Cypress Semiconductor Corporation (CY)

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Cypress Semiconductor Corporation Q1 2008 Earnings Call Transcript

Brad W. Buss - Executive Vice President and Chief Financial Officer...I am going to go through Q1 real quickly, then I am going to give Q2 guidance. So the consolidated reported revenue for Q1 was $442 million and it was impacted by a $20.8 million one-time planned disti conversion in Asia and I will talk a little more about that later. It was a record revenue quarter if you adjusted for the disti conversion and it actually exceeded our consolidated revenue guidance, free the disti conversion which I guided at $410 million to $438 million or $392 million to $415 million after the disti conversion. So our reported revenue again which includes the impact of the disti conversion increased 3% sequentially and 29% year-on-year or put another way, if you normalize for the disti conversion we increased 7% sequentially and a strong 35% year-on-year. SunPower had another great quarter as they reported record revenue and our Semiconductor segment actually did better than we expected and it exceeded the top end of our guidance, which I was excited to see in this challenging economic environment.

So now I am going to talk just on the semi revenue and I am going to talk about it prior to the impact of the disti conversion, okay, so that way we kind of get a feel of how it normally ran versus Q4. So that was a $189.2 million that exceeded the top end of our guidance and more importantly, we expect to see continued strength in the Q2, which I will talk about in guidance the down the road.

On a sequential basis, CCD was basically the entire decrease that we saw and it was consistent with what we expected obviously due to the normal seasonality and further declines in certain large consumer and PC peripheral-related customers. MID was relatively flat and DCD actually grew, I think about 4% was solid growth in West Bridge that Dinesh can talk about later.

So our reported revenue which is what you're seeing in the press release which is after the $220.8 million was taken out totaled a $168.4 million and again like I said, it was at the high end of our guidance, what I expected.

As we've talked about in Q4, we plan to convert the Asia and Japanese distributors. It's going to allow us to have better pricing control. We expect longer or higher margins over the long-term. More importantly, we're going to provide design registration protection for the design efforts which is the major focus of the company going forward and we now have a consistent revenue recognition policy across our entire distribution chain worldwide and that's very important since distribution is north of 50% and we expect that to continue to grow as they go deeper into our PSoC and other proprietary programmable products.

The breakdown of the $20.8 million between the three divisions so that you can kind of threw up your model was CCD, was the bulk of it at $12.1 million, MID was $7.6 million and DCD was $1.1 million. Overall, the conversion went very well and we expect to have the majority of guys fully operational under ship and debit in Q2.

Turning to the net income end of the life, GAAP basis we posted a net loss of $18 million, which was a diluted loss per share of $0.12 and it was impacted obviously by the lower sales of the disti conversion. We had write-offs various manufacturing equipment between SunPower and Cypress of over $7 million. We had a $2.4 million charge related to the restructuring costs for CTI which we'll talk about down the road and we wrote-off the remaining part of the bond issuance costs at about $2.5 million.

The non-GAAP net income was about $20 million and it gave us $0.12 in fully diluted earnings per share, and again there was about a 6.5% impact related to the disti conversion. So if we add all that together, we're just north of 18% and actually higher than the guidance that I have given of 14% to 17%.

I think one other thing when I look at the consensus guidance was out there, different analysts were treating the disti conversion, whether it was in or out of the model and the assumptions differently. So I think the consensus guidance looks different than when we came in, but I think the important thing for everyone to notice that we actually did what we expected when we normalized for the disti.

Our consolidated non-GAAP gross margin for the quarter was 34%, it was down from 37%, almost or entirely due to the mix of SunPower revenue. SunPower was actually 62% of the consolidated revenue in the quarter, and again I want to keep emphasize and it's important that you model SunPower in the semi business separately, because the margins structures are vastly different and we provide all the information in the press release on the actuals and I actually guide separately, so please ensure that you model the businesses that way.

The non-GAAP gross margin for the semi business was $50.7 million, actually the highest level we've seen since Q2 of '04. It was up nicely from $48.8 million in the prior quarter, mainly due to product mix, a higher fabulization, we reset our standards that reflect we do every year at the beginning of the year and we're also seeing a heavier weight towards our foundry partners as we go more to a fabulized model and a few other inventory related adjustments. We expect a slight decline in Q2, but the key thing that I am excited about as our ASPs remain very strong and our product margins with our customers are extremely strong. So as we continue to work on the various categories of inventory and overhead in COGS, we expect to continue to hit our 50% gross margin target in the back half of the year. Going to the expense line, our non-GAAP consolidated operating expenses increased by about $10 million of which semi was 8, SunPower is roughly 2. The semi OpEx was basically a comp related due to kind of a lot of the Q1 event. Well that payroll tax is resetting. We had a full quarter of our annual merit increase in Q1 versus only 1 month in Q4. We had less vacation and no shutdowns in Q1 versus Q4. We've kept a very tight reign I should say on new hiring. We only added 22 net people in the semiconductor business for the quarter and the vast majority of them were offshore in our lower cost areas.

We also had a seasonal increase in our added SoCs cost and we had higher legal and consulting costs for a variety of initiatives, obviously including the one that we announced in the press release on today. Offsetting those increase was actually a benefit of $1.6 million related to the adjustment to our differed comp plan due to the accounting rule that force you to kind of take a comp charge through OpEx when the plan moves around. That could be a benefit, it could be negative. This quarter is actually with a benefit. There is not net impact to the P&L as I think most of you know because the other side of the charge goes through OIE. So, it's really just fluctuations between OIE and OpEx and there is not net income or EPS impact. So, on the balance sheet now consolidated cash and investments totaled $957 million. The semiconductor segment had cash and short-term investments of 761 and that doesn't include the auction-rate securities that I'll talk about. We declined from Q4 as we purchased $12.6 million shares of stock, which was approximately 8% of the Q4 ending basic share count, and we bought it a price of $21.95, which was 8% below the Q1 average stock price and it's actually 22% below yesterday's closing price. So, we are happy with that.

Since March of 2007, we have repurchased 41.5 million shares at a cost of $848 million, which is approximately 30% of the basic share count outstanding at the beginning of Q1 2007, and again we have been very strategic in how we purchased it and the average purchases of all of this is actually 27% below our closing stock price. We continue to have an outstanding stock and bond repurchase authorization and that equals $323 million and we will execute on that accordingly.

So, just a quick update on the auction-rate, consolidated to 75 million, the semi business had about half of that SunPower has the rest of it. The semi ones are all highly rated self student loans that are guaranteed by the US government and they are all AAA rating. We took an unrealized valuation mark down like everybody else is holding these things right now. That was recorded in OCI equity, so there is no P&L impact and we are going to continue to monitor that.

We don't have any other significant asset backed investments and actually if you look at our portfolio at the end of Q1, we had 82% of it was in AAA money market funds and to our US treasuries and agencies, about 13% was in corporate bond and the balances within, about 5% was in those auction-rate that are actually classified as long-term. So, obviously the portfolio yield moved down as we re-balanced and as well with the Fed decreasing the rate. So, we expect to see some downward pressure in OIE for Q2
and the rest of the year...

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