Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor (CY)

Q1 2011 Earnings Call

April 21, 2011 11:30 am ET


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

T. 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

Dana Nazarian - Executive Vice President of Memory and Imaging Division

Norman Taffe - Executive Vice President of Consumer & Computation Division

Shahin Sharifzadeh - Executive Vice President of Worldwide Manufacturing and Operations and President of China Operations

Dinesh Ramanathan - Executive Vice President of Data Communications Division

Christopher Seams - Executive Vice President of Sales & Marketing


Rajvindra Gill - Needham & Company, LLC

Jeffrey Schreiner - Capstone Investments

Stephanie Sun - Crédit Suisse AG

Delos Elder

Steven Eliscu - UBS Investment Bank

Sujeeva De Silva - ThinkEquity LLC

Vijay Rakesh - Sterne Agee & Leach Inc.

Charlie Anderson - Dougherty & Company LLC

Christopher Danely - JP Morgan Chase & Co

Betsy Van Hees - Wedbush Securities Inc.

John Vinh - Collins Stewart LLC

Ruben Roy - Pacific Crest Securities, Inc.

John Barton - Cowen and Company, LLC

Timothy Luke - Barclays Capital

Doug Freedman - Gleacher & Company, Inc.



Good morning, and welcome to the Cypress Semiconductor First Quarter 2011 Earnings Release Conference Call. Today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. TJ Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. Rodgers

Good morning. We're here to report the first quarter of 2011. We'll do it in a standard way with our CFO, Brad Buss, leading off.

Brad Buss

Thanks, TJ. Thanks, everyone. Thanks for joining. It should be a fun report as usual. We had a great quarter and I think you'll be pleased with the guidance.

And just a reminder, a lot of forward-looking language take a look at our risk factors and our nice big 10-K that's out there. The 10-Q will get filed in early May. And just a couple of housekeeping things, I think you probably noticed the press release is a little different. We tried to make it more concise, shorter and informative. We hope you like it, we'd like to get any feedback you have on it.

Another item, the deferred comp plan was always bobbing around in the non-GAAP. We've actually moved it to GAAP only since it's non-cash and there's no impact on the business. We've restated all the historical numbers. In that way, it won't be confusing for everybody and their models.

MID is no longer. Image Sensors rest in peace. We renamed it to MPD, Memory Products division. So again, you'll see that acronym throughout the report. And I just want to hit the Japan questions kind of upfront. We don't do any direct manufacturing in Japan. We don't have any subcons that do direct manufacturing in Japan. Japan's about 12% of our revenue. We have a good-sized sales office in Tokyo, a little smaller sales office in Osaka and those people have been working their butts off taking care of the customers. They've done an extraordinary job in a very tough time for the people over there. And we want to thank them for what's going on.

As far as all the raw material stuff, the DT res and the mold compound wafers, we see no issues for the next couple of quarters. I think one of the benefits of being a satellite company is that we do keep inventory, we do have second sources. So we feel pretty comfortable all the way through Q3 and we don't expect any big disruption. We haven't heard of any major disruptions with our customer base. We're keeping an extremely close eye on that. In fact, I think in the end, we're actually going to be a net gainer of business due to the fact that some of our Japanese competitors are obviously pretty impacted, and we're helping to support their customer base as best we can.

And then the 1 last final note, we've got a proxy out there. This year, we're looking for a measly 15 million shares to add to the pool. I think we performed pretty well for you guys, we're very focused on shareholder value and we'd like to get your support on that as best you can. So we appreciate that.

So if you look at Q1, we came in at $233 million, higher than guidance. It was up 3% sequentially, 15% year-on-year. And again, in that we only had 2 months of the Image Sensor business. So if you strip that out and looked at the continuing business, we actually grew 4% sequentially, the same 15% year-on-year. We saw a very good revenue growth in Handsets, which grew 62% sequentially for us. And we saw declines as we expected in all the other major segments: Wireless, Wireline, Industrial, NPC and Chris will give you some more color on that.

If you look at the divisions, our Memory Products division decreased 5% as expected as we saw some of the comp markets adjusting with the lower lead times. Again if you adjust Image Sensor out of that equation, they really only dropped about 3% which is actually better than normal seasonality.

We saw DCD increase 8% driven by higher West Bridge revenue for the handset market and that was offset by some slightly lower con revenue, again as expected. CCD had a record revenue in Q4. They increased 7%, which is actually quite phenomenal because normally CCDs can go down 5% to 12% just due to the standard seasonality in consumer.

The TrueTouch revenue hit another record. It grew almost 40%, sequentially, was up north of 200% year-on-year and you can expect it with very strong growth in handsets. And we also had starting to see some nice contribution in our large screen formats, which we kind of include the e-readers and tablets. And we saw some normal seasonal declines in clocks and USB. CCD is the biggest division by revenue. They accounted for 46% of revenue and I expect that to increase throughout the year. They should be north of 50% of our revenue in fiscal '11 and as a comparison, they were only 39% in 2010. So we're seeing a very good movement there.

TrueTouch actually became our largest individual product family in Q1. It was bigger than our synchronous SRAM business which has been the big daddy for quite a few years. Design activity continues to be really strong, and I'm sure Norm and Chris can touch on that and that's really across the PSoC, including 3 and 5 and all the touchscreen stuff. The handset revenues, it again increased 62% sequentially. And I think they could be 25% plus of our company's revenue in 2011, and definitely will be probably the largest end market that we serve going forward.

Just on the tablet stuff again. Just to hit that up, I know there's been a lot of questions in the press on tablets and non-tablets requires and how they're going to do in supply chain and sell-through and all of that kind of stuff. Now remember, when we gave your guidance for TrueTouch, we said it would more than double in 2011 which is extremely strong guidance, yet we only need kind of the tablet format products to be less than 5% to achieve that guidance. We're actually doing very well in that area, and I see no issue in tablets regardless of what they do impacting our guidance and if they could continue to do as well as we think, we may be able to raise that later in the year.

Turning to the profit end of it, we had net income of $55 million, about $0.28 a share. That was on a GAAP basis, by the way. We have the gain of the Image Sensor business that obviously, we pro formatted and we have a donation of the building to the bank that we're very proud that we can support them on that. And that was a big change versus the year-ago number of $0.07.

The non-GAAP net income was very strong at $48.5 million. That's the $0.24 of fully diluted EPS, which was higher than my guidance -- at the high-end of our guidance, I should say. And we had a little bit of a tax benefit there and we also had higher shares in OpEx that I'll talk about. So I think overall, it came together pretty well.

More importantly, it was very strong EPS growth. It was a 40% growth year-on-year, almost 3x faster than revenue. So I'm just pretty excited on that. You strip out the Emerging Tech business and just look at the core business, we would've had $0.27 in EPS so almost a 3% drag on Emerging Tech.

The non-GAAP gross margin was $58.1 million. It was down from Q4. Again, mostly due to the product mix and plant capacity reductions at our Fab as we try to balance the lead times with customer inventory levels. And most of that was in the memory products group. We're ramping nPD and backed up in Q2 actually quite strongly to meet increased demand.

If you look at our core semiconductor margins without the Emerging Tech, we came in at 58.7%. Utilization in the Minnesota Fab based on starts for Q1 was about 76%. That was down from 82% in Q4. Like I said, as we proactively put down the wafer starts. And we think the utilization will probably bump up to around 88% for Q2. Another record, we actually had 55% of our wafers come from our foundry partners, so we expect to begin 50%. We've actually had it earlier than we expected, and most of that is because of the rapid rise in the PSoC family of products.

We continue to be pleased with our ASPs. They remain relatively flat at around $1.48 and saw memory and CCD group actually increase slightly in the quarter. Our non-GAAP operating expenses were flat to last quarter and totaled to 86.6. If you adjust out the deferred comp like we've done, they actually moved up from Q4. And that was basically due to a couple of items. We've had our sales conference in Q1 the first we've done in 7 or 8 years, and we also have a pretty big hit beyond the standard fringe resets.

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