Cypress Semiconductor (CY)

Q3 2011 Earnings Call

October 20, 2011 11:30 am ET

Executives

Shahin Sharifzadeh - Executive Vice President of Research and Development, Executive Vice President of Worldwide Manufacturing and Operations and President of China Operations

Dana Nazarian - Executive Vice President of Memory and Imaging Division

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

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 -

Analysts

Charlie Anderson - Dougherty & Company LLC, Research Division

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

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

John Pitzer - Crédit Suisse AG, Research Division

Glen Yeung - Citigroup Inc, Research Division

Jeffrey A. Schreiner - Capstone Investments, Research Division

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

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

Daniel K. Marquardt - Robert W. Baird & Co. Incorporated, Research Division

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

Sujeeva De Silva - ThinkEquity LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the Cypress Semiconductor Third 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 discuss Cypress' third quarter results. We'll go to the usual manner, starting out with our CFO, Brad Buss.

Brad W. Buss

Thanks, T. J. Thanks, everybody, for joining. Welcome to our third quarter call. Just a quick housekeeping thing as usual. We'll be making a lot of forward-looking statements. Please check out our forward-looking language in the press release, as well as our SEC filings that we have. And as standard, we always have the GAAP to non-GAAP recons there and on the website.

I know the issue in Thailand will come up. It's very unfortunate what is going on there. Fortunate for us that we do not have any direct operations in Thailand. We have really no major subcons there. Some of our customers use some of the CMs there, but they're very minor amount of revenue. And they're not impacted at this point. Overall, we don't expect any issues right now or in the future, but we're continuing to monitoring it.

As well, don't forget we have our Analyst Day on November 9. It's at 9:00 a.m. to noon at San Jose. We have got T.J. and all the product line guys talking. We'll have a couple of interesting announcements, and we're also going to be unveiling our stealth startup and having a couple of outside speakers come in. So we hope that you can join us. So please RSVP.

I'll go through Q3 real quick, and then I'll get into the guidance. So we actually outgrew the industry pretty nice in Q2. I think as most of you knew, we grew 9%. We continue to grow into Q3, and we actually had our highest quarterly revenue since the 2000 boom. We ended up at $264.7 million. It was up along in the guidance, but it was up 4% sequentially as we saw strength in all of our major product lines focused on obviously PSoC and SRAM. But we saw a decrease in distributor sell-through in the last few weeks of the quarter. So I don't think that's been much of a surprise. I think you've been seeing and hearing that from most of the other guys as well.

If you exclude the partial revenue from our Image Sensor Group that we sold in Q1, our year-on-year revenue increased 18%, which, from what I've been seeing so far, is pretty good. We saw no real big surprises by any of the major end markets. Chris will go through those in more detail.

Mobile handset continued to be our largest end market at 28%, and we did actually have one of our major handset customers become our first-ever 10% customer, just a bit went over 10% in Q3. So we saw sequential growth in every major product line, and all of our channels grew, with the exception of a very minor decline in our direct channel.

If you look at it by divisions, you saw MPD increased 6% as we expected, with solid growth in our SRAM business. DCD decreased 9%, driven by, again, expected decreases in West Bridge and some of our legacy comp business. And CCD increased 8% and achieved record revenue for Q3. Our friends, TrueTouch, also had another revenue record, then they actually grew 208% year-on-year, obviously, with a very strong growth in Tier 1 handsets and due to tablet increases, which I'm sure you'll have a lot of questions for Norm later.

CCD continues to be our largest position at 54% of revenue and contributed the most to earnings. And TrueTouch continues to be our largest individual product family. Design activity is remaining very strong. Gen4 is kicking ass. And I think T.J. and Norm and Chris will talk through that, and we are going to cover that very heavily at the Analyst Day because it's definitely setting us ahead.

On TrueTouch guidance, while we're on that subject, we increased it to $230 million to $250 million in Q2. We're not changing that guidance at all, and if anything, we expect it to track closer to the mid to the higher end of that $230 million to $250 million. So I'm sure that will be a relief for some of you out there.

On a GAAP basis, we had net income of $40 million or about $0.22 per diluted share, and that was a year-over-year increase of 22%. Our non-GAAP net income was $69.2 million, yielded a whopping $0.37 of EPS, which exceeded my guidance even with revenue at the low end of my guidance, due to good gross margins and a lower share count.

Just to put it in context, it's our highest level of net income since 2000. It's a 32% year-on-year EPS growth. Again, I don't think many people are putting up year-on-year growth like that. And it's actually a rate of growth 2x faster than sales. So, again, we continue to drive a tremendous amount of leverage. And that's also with us investing very heavily, guys, into the Emerging Tech division. And like I said, we'll talk about the self one [ph] in a couple of weeks.

If you look at the Core Semiconductor business, which includes the impact of our Emerging Tech division, we had $0.42 of EPS and a PVC of 31%, so extremely pleased with their earnings power in that group. The non-GAAP gross margin was 57.9%. It was at the high end due to product mix, some customer mix. And, actually, the factories continue to do a very good job in there. If you exclude Emerging Tech from that, we're up at around 59%, which is back in the range of our model of 58% to 60%.

Utilization in our Minnesota fab was 83%. It was down from 89% and 82% and obviously have adjusted wafer starts to reflect a much lower level of bookings. I think you'll see Q4 utilization run in the high 70s to about 80%. And our wafers from foundry partners decreased down to about 39%. So, again, our FlexFab model has been paying off very well. You're seeing us deliver very good gross margin. I think the gross margin guidance will be good as well, and I'm real pleased where that's went.

The average corporate ASPs decreased slightly to $1.43. And just as a sidenote, ASPs for CCD increased 17% year-on-year. Our non-GAAP operating expenses were $83.6 million, $2.5 million better than my guidance. Like most people, we then put in a few enhanced cost controls. We're seeing lower sales cost due to the decrease in the Q4 revenue, and we have some litigation expense timing.

Headcount is tightly controlled. We decreased slightly quarter-on-quarter, and we actually achieved the highest revenue per employee again since 2000.

We're very focused on OpEx. We're going to continue to be focused on OpEx all the way through 2012. And, again, in Q3, we dropped 91% of the incremental GP dollars we generated in the quarter right through to the bottom line, stuff that I'm very proud of what the team's accomplished to do that.

OIE was $1 million, mainly due to interest income and some exchange benefits. The non-GAAP tax charge was $1.8 million. That was about a 2.5% ETR. And I expect to maintain a rate between 2% and 2.5% for the rest of the year, which is pretty much close to our actual cash tax rate.

The balance sheet continues to be really good. We spend a lot of cash buying back stock, and we repurchased 8.3 million shares. We have about $148 million in cash and investments exiting the quarter. We completed the $600 million buyback, as you know. We also announced that the board re-update new buyback for about $400 million. And like I said before, we'll continue to deploy that on an opportunistic basis. About 17.5% of our total assets were in cash and investments. And, again, we have no debt.

Very good cash from operations. We netted $106 million. That was up almost $30 million sequentially due to strong working capital management. We paid out $15.3 million in Q2 for the Q2 dividend, and today, we paid out another dividend of $0.09 a share, which was yielding before we -- before today, 2.2%. So, again, we're very pleased to deliver a real man's dividend, as well as buying back stock and delivering good financial results.

Our return on assets for Q3 was 8.2% and almost 28% on a rolling fourth quarter basis. And I expect to see continued strong cash and returns going into next year. Net inventory of $111.6 million increased from Q2, and our days increased by about 4, really due to the HP tablet cancellation that we've talked about before. We're hoping to get that all resolved this quarter. And we also saw distributors slowing their orders obviously in the quarter, which means we delivered the inventory, but it didn't ship out to them. Nothing I'm concerned about. The team is managing it very tightly.

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