Cypress Semiconductor Management Discusses Q2 2012 Results - Earnings Call Transcript

Cypress Semiconductor (CY)

Q2 2012 Earnings Call

July 19, 2012 11:30 am ET

Executives

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

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

Cathal Phelan - Chief Technical Officer and Executive Vice President

Dana C. Nazarian - Executive Vice President of Memory and Imaging Division

Analysts

Ruben Roy - Mizuho Securities USA Inc., Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Delos Elder

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

John Nguyen Vinh - Pacific Crest Securities, Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

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

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

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

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Jeffrey A. Schreiner - Capstone Investments, Research Division

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

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Presentation

Operator

Good morning, and welcome to Cypress Semiconductor Second 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. Thank you. Sir, you may begin.

T. J. Rodgers

Good morning. And we're here to present the second quarter. The press release of the second quarter's full highlights I will quote that the euphemism will start out with the finances in Brad Buss.

Brad W. Buss

Thanks, T.J. Thanks, everybody for attending our call. As usual, these are preliminary unaudited results. We encourage you to take a look through our 10-Q, which will be filed in the middle of August. And obviously, a lot of forward-looking statements, a lot of risk running around in this macroeconomy and we encourage you to take a look at all the risk factors. And as standard, we have full GAAP to non-GAAP recon in this release and on our website. So I'll jump into a little bit of housekeeping, go through the current quarter and then give our guidance.

So with respect to Ramtron, I think everybody knows we have an open tender. It expires at midnight tonight and the tender rules are pretty tough. There's not a lot that we can comment on the call, so we don't plan on taking any questions. And we do plan on providing a status update by tomorrow morning, so take a look at that. Just as a side note, our nonvolatile business that competes directly with Ramtron and a few other people had a very strong quarter as we gained market share and we grew that revenue north of 25% sequentially.

So now I'm going to dive into our quarter. Our revenue for Q2 was $201.3 million. While it was at the low end of the guidance, it increased a strong 9% sequentially, which is much better than our normal seasonality, albeit off a much smaller revenue base in Q1. We had all divisions, all major product lines and most end markets growing. The only end market that did not grow for us was the Wireless Communications, and I'm sure that's no surprise to anybody as you're seeing results from other companies. If you look at it by division, our MPD division increased 1%. And again, it was slower than expected due to this lack of rebound in the calling customers offset by the strong growth in our nonvolatile SRAM business that I talked about. DCD increased 2%. Again, we had solid increases in our USB products led by 3.0 that were offset by a decline in West Bridge as we continue to end the life of the one major customer there and again, I don't believe there is any surprises there for anybody. PSD was the shining stars, it increased 18%. We had strong demand for TrueTouch as we had expected in the handset, tablet and eReader customers. And we also had strong growth in CapSense. We're -- we've got very good design penetration, some leading high-end Android smartphones there, so that was a good benefit for the quarter. Our touchscreen revenues has increased 21% sequentially. PSD is our largest division as measured by revenue. MPD is our largest division as measured by profit dollars. And TrueTouch is once again our largest product line by revenue.

If you look at the end markets, I'll skip over most of that right now and Chris will handle some of that, but basically we saw good growth in handsets and computation. Our direct sales channel decreased sequentially and we also have strong growth in our distribution channel and it accounted for 76% of our revenue, which was a new record for us. And once again, we have the same greater than 10% customer as we have had in the prior quarters.

On a profit basis, we had a net income of $5 million on a GAAP basis, that was $0.03 per share. That was up 123% from the loss in the prior quarter. On our non-GAAP net net income, we had very strong growth of 48% sequentially, that yielded $30.3 million and a diluted earnings per share of $0.18. If you exclude the Emerging Tech division business, our core business would have drove $0.21 in EPS. So as you can see, I mean we were very pleased with the earnings growth. It was more than 4x greater than the rate of the sales growth, something that's pretty hard to do in the semi- business. And the team's working very hard and I expect to see that continue going forward.

We had very nice gross margin at 57%. It was at the high-end of our guidance even though our revenue was at the lower end. So we had good product and end customer mix. We had great execution from our factories, and our world-class cost program that we've discussed continues to work and drop benefits to the bottom line. If you exclude the Emerging Tech division from the margins and look at our core business, it was 58% and again, that's up 100 basis points sequentially. So again, very pleased with what we're doing in that area.

Our utilization in our fab in Minnesota phase on wafer starts is around 81%, that was up 8% from Q1. And I expect to see utilization stay flat to slightly up as we go into the next quarter. Wafers from our foundry partners were about 37%. Again, up from 24% in Q1 but down from our average of 48% in the prior year. Operating expenses were $83.7 million, that was within our guidance. We had a couple of non-reoccurring expenses in Q2 that will allow us to keep our OpEx flat to down in Q3. We're extremely focused on OpEx and leverage as you can see in our results and we will commit that, that will continue going forward. Our OIE was a loss of 200K. We have some nominal interest income on our lower cash balances, offset by a little interest expense. And remember the full expense related to the revolver will not hit until Q3, and I'll cover that in the guidance.

The non-GAAP tax expense was 900K, approximately 3%, and that's pretty much consistent with our expected cash tax rate. On the balance sheet, we had cash and short-term investments of $210 million, that increased $102 million from Q1. We closed on the revolver. As most of you knew, we drew down $153 million. We used $50 million to close out the SBB line, so that's totally gone now. We bought 1.5 million shares in the quarter. And as you know, we didn't have a ton of excess cash so that's now changed. And we exited Q2 with $202 million left on our share repurchase buyback authorization. We paid our dividend today as well, that was $0.11 per quarter, and that was $16.7 million. And we have about 80% of our cash onshore just as an FYI. We generated $43.3 million in cash from ops. We had free cash flow of $33.6 million and that was a 4x increase over Q1. So again, the incremental profits are turning into cash. And if you look at our Q2 annualized non-GAAP return on equity, it was north of 60%. Again, I think one of the highest that you'll see in the semiconductor universe. Inventory was -- we did pretty well. It was $91.4 million. It was down $6.6 million or 7% from Q1. And as you know, we've got some last time builds and capitalized 1, 23 or cost in there. So if you exclude that, we really had an effect of operating inventory of about $71.2 million and that equates to about 75 days.

Our distributor inventory finally increased. As you know, it declined 3 quarters in a row. It popped up 12% in dollars, 16% in units and we are actually very glad to see that after being drained for the last 3 quarters. Weeks of inventory in the channel went down slightly to 6.2 and they remain at the low end of our model. So that's why you're seeing the deferred income. It popped up to around $20 million to $148 million and that's consistent with the rise in accounts receivable. I think as most of you know, we do not recognize any revenue from distribution until they resolve it. So them taking on inventory has no impact to us from a revenue perspective.

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