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Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corporation (CY)

Q1 2019 Earnings Conference Call

April 25, 2019 4:30 PM ET

Company Participants

Colin Born - Vice President of Corporate Development & Investor Relations

Hassane El-Khoury - Chief Executive Officer

Thad Trent - Chief Financial Officer

Mike Balow - Executive Vice President of Worldwide Sales & Applications

Conference Call Participants

Christopher Rolland - Susquehanna

Harsh Kumar - Piper Jaffray

Anthony Stoss - Craig-Hallum

Tom O'Malley - Barclays

Karl Ackerman - Cowen

Charlie Anderson - Dougherty & Company.

Ari Shusterman - Needham & Company

Craig Hettenbach - Morgan Stanley

William Stein - SunTrust

Suji Desilva - ROTH Capital

Vijay Rakesh - Mizuho

Presentation

Operator

Good afternoon, and welcome to Cypress Semiconductor First Quarter 2019 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

Thank you, Michelle. Good afternoon and thank you for joining our Q1 2019 earnings conference call.

With me today are Hassane El-Khoury, CEO; Thad Trent, CFO; and Mike Balow, Executive Vice President of Worldwide Sales and Applications. Hassane will make some introductory remarks, Thad will provide a financial overview and then we will take your questions.

All information discussed in our earnings release and on this call is based on preliminary unaudited results and we encourage you to review our 10-K once it is filed.

During the call, management will make statements about our second quarter guidance, our long-term financial model and other future matters that should be considered forward-looking. Actual results might differ materially from the results anticipated in our forward-looking statements. Please refer to our earnings release, the risk factors in our most recent filed 10-K and the -- with the SEC and our other SEC filing for a more detailed discussion of risks and uncertainties that could cause these differences. All forward-looking statements are based on the information available to us as of today and individuals are cautioned not to place undue reliance on our forward-looking statements.

In addition, we undertake no obligation to update these statements. Please note 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 non-GAAP financial measures are included in our earnings release and our investor presentation deck both of which are dated today and available on our website at investors.cypress.com.

I will now turn the call over to Hassane.

Hassane El-Khoury

Thank you, Colin, and thanks to everyone for joining us today. Welcome to our first quarter 2019 conference call. The first quarter was a success for Cypress in many ways. The overall business environment continued to be challenging, but we kept a laser focus on executing to what we can control. As a result I'm pleased to report that our Q1 results met our plan on revenue, operating expenses, EPS and cash flow. Our management team and employees continue to drive the company towards our goals of achieving higher-than-industry revenue growth at greater than 50% gross margin and greater than 25% operating margin targets.

We also have fast our commitment of maintaining greater than 20% operating margin through market downturns as evidenced by our ability to deliver a 21% operating margin this quarter. As expected, the persisting softness across our automotive and IoT end markets as well as our legacy businesses resulted in sequential and year-over-year revenue declines. We see some signs of stabilization in ordering and backlog patterns starting in Q2 with our MCD backlog increasing, specifically for IoT which we expect to grow approximately 20% in Q2.

We remain cautiously optimistic in our guide and continue to keep a close eye on our channel by carefully matching our replenishment levels to end consumption. In the channel, we are under shipping orders and reducing inventory dollars to prevent any unnatural inventory bubbles setting us up nicely for the second half of the year should the early signs of recovery persists.

On April 1, we closed a NAND JV with SK hynix system ic, a transition we announced in October 2018 that effectively exit the NAND flash market. Following this move, approximately 94% of our NPD revenue will now come from differentiated products in the industrial automotive and enterprise end markets.

We hosted customers, partners and analysts at three major events in Q1: CES, Embedded World and our 2019 Analyst Day. These events underscored our sharp focus on solving problems for IoT and automotive customers in high-growth, high-value applications. In fact, at Analyst Day we shared that 85% of our R&D investments are now concentrated on IoT and automotive.

Our pipeline of silicon software and services will empower customers of all sizes to create winning products for some of the most exciting megatrends of our time. Our customers continue to select Cypress as leading Connect and Compute solutions as our design win activity in the first quarter increased 15% year-over-year led by automotive. There's no question that everything will become smart secure and connected.

Of the roughly two billion IoT demand for wireless connectivity solutions in 2019 almost 75% will be based on some combination of Wi-Fi and/or Bluetooth.

This makes perfect sense because developers and users are looking to leverage the most ubiquitous wireless technologies on the planet. The 500 million Wi-Fi networks installed throughout the world and the four billion Bluetooth nodes living in the smart homes -- smartphones we hold all day every day.

Read the rest of this transcript on seekingalpha.com