Cypress Semiconductor (CY)

Q4 2011 Earnings Call

January 26, 2012 11:30 am ET


Dana Nazarian - Executive Vice President of Memory and Imaging Division

Christopher A. Seams - Executive Vice President of Sales and Marketing

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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

Dinesh Ramanathan - Executive Vice President of Data Communications Division

Norman P. Taffe - Executive Vice President of Consumer & Computation Division

Unknown Executive -


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

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

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

John Pitzer - Crédit Suisse AG, Research Division

Jeffrey A. Schreiner - Capstone Investments, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Delos Elder

John Vinh - Collins Stewart LLC, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

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

Steven Eliscu - UBS Investment Bank, Research Division

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

Betsy Van Hees - Wedbush Securities Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division



Good morning, and welcome to Cypress Semiconductor's Fourth Quarter 2011 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 fourth quarter of 2010 -- 2011, rather. And I will start out [indiscernible] with CFO, Brad Buss.

Brad W. Buss

Thanks, T.J. Thanks, everyone, for attending our fourth quarter call. And as usual, the information in here is based on all our preliminary unaudited results. we'll be filing our 10-Q on schedule in mid-February. And obviously, there's a lot of forward-looking statements and things especially with the way the economy and so many moving parts right now. So obviously, we can all please look through all the risk factors in our 10-K and as well as in our press release. And we have a full GAAP to non-GAAP recounts everywhere. I'm going to spend a little more time than unusual because there's a lot of moving parts going on between Q4 and Q1. And hopefully the detail will answer a lot of your questions.

So if you look at Q4, we're really pleased with where that ended up. We ended up with revenue of $242.4 million, slightly above the high-end of our guidance. And it was better than we expected as we had some legacy communication product sales and our emerging tech division growing a little more than expected. We decreased 8% sequentially with all 4 divisions, most major product lines and all channels declining pretty much as expected. We continue to have 1 10% customer for the company as we did in Q3, and that was one of the large Korean cellphone makers.

And even in the ugly macro environment, we have the best revenue for Q4 since 2000. So I was pretty impressed with what the team pulled off there. By division, our Memory Products Group decreased 13%, pretty much as expected as we saw a lot of inventory adjustments and lower demand pretty much across the majority of the SRAM wireless infrastructure customers. And that was pretty consistent with what you've seen from other semi guys.

DCD decreased only 4%. There is a really big decrease in West Bridge as we've talked about, offset by better-than-expected increase in our legacy comm business, which as you know is very lumpy and will be one of the things that will not be repeating and impacting Q1.

CCD decreased 8% sequentially and was driven by declines in touch, USB and clocks, offset by actually fairly flattish tablet revenue. And that was -- really only happened because he closed all the remaining HP comm inventory liabilities. And on the bright side, we actually had a small seasonal increase in our core PSoC business, which actually has its highest quarter for 2011. And we had a little better than seasonal revenue in our CapSense areas, and the initial ramps on PSoC 3 as we've been discussing have started. Albeit small, they will be continuing to grow year-on-year for quite a few years.

As a reminder, TrueTouch share of revenues in 2011 exceeded our annual target of $230 million to $250 million. CCD remains our largest division and accounted for 54% of revenue, and TrueTouch continues to be our largest individual product family.

Overall, we saw no major surprises by end markets. We pretty much saw sequential decreases across all of the markets, with the exception of consumer, which is basically flat due to some seasonality. Mobile handsets were slightly better than expected but they were still down sequentially. It continues to be our largest end market at approximately 27%. And as I've said before, all of our major sales channels decreased sequentially, driven mostly by distributors and with Asia being the biggest impact.

On a GAAP basis, we had net income of $31 million or $0.18 per share, and that's versus $0.05 a share in a year-ago period, so a nice increase in there. Non-GAAP net income were also quite strong with $56.1 million. We posted $0.32 per fully diluted share. And again, that exceeded our guidance due to a tight OpEx control and a small year-end true-up in our tax provision. Again, a very strong earnings quarter for us, and that was a 28% increase versus the 25% EPS we posted in Q4 '10.

In our core semiconductor business, which excludes the impact of our investing in emerging tax, deliver $0.36 and the PBT is 27%. Again, near highest for us. Non-GAAP gross margin was 56.1, a little below guidance due to declines in our factory loadings. As you saw, we took our inventory down pretty heavily to react to the bookings that we saw. Stuff that I think is very prudent and we expect to recover. We also had minor gross margin impacts due to product mix and so near-end inventory reserves.

The average utilization in our Minnesota fab based on wafer storage for Q4 was 75%. Just to put that in context, that was the lowest since Q4 '09 and that was down from 83% in Q3. And again, we're being very proactive in managing our inventory. I expect the Q1 utilization to increase to around the low 80s. And obviously we have a very good booking levels. Our wafers [indiscernible] are 22% and that was down from post of 39% in Q3. And again, it's been as high as the mid- to high-40s. And again, I expect margins to be impacted favorably as we increase loadings to the fab going forward.

The average ASPs decreased slightly to $1.39, again mostly due to the mix of products and customers. For the fiscal year, we achieved total revenue of $995 million. That's point dot billion but close enough to round it. That was an increase of 13% from 2010. And that's a raise that we think is going to be at least 2x, maybe 3x better than the industry when it does all settle. So I was really proud of the team pulling that off. I still expect this to grow nicely in the second half that see a lot of new products and designs coming out. And for the year, we had non-GAAP fully diluted earnings per share of $1.22, an increase of 32%. So again, a rate that was 2.5x the revenue growth. Great leverage, I was pleased to see.

OpEx, the team did a very job there. We came in at 81.1, lower than my guidance. We saw some of the variable comp go down. We've tightened up OpEx control real well. I think, as you all know, that's been a major focus for us for the last couple of years, and it's going to continue to be a major focus this year. And we won't let you down in that area. Our headcount was down year-on-year even after we've invested very heavily in our touchscreen and PSoCs group. And again, we only increased OpEx 5% for 2011, and we increased operating income by over 18%. And that's even with continued focus in bringing DecaTech up to a ramp stage. So real pleased there.

OIE was 800K due to interest income. Our tax benefit in Q4 was 200K as we have some year-end discrete items being trued up. And I expect the GAAP -- non-GAAP, I should say, tax rate to be around 2% to 3% for '12, which is pretty consistent with our expected cash tax rate.

So on the balance sheet, I think as you saw, our cash came in real solid. We had $166.3 million. That increased $31.3 million from Q3, even after we spent $62.8 million to buyback 4 million shares. So the buybacks that we kicked off in September was $400 million. We bought 5.1 million shares at an average cost of $15.78 and we've got about $319 million left to be able to spend. And just as another tidbit, about 23% of our total assets are in cash and related investments.

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