Cypress Semiconductor Corp. (CY)
Q1 2010 Earnings Call
April 22, 2010; 11:30am ET
T.J. Rodgers - President & Chief Executive Officer
Brad W. Buss - Executive Vice President, Finance and Administration & Chief Financial Officer
Chris Seams - Executive Vice President of Sales and Marketing
John Pitzer - Credit Suisse
Uche Orji -UBS
Frank Keller – Barclays Capital
Doug Freedman - Broadpoint AmTech
Adam Benjamin - Jefferies & Co.
Glen Yeung - Citigroup
Christopher Danley - JPMorgan
Suji De Silva - Kaufman Bros.
Srini Pajjuri - CLSA
Betsy Van Hees - Wedbush Securities
Jeff Schreiner - Capstone Investments
John Barton - Cowen
Sandy Harrison - Signal Hill
Charlie Anderson - Doherty & Company
Previous Statements by CY
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» Cypress Semiconductor Q2 2009 Earnings Call Transcript
Good morning, and welcome to Cypress Semiconductor first quarter 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 are here to report the first quarter in usual format; finances, marketing and comments by me, and questions.
Thanks T. J. This was a very exciting quarter. Not only did Canada win the hockey goal -- sorry my friend in Boston, but we also had a very strong quarter. A lot of great results and I think you’ll be very pleased with the guidance.
So just as usual we’ll be making a lot of forward-looking comments. Make sure you take a look at our 10-Q that will be coming out the door in a couple of weeks, and for all of our GAAP and non-GAAP stuff, we have full recons in the press release and they are also posted on our website, so please take a look there.
I will go through the Q1 result, give you a little color and I’ll jump into the guidance. So I was really pleased that Q1 closed with better revenue, gross margins, OpEx, net income and EPS than we originally expected. It exceeded my prior guidance and it also beat the average street consensus that you guys had. Again, the thing that I was most excited about was, it was really all due to good old-fashioned normal leverage. We didn’t have any weird one-time advance or tax events that drove that EPS number.
So revenue for Q1 was $202 million. It was an increase of 4% sequentially, and an increase of 45% on a year-over-year basis. Again, it’s very important we put that in context. Since normally in Q1 we go down seasonally about 4% to 8% and also don’t forget that Q4 was a 14-week quarter. So if you just put an average normalization down to 13 weeks, we grew like 12%.
So revenue for the quarter exceeded the top range of guidance due to strength, mostly in MID and to a lesser degree an DCD. By the division MID increased 17% from Q4, driven by strength in our SRAM business, and that was a combination of market share gains, as well as the overall communications and demand in wireless and wireline, and customers that you have been seeing from a lot of other semiconductor guys.
DCD increased 5% driven by again growth in com and some end of life sales, and CCD which has the most consumer exposure decreased 9%, better than normal seasonality. One of the things to highlight in there, is that our flagship PSoC family, which is obviously the largest revenue component of CCD, they had a record for a Q1. Normally they go backwards pretty hard because of the consumer exposure, and they did far better than any Q1 in history, and we expect them to obvious have record revenue for PSoC in 2010.
Looking at net income on the GAAP basis, we posted another positive quarter. We had GAAP net income of $12.7 million, which equated to $0.07 per diluted share. That increased 250% sequentially versus the $0.02 we posted in Q4, and on a year-over-year basis we had a net loss of $0.66 in the prior year. I expect to be GAAP profitable every quarter throughout 2010.
On a non-GAAP basis, our net income was $34.1 million, a 7% sequential increase in the highest level since 2004, that yielded an earnings per diluted share of $0.17, which was well above the prior guidance I gave of $0.12 to $0.13. Again, this is the first Q1 that has grown sequentially in profit in quite a few years. As to my earlier points, we normally go backwards due to seasonality.
More importantly, the operating income increased 23% sequentially, and we achieved an 18.6% PDT percent, which again has been our highest since 2004, and again all of that was due to good old fashion leverage. We did well on the top line gross margin, and as you saw we had an extremely tight OpEx control.
Turning to the non-GAAP gross margin, that was 55.6%, up a very strong 1.7 percentage point from the prior quarters as our factories and foundry partners continue to execute very well. We had a favorable product mix, and this likely lowered inventory reserved. This is the highest non-GAAP gross margin since 2000.
Our core semiconductor gross margins which again excludes the impact of emerging tax, and I break that all on a press release was even higher at 56.4%, as the emerging tech group is still weighing down the overall leverage, but that will start to move up as they start ramping, which we’ll see back after the year.
Average utilization in our Minnesota fab based on wafer starts for Q1 was 81,% up from 73% in Q4, and I expect that utilization grow a little more in Q2. We are very committed still in our flex fab foundry. Our partners are doing very well there. We did about 30% of all of our wafers came from our foundry partners, and we still expect that to grow to probably a 50-50 mix over the next year, to year and a half, as we are not adding any substantial capacity to our one remaining fab and as our sync SRAMs will continue to transition to UNC at 65 nanometers.
Our product margin increased slightly due to cost improvements as stable pricing environment and in some selective cases of rising prices. I was very pleased with the corporate ASPs in Q1, they increased 6% sequentially to $1.48, again the highest since 2001, really due to a favorable product mix across all of our divisions.
Non-GAAP operating expenses increased by only $1 million bucks, to a total of $75.7 million, and again that included an 800k non-cash accounting charge related to the evaluation of the deferred comp plan. I think as you know, when I do my guidance, I assume that the deferred comp plan is neutral, so I have no clue which way it is going to go. So if you’re doing on apples-to-apples to track down the deferred comp, it was really OpEx of $74.8 million, and that was down a couple of million from my guidance of $78 million to $79 million, which basically flat with Q4.
All the one-time events from the downturn have all been reversed. We are operating under our normal business model, and we continued to be very vigilant on OpEx as everybody in this room can attest to and we expect to have that continue all throughout the year. Just a quick data point; our head count decreased again sequentially. As you said about 3500 people, net count 21% since the piece in Q3 ‘08 and the lowest in a decade.
We had OIE of a net 900k, and remember there is no debt, plus no interest expense. The non-GAAP tax came in with my guidance of 10% which equated to $3.7 million. We had basic shares right in the middle of my guidance at 159, fully diluted was at 199, and our yield enhancement program delivered three million shares to us in the lower $11 range, and that will start benefiting the share count in Q2.
If you look at the balance sheet, cash and short-term investments were roughly flat due to the yield enhancement program that I just talked about, that used a net $32 million. If you included the $33 million of the lovely auction rate securities that we still have, and they are classified as long-term investments, we had $330 million, which equates to $2.04 per outstanding share, with good operating cash flow of $38 million; free cash flow of $20.2 million, and I expect both of those metrics to increase throughout 2010.
Towards the inventory, I was really pleased with where that came in. The net inventory was $84.3 million, a decrease of 8% from Q4 ’09. As we continue to ship more than we are building we may be increasing customer demand. Just to put it in perspective, our net inventory is down 33% since Q3 ‘08. Obviously, the lowest level in years, and our sales, are only up about 9% I believe from that peak. So fantastic job there, and at the same time we have actually increased our on-time delivery to our customers, which is making them happy.
Again don’t forget, the $84.3 million includes our lovely non-cash stock based comp charge of $5.1 million, and there’s about $9.7 million for the last time build that we did when we closed taxes. So if you normalize those two out, we are really just a snitch under $70 million dollars or 70 days of inventory. These levels are pretty low and we hope to increase in the back half of the year, but we don’t see any substantial increased in inventory at all in the next quarter to most likely remain flat.