CY

Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor (CY)

Q3 2012 Earnings Call

October 18, 2012 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

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

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

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

Analysts

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

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

William S. Harrison - Wunderlich Securities Inc., Research Division

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

Ian Ing - Lazard Capital Markets LLC, Research Division

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

Steven Eliscu - UBS Investment Bank, Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

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

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Liwen Zhang

Presentation

Operator

Good morning, and welcome to the Cypress Semiconductor Third 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 third quarter and answer some questions. As usual, we will start out with our CFO, Brad Buss, talking about the numbers; and follow with our VP of Marketing and Sales, Chris Seams, talking about mark-to-markets and customers. I'll do a few technical odds and ends, and then we'll open up for questions as quickly as we can. Brad?

Brad W. Buss

Thanks, T.J. Thanks, everyone, for attending our third quarter call. Just a reminder that everything is based on preliminary unaudited results. Our Q will be filed in early November. We would like you to take a look at that and all the risk factors incorporated there within our press release, and we have full GAAP to non-GAAP recon in the release and on our website.

So I'm going to start off with a little housekeeping related to Ramtron. So the tender was successful. And on October 10, we took control of Ramtron with about 70% ownership. That's now gone up to about 78%. The tender is officially over. We've paid out $80.3 million so far in October, and we will begin to consolidate the results effective October 10.

There is a proxy statement that'll be going out to shareholders. That's basically a paperwork exercise to finalize the merger and then bring in the other 22% that we don't own. We expect all of that to be done and have 100% control of the company by the end of November, subject to any kind of regulatory review. And just as a note, all the current minority shareholders that are out there will receive the same $3.10 as everybody else.

We're just going through -- we've only been involved with them for just over a week. We're still poring through the numbers and beginning our integration process. So I'll give you an update from a guidance perspective with and without Ramtron, just so you can kind of understand the impact that Ramtron will have. And I'll explain some of the stuff that's in flux there.

So as we look at our Q3, which, again, has nothing of Ramtron in it, okay, just this -- it levels to everybody [ph]. We had revenue of $203 million. It was at the higher end of our guidance. It was up about 1% sequentially. As you can see in the release there, MPD increased about 6%. They had some onetime benefits in the timing group related to some patent sales, and they saw some increases in their Sync business. DCD decreased 8%. We have 100% of the end of life of West Bridge now through us. PSD decreased a little bit, primarily in the CapSense and auto area and it was offset by a slight growth in TrueTouch. PSD remains our largest division by revenue, and TrueTouch continues to be our largest product line by revenue.

By end market, there was really no surprises, and Chris will touch on that. Our direct sales channel increased slightly due to customer mix, and our distribution business was down slightly but still remained at 74% of revenue. Our historical largest customer continues to remain our largest customer. However, they're just under 10% of revenue versus just over 10% of revenue versus the prior quarter.

Our GAAP net income was $14.3 million or $0.09 per diluted share. That was a 200% increase from the prior quarter, mainly due to higher earnings and lower stock-based comp expense. Non-GAAP net income was $32.3 million. It was our best all year. It grew 7% sequentially and yielded us earnings per diluted share of $0.20.

Our Core Semi business, which excludes the impact of our Emerging Tech division, resulted in $0.23. So the Emerging Tech division, as you can tell, cost us $0.03. I was very happy where the quarter came in, considering it's a pretty gnarly macro environment out there, and again, we demonstrated very good leverage, growing earnings at a far greater rate than sales.

Our non-GAAP gross margins continued to hold in well. We came in at 57.1%. The core semiconductor margins, again, which excludes the Emerging Tech impact, was a strong 57.8%. Utilization in our Minnesota fab was around 81%. That was down from Q2. And obviously, we're managing wafer starts with the level of inventory and bookings in the quarter. I'd expect utilization to go down slightly in Q4.

Our non-GAAP operating expenses of $80.8 million decreased 3.5% sequentially. It was below guidance, and it's the lowest level we've seen all year. We had a few onetime expenses that won't repeat. And again, I'd expect OpEx to decrease again in Q4, even as we start some new projects. We're very focused on OpEx, as you all know, especially fixed costs and especially in this kind of crazy macro environment we're in.

Our OIE was a loss of $1.2 million and if we -- we had nominal interest income on higher cash balances, offset by the interest expense from the revolver, which I'm sure you're all aware of. The non-GAAP tax expense was $2 million or about 6%. The percent's higher than normal but it's basically the tax expense is fairly flat, and it's now just spread over a lever -- lower revenue base.

On the balance sheet. Cash and investments totaled $219 million. It increased about $9 million from Q2. Approximately 60% of the cash is onshore. We had a very good cash flow quarter. We generated $58.1 million in cash from ops, which equaled 29% of revenue, and our free cash flow was $52.6 million, again the highest for the year, even in a pretty soft revenue quarter.

We took out 7.3 million shares in the quarter for $81.6 million. We have approximately $121 million left as of the end of Q3 for additional repurchases. And so far in Q4, under 10b-5, we've taken out another 2 million shares.

In Q3, we paid a dividend of $0.11 per share. That totaled $16.7 million. And again, that was only 31% of our free cash flow for the quarter, so a very manageable payout ratio. And we just paid our Q4 dividend today, again, of $0.11 per share, and that was $16.1 million.

I think we've got one of the best return to capital strategies in the industry. We're very proud of what we're able to do. And more importantly, we have the cash flow and the balance sheet to continue to execute that strategy in 2013 and beyond.

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