Li-Wen Zhang - Pacific Crest Securities, Inc., Research DivisionPresentation Operator Good morning and welcome to Cypress Semiconductor First Quarter 2012 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 first quarter and answer questions, and we'll have the standard meeting: Brad with the numbers, Chris with the market, me with some random stuff and then your questions. Thank you. Brad? Brad W. Buss Thanks, T.J. Thanks everybody for joining us to go through our first quarter results and our look towards Q2 and beyond. As every -- standard stuff, these are preliminary unaudited results. We encourage you to take a look at our 10-Q. Obviously, lots of risk factors especially after going through Q1, and obviously, we're making a lot of forward-looking statements that we don't plan on updating unless it's material. And we've got our full GAAP to non-GAAP recons in the release, as well as on the web. And we also have redone our segments, which is pretty detailed in the press release, and we've also taken 3 years of history for those of you that want to go back far. And that's all on the website as well. So if you want to go change your models to reflect the current organization, you can do that. And I think it's fairly straightforward, but let me just put a couple of things in perspective on the segment change, something we've been obviously talking about for a while. And it really kind of aligns us into the 3 core areas of the company focused around our memory products; our USB and our programmable products, which includes our PSoC 1, 3 and 5 and all the derivatives; and then all of our user interface products.
One thing that's different is we moved the trackpad and the ONS from Emerging Tech. They've kind of graduated, so to speak, and they're now part of PSD. Automotive went from memory to PSD, and timing is now in MPD. So pretty detailed in the press release, take a look through that. Very strong alignment to what we're doing, and now the Emerging Tech group is purely our 3 wholly-owned subs: Cypress Envirosystems, AgigA and DecaTech. And then, any other little and startup things that we do will go in there as well.So I think it's very clean. It's very straightforward. You can get a good feel for the drivers of the company. And like I said, all the history is there. So we're very aboveboard in what we're doing there, and we thought it made sense to do it at the beginning of the year to start the year off right. Okay, so if we look at Q1, obviously, the pre-announcement was not something we were pleased with, or you guys, but it was really limited to a couple of the factors we described in the release. So we ended up at $185.1 million. It was the middle of our revised guidance. Unfortunately, it was a sequential decrease of 24%. And basically, all the divisions, major product lines and channels performed consistent with the revised guidance. MPD decreased 9% as we expected, mainly due to inventory adjustments and lower demand from the major SRAM wireless customers. DCD actually increased 6%, and that was driven, believe it or not, by some increases in West Bridge, offset by normal seasonal declines in USB, and we're going to see that business coming back nicely in Q2. PSD declined 38%. And as we said, it was pretty heavily centered around the touch end of it. We had a lot of end-of-life going on in the tablet end of it, that most of you knew, that was a pretty big drop. We had 1 or 2 specific customers that had some end market challenges that impacted us pretty heavily. And then, you had a little bit of seasonal decline there. Again, we feel very comfortable that they weren't any specific share loss issues related to us, but really more customer issues.
And on the positive side, like we said, we expected Q1 to be the bottom. And we've seen very strong designs, bookings and revenue metrics for Q2, and we'll talk about that in the next section.If you look at it by end market, we saw sequential decreases across all market, with the largest impacts in handset, obviously, because of the touch end of it, communications and computation. Really, we didn't see no major surprises by any of the end markets. All of our channels decreased sequentially, driven mostly by distis and again, within Asia and Europe, as we talked about before. We continue to have one 10% customer, and again, that's consistent with the same customer in the prior quarter, and we're glad to see that customer there. On a GAAP basis, we had a net loss of $12 million, about $0.08 per diluted share. And on a non-GAAP basis, we had $20.5 million in net income. That allowed us to get $0.12 in fully diluted EPS, which exceeded the guidance, really due to better GM and tight OpEx. The buybacks that we did in the quarter were later in the quarter and really had no impact on that EPS end of it, and we'll get the benefit of that in Q2. If you look at the core semiconductor business, which excludes the impact of our Emerging Tech division, we actually had $0.15 in EPS and a PBT of almost $0.15. So I was pretty excited to see that in what was a pretty bad and trough quarter. So obviously, you can tell that the Emerging Tech has cost us about $0.03. The non-GAAP gross margin was 55.7%, better than my guidance. And it was really due to just the product and customer mix and we had a slightly better performance from our factories. As we saw the bookings rebounding in the quarter, we were cranking up some starts. And again, it's very important, if you look at our semiconductor gross margin, again, which excludes the Emerging Tech division, it was 57.3%. And that was actually up from the prior quarter. So again, I was very pleased to see that. And just to put it in perspective, we've had our ninth consecutive quarter with our consolidated gross margin above 55%, so a very strong testament to what we've done, the products we have, the fab-lite strategy, and we only see gross margins being able to trend up going forward.
The average utilization in our fab for Q1 was around 73%, the lowest in about 1.5 years. It was down slightly from the 75% in Q4. And I think we'll move utilization back up to the high 70s, 80% range in the next quarter. The wafers from our foundry partners were pretty much flat, around 24% of the total. And that's down substantially, and I would expect to see that increase as we fill up our fab and revenue increases throughout the year.The average corporate ASPs were roughly $1.32, down slightly, really just due to the mix of products as we had a lot less touch and SRAM, which are very beneficial for the ASP number, and I'll expect to see that move back up. We did a great job on managing OpEx. We came in at $82.1 million, around the low end of where we expect it to be. You guys know we're very tight on OpEx. We had very light variable comp expenses because of the quarter, and we had slightly lower sales costs. We're down about 160 people as we planned in the quarter. And just a little side note, we're at the lowest headcount in over a decade. So I think we're managing that very well, and I think you're going to see some good leverage in Q2 and beyond as we continue to get a very high fall-through from the incremental revenue. OIE was about 100k. We had very minimal interest income on lower cash balances, and there really is no interest expense related to the line of credit drawdown we did until Q2, and I'll take you through that. The GAAP -- non-GAAP, I should say, tax expense was 700k, and we still expect taxes to be around 2.5% to 3% for the year, which is consistent with our cash tax rate.
So on the balance sheet, cash and investments were around $109 million. It decreased about 4 -- $58 million from Q4, and we used $98 million to buy back 6.1 million shares. So we basically have about $222 million left on our authorization to spend, and we'll continue to be opportunistic in deploying that.91% of our cash was onshore, and really, I don't see any issues in bringing offshore cash onshore because we have a very strong current period NOLs that we can use to offset. And I'll think you'll see cash from ops and free cash flow continue to grow nicely with the revenue through the balance of the year. Net inventory. Again, I think another very good management item here, even though you did see it increase, up to around $98 million, most of that was due to the wacky noncash-based, stock-based comp. And if you take out that and you take out some end-of-life inventory that we have, our operating inventory is around $81 million, which is 89 days. I'd expect to see the inventory increase in dollars slightly, days to go down this quarter. And I think we're doing pretty well in that area. If you look at the disti part of it, about 71% of our revenue gets fulfilled through distribution. Amazingly, their inventory decreased by almost 16% in dollars this quarter, so that's the third consecutive quarter distis have taken down inventory. We expect that to be the bottom. We expect to see them turn up slightly. Read the rest of this transcript for free on seekingalpha.com