Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corporation (CY)

Credit Suisse 22nd Annual Technology, Media and Telecom Conference Transcript

November 27, 2018 5:30 PM ET


Hassane El-Khoury - President and CEO

Thad Trent - Executive Vice President and CFO


John Pitzer - Credit Suisse


John Pitzer

[Call Started Abruptly]

… presentation with Cypress Semiconductor. My name is John Pitzer. For those who don’t know me, I am the Semi and Semi Cap Equipment Analyst here at Credit Suisse. It’s my distinct pleasure to introduce the management team of Cypress Semiconductor. To my immediate left is President and CEO, Hassane El-Khoury. To his left is CFO and EVP, Thad Trent.

We’ve got about 20 minutes, 25 minutes in this room to do a fireside chat. It’s a pretty intimate group. There are mics that are circulating, so if you have question, please raise your hand and we will get you a mic.

But the same -- from my perspective, I think one of the obligatory questions in a fireside chat in case there’s anyone new in the room is to ask you to spend just a few minutes, position of the company. What sort of is the core IP that you bring to the table, what end markets you’re trying to exploit, and I guess, specifically, since you’ve been CEO, you’ve gone through a sort of transformation at the company, especially with the acquisition of the old Broadcom IoT business, maybe you can touch upon kind of your vision and that transformation as well?

Hassane El-Khoury

Sure. So Cypress what you -- here we refer to is the Cypress 3.0. It is basically the deployment of the new Cypress since I have taken over. But what that entails is moving from a traditional semiconductor component supplier to a more system and solution supplier.

What does that mean? Every customer we have complexity of the systems is increasing. The complexity of the system and automotive industry, you probably heard in this conference that a lot of the submarkets in automotive and what the complexity when they require, customers need that. So therefore our ability to be able to provide all of that IP and all of these components into a seamless yet a targeted solution is what this is all about. And while doing that we’d be able to provide a value that makes our solution sticky obviously for our competitiveness.

So at a high level the objective for Cypress 3.0 is to outgrow the industry, the semiconductor industry and the way we do that is by repositioning which we have done very well, moving the company to automotive, industrial and consumer, all three of these are growing faster than the general semiconductor industry.

Within these markets obviously there are submarkets that are more favorable for growth than others. For example, in the automotive, you have ADAS that we all hear about. We have conductivity, body electronics, instrument cluster, all of these are high single-digit to mid-teens growth. So clearly the company exposed to these sub-segment, inherently we will grow faster than the general semiconductor.

What do we provide, whether it’s in the automotive, whether it’s in the consumer industrial. The tech -- core technologies we provide I would summarize in the three pillars, compute, connect and store. So the compute, think about as microcontrollers, anything from -- everything is 32 bit, so high-performance microcontroller.

Connect, that’s -- we touched on the Broadcom IoT acquisition. We have acquired IoT business from Broadcom which brought in state-of-the-art assets, Wi-Fi, Bluetooth and Bluetooth/Wi-Fi combo chips. That puts us in the full position to be able to service that, I am going to call it the broad IoT market.

And the store, which is a differentiated storage, focusing on historically SRAM, but now is more on the NOR, where we are taking the, call it, what people are used to traditional NOR and adding the value proposition to it and putting it on automotive ADAS and the value proposition puts us in a very different bucket than our potential NOR peers.

So all of these have been kind of where we have been working on the last couple of years and the results quarter-after-quarter has really shown and improved of the fruit of that strategy being deployed and even where we are today in -- if you look at the macro we are very solid as far as the foundation that we built.

John Pitzer

So that was a very good fundamental sort of description of the company. So how do we think about the financial targets that are entailed in that Cypress 3.0 transformation?

Hassane El-Khoury

Yeah. So if you look at the model that we’ve outlined, our goal, our targeted gross margin is 50% in greater than 20% operating margin. We’ve been achieving the operating margin targets for the last four consecutive quarters, last quarter we were right around 25% operating margin. At this onset as we have restructured this business, we really structured in a way that we can maintain those operating margin in up market as well as down markets.

If we go through the last downturn in 2015 we had two empty fabs both running about 50%, our margin -- our gross margin just got crushed, operating margin got crushed. Today we got one fab. It’s fully utilized, we can move product inside, outside. So a lot of the structure has been around. The predictability of the business, the margin expansion, where you just reported a quarter 47%, our goal is to get the 50%, we will move to 50% and then hopefully beyond that as well. But everything we’ve been doing is really focused on the free cash flow of the business and the leverage and the model to grow earnings faster than the topline as well.

Read the rest of this transcript on seekingalpha.com