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Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corp. (CY)

Q3 2017 Earnings Call

October 26, 2017 4:30 pm ET

Executives

Colin Born - Cypress Semiconductor Corp.

Hassane El-Khoury - Cypress Semiconductor Corp.

Thad Trent - Cypress Semiconductor Corp.

Michael Balow - Cypress Semiconductor Corp.

Analysts

Blayne Curtis - Barclays Capital, Inc.

Charles Kazarian - Credit Suisse Securities (USA) LLC

William Stein - SunTrust Robinson Humphrey, Inc.

Suji Desilva - ROTH Capital Partners, LLC

Adam Gonzalez - Bank of America Merrill Lynch

Charlie Lowell Anderson - Dougherty & Co. LLC

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Betsy Van Hees - Loop Capital Markets LLC

Robert Mertens - Needham & Co. LLC

Anthony Joseph Stoss - Craig-Hallum Capital Group LLC

Presentation

Operator

Good afternoon, and welcome to Cypress Semiconductor Third Quarter 2017 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. Colin Born, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Colin Born - Cypress Semiconductor Corp.

Thank you, Michelle. Good afternoon, and thank you for joining our Q3 2017 earnings conference call. With me today are Hassane El-Khoury, CEO; Thad Trent, CFO; and Mike Balow, Executive Vice President of Sales and Applications. Hassane will make some introductory remarks. Thad will provide a financial overview. And then, we'll take your questions.

All information discussed in our press release and on this call is based on preliminary unaudited results, and we encourage you to review our 10-Q once filed. During the call, management will be making statements that should be considered forward looking and, as such, they are subject to a number of risks and uncertainties that could cause actual results to differ materially from results anticipated by the forward-looking statements.

Please refer to our earnings release, the Risk Factors in our 10-K filed with the SEC, and our other SEC filings for a more detailed discussion of these risks and uncertainties. All forward-looking statements are based on the information available to us as of today. We undertake no obligations to update these statements.

Please note that the financial measures to be discussed by management today are non-GAAP measures unless they are specifically identified as GAAP measures. Reconciliations of non-GAAP measures to their most comparable GAAP measures and certain limitations of using non-GAAP financial measures are included in the earnings press release issued today.

I'll now turn the call over to Hassane.

Hassane El-Khoury - Cypress Semiconductor Corp.

Thank you, Colin, and thank you all for joining us. Q3 was another solid quarter for Cypress in terms of revenue, gross margin and earnings growth, reflecting our strong execution. In Q3, we set an all-time record for revenue and achieved our highest earnings and operating margins since 2011.

We met our Q4 2017 gross margin target one quarter ahead of schedule due to strong execution on key initiatives. It's a very exciting time for Cypress, as our 2016 decision to focus the company's strategy around the IoT opportunity is starting to pay off.

Our IoT wireless business grew by 80% year-over-year on the strength of our Wi-Fi/Bluetooth combo chips, which have become the IoT industry standard for wireless connectivity. Virtually, all OEMs across our markets are transforming their road maps to include a reliable connection to the cloud and local intelligence to sense, process, store and share data.

Cypress's comprehensive portfolio of connectivity, MCU and memory solutions is uniquely tailored for these IoT applications, with the performance, security and support developers need to get great ideas into these fast-growing markets on time.

We have the number one IoT connectivity business in the world, no matter how you measure it; by revenue, breadth of devices, maturity of our connectivity software with over 2,000 man years invested in it and, most importantly, customer adoption. We lead in any metric. Our world-class 802.11ac Wi-Fi, Bluetooth and BLE combo chips and the Amazon Echo Show and Look are perfect examples of how Cypress continues to lead.

Consumers buy IoT products expecting a great experience. That's why Cypress wins. Our solutions empower customers to differentiate their products with rock solid high-performance connectivity that lies at the heart of a great user experience. MCU and memory products are also critical to our IoT strategy.

Cypress's PSoC MCU product line is gaining traction in IoT applications, where low power, programmability and easy-to-use design tools are important. Cypress also sells memory into these same platforms. Many of our IoT customers utilize our memory products for mission-critical data storage, thus putting a premium on the reliability and performance of Cypress memory products.

Over the last two years, we have shifted the focus of our memory products from low-margin commoditized markets into high-end sticky markets where customers value quality, reliability and longevity; and we are seeing this in our improved margins on this business today.

It's also an exciting time for us because the holidays are approaching. This year, more than ever before, Cypress products are inside many of the most popular consumer gift ideas, ranging from a broad array of wireless ear buds and mobile devices that charge faster with USB-C, to connected smartphone devices from hubs, to lighting, to thermostats. And if you're like me and looking for a big gift idea, we are inside most of the connected cars.

Cross-selling of our connectivity, microcontroller and memory products enable us to provide our customers with system-level solutions. Cross-selling is one of the primary goals of our Cypress 3.0 strategy. In the third quarter, approximately 80% of our revenue was generated by customers buying more than one product family across connectivity, microcontroller and memory. For example, the Nest smart thermostat uses Cyprus's Wi-Fi and NAND flash memory.

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