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor (CY)

Q4 2012 Earnings Call

January 24, 2013 11:30 am ET

Executives

T. J. Rodgers - Co-Founder, Chief Executive Officer, President, Director, Director of Cypress Envirosystems, Director of Agiga Tech, Director of Bloom Energy and Member of Board of Trustees at Dartmouth College

Brad W. Buss - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance & Administration and Corporate Secretary

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

Hassane El-Khoury - Executive Vice President of Programmable Systems Division

Badrinarayanan Kothandaraman - Executive Vice President of Data Communications Division and Executive Director of Cypress India Limited

Cathal Phelan - Executive Vice President of the Consumer and Computation Division

Dana C. Nazarian - Executive Vice President of Memory and Imaging Division

Analysts

John W. Pitzer - Crédit Suisse AG, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

William Harrison - Wunderlich Securities Inc., Research Division

John Vinh - Pacific Crest Securities, Inc., Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Charles L. Anderson - Dougherty & Company LLC, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

Presentation

Operator

Good morning, and welcome to Cypress Semiconductor Fourth Quarter 2012 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 Cypress' fourth quarter and year results. We'll do it in the usual manner, starting out with our CFO, Brad Buss.

Brad W. Buss

Thanks, T.J. Good morning, everybody. Thanks for joining us. We're going to go through Q4 and the year, and I'm glad this year is done and behind us. And the only good thing that I've seen so far is that San Francisco is going to the Super Bowl, and the Sharks are 2 and 0.

So anyway, we're going to go through the preliminary unaudited results. Our 10-K will be filed in mid to late February. So we encourage you to check that out. And as usual, we've got all our stuff posted on the web. We've got full GAAP to non-GAAP recons, et cetera, et cetera.

So just on the housekeeping side on Ramtron, I think as most of you know, we closed the acquisition on November 20. We have most of the cash costs behind us in Q4. We've adjusted their cost basis. We've moved our team that was in Colorado Springs into their building, and they are now part of our F-RAM product line that is part of our nonvolatile business unit, which rolls up into MPD. So everything Ramtron-related, you'll see under the MPD division breakdown. The integration has gone well. It's on schedule. We expect everything to be done on time and to be accretive beginning in Q2.

As well, we divested Cypress Envirosystems, as T.J. had talked about in the prior call. As such, we're no longer consolidating our financial results. We have a very minor ownership position, and the cash proceeds will be mostly earn-out-based over the next couple of years. We wish them a lot of luck. They've got some interesting things going on, and we hope they bring it to fruition.

As you also saw in the press release, we have 4 internal divisions that we're moving down to 3 divisions. T.J. will talk on some of the minor personnel changes associated with that. But from your perspective, I don't expect that you'll see a lot of changes in the segment reporting that we do in our press release and our public filings.

So for Q4, we ended up at $180.3 million, which was slightly above our guidance that we gave out on January 8. But unfortunately, that was an 11% sequential decrease. By division, MPD decreased 12%, mostly due to lower SRAM revenue as we expected. And as everyone knows, the comm end markets continue to remain pretty lackluster. DCD decreased 12%, driven by weak PC sell-through and lower wireless revenues. PSD actually decreased the least. They were only down 9%, and that was mostly due to normal seasonality in CapSense and some lower PSoC and handset revenues. And that was offset slightly by a little bit of growth in Trackpads. PSD continues to be our largest division by revenue, and TrueTouch continues to be our largest product line by revenue.

By end market, really, no major surprises, and Chris will take you through that. As we said before, our distribution channel was weaker than we expected, especially in the last couple of weeks. They were about 75% of revenue for the quarter. Our one 10% customer, Samsung, continues to be a 10% customer in Q4, and we expect them to be a 10%-plus customer in '13 as well.

We ended the year with $767 -- $769.7 million in revenue, unfortunately down 23% year-on-year. A lot of that was various product customer transitions that we've talked about at the beginning of the year, and we're looking to turn that around and head to a growth phase for 2013.

For the quarter, on -- we had a net loss of $24.2 million on a GAAP basis, about $0.17 a share. A lot of that was due to the various Ramtron charges that we took, and you can see that in the press release. On a GAAP -- non-GAAP net income, we ended up at $8 million. That gave us earnings per diluted share of $0.05. It would have been $0.03 higher if it wasn't for Ramtron and another $0.03 higher if it wasn't for the Emerging Tech Division. So decent earning potential in the core business, and like we said, I think the Emerging Tech and the Ramtron stuff will start becoming less diluted to us as we move throughout the year. The non-GAAP net income for 2012 was $91.1 million, and that was $0.55 a share fully diluted.

Our gross margin for the quarter was 51.3%. It was down from Q3, really due to the higher factory absorption we had to take since we took our starts down. You'll see our inventories down nicely. We have some product and customer mix impacts obviously in the quarter. We have some impacts from Ramtron, and we took a couple of inventory reserves. Our core semiconductor gross margin, if you exclude the Emerging Tech, was 52.4%. Utilization was down fairly heavily, down to about 63.3% as we aligned our wafer starts with revenue and booking levels. And wafers from our foundry partners was about 30% of our total. The non-GAAP gross margin for the year was a pretty healthy 55.4%, and, again, it reflects the earning leverage that we have in our business model. And we look to start turning the gross margins back up as revenue increases.

We managed the OpEx very well in the quarter. We came in at $82.9 million. That was an increase of 2.5% sequentially, but that included an incremental $5.2 million related to the rammer. So if we excluded Ramtron, we decreased OpEx by 4% sequentially, and that's really the lowest level that we've seen since early 2010. We are going to take further action on the OpEx area as we mentioned in the press release, and we're taking this very seriously. And we'll look at all areas throughout the company. For the year, we ended up at $329.5 million. OIE was a loss of $1.6 million, basically nominal interest income and the expense related to the revolver. Tax expense for Q4 was light, it's 138k.

On the balance sheet, so the cash and investments were down $117 million -- I'm sorry, the total is $117 million. That was a decrease of $102 million. But in Q4, we spent $115 million to complete the Ramtron acquisition and some various expenses. $32.3 million to purchase 3.2 million shares, and we had our regular dividend of $16.1 million. About 85% of our cash and investments are onshore. We generated $18.7 million in cash from ops, and that was about 10% of revenue. And we had free cash flow of around $11 million.

For 2012, we generated $136.4 million in cash from ops, equal to a very healthy 18% of revenue. We think we have one of the better returns of capital strategies in the industry, and we have the cash flow and balance sheet to continue to execute that strategy, which, obviously, the dividend is a key part of in 2013 and beyond.

Our inventory dollars was $126 million. That increased $36 million, but most of that was driven from Ramtron. So we had an incremental $44.7 million related to Ramtron, of which $23 million of the $44.7 million is the noncash wacky fair market value purchase accounting. So, again, if you excluded Ramtron out of there, we decreased our inventories a whopping 9% sequentially. So I was very pleased to see what we've been doing on the inventory management front.

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