Cypress Semiconductor Corporation
Jul 27, 2017

Cypress Reports Second Quarter 2017 Results

SAN JOSE, Calif.--(BUSINESS WIRE)-- Cypress Semiconductor Corporation (NASDAQ: CY) today announced its second quarter 2017 results.

"Cypress set another revenue record in the second quarter, supported by record revenue in each of our three key growth vectors: automotive, IoT wireless connectivity and USB-C," said Hassane El-Khoury, Cypress president and chief executive officer. "We remain laser-focused on driving revenue and earnings growth by investing in high-growth end-markets, expanding gross margins and broadening our customer base.

"It's now been a year since we embarked upon our Cypress 3.0 strategy, focused on selling embedded solutions into markets that are growing faster than the overall semiconductor industry," El-Khoury continued. "Our team has continued its strong execution of this strategy. It has been well-received by our customers, partners and employees, and it has begun to generate consistent growth in our top and bottom lines. This is a very exciting time for Cypress."

Revenue and earnings for the quarter are given below, compared with those of the prior quarter:

(In thousands, except per-share data)

   
GAAP NON-GAAP1
Q2 2017   Q1 2017 Q2 2017   Q1 2017
Revenue $ 593,776 $ 531,874 $ 593,776 $ 531,874
Margin 39.8 % 37.4 % 40.9 % 39.3 %
Pretax profit margin (3.1 )% (7.7 )% 13.1 % 9.2 %
Net income (loss) $ (22,904 ) $ (45,782 ) $ 74,703 $ 45,887
Diluted EPS (loss) $ (0.07 ) $ (0.14 ) $ 0.21 $ 0.13
 
  1. See "Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures" tables ("Non-GAAP Results" tables) included below.

BUSINESS REVIEW

+ At the Computex trade show in Taipei, Cypress announced additions to its USB-C and Internet of Things (IoT) wireless connectivity portfolios. Cypress' new, highly integrated EZ-PD™ CCG3PA USB-C controller is optimized to streamline the design of power adapters, mobile chargers, car chargers and power banks. Cypress also demonstrated EZ-PD CCG5, the industry's first two-port USB-C controller that supports designs with Intel's Thunderbolt™ 3, earmarked to support the ramp of USB-C in notebook and desktop PCs, as well as docking stations. Cypress introduced the new CYW4373 combo solution that delivers advanced wireless coexistence combining 802.11ac high-performance Wi-Fi®, Bluetooth® and Bluetooth Low Energy (BLE), and it incorporates a USB 2.0 hub. The solution is ideal for smart home products and network peripherals such as home appliances and printers, and it is supported in Cypress' easy-to-use WICED® Studio IoT development platform.

+ GAAP and non-GAAP margins for the second quarter of 2017 were 39.8% and 40.9%, respectively, above the midpoint of guidance and in line with the Company's margin-enhancing initiatives.

+ Cypress paid a cash dividend of $36.3 million, or $0.11 per share, to holders of record of the Company's common stock as of the close of business on June 29, 2017. The dividend was equivalent to a 3.2% annualized yield as of June 30, 2017. This dividend was paid on July 20, 2017.

 
REVENUE SUMMARY

(In thousands, except percentages)

(Unaudited)
 
  Three Months Ended
July 2, 2017   April 2, 2017  

Sequential

Change

Business Unit

         
MCD $ 360,533 $ 317,901 13 %
MPD $ 233,243   $ 213,973   9 %
Total $ 593,776   $ 531,874   12 %
 

Geographic

China & ROW 55 % 55 % %
Americas 12 % 11 % 9 %
Europe 12 % 13 % (8 )%
Japan 21 % 21 % %
Total 100 % 100 % %
 

Channel

Distribution 74 % 71 % 4 %
Direct 26 % 29 % (10 )%
Total 100 % 100 % %
 

THIRD QUARTER 2017 FINANCIAL OUTLOOK

For the third quarter of 2017, Cypress estimates financial results as follows:

             
      GAAP     Non-GAAP
Revenue     $585 million to $615 million
Margin %     40.0% - 41.0%     41.0% - 42.0%
Diluted EPS     $(0.05) to $(0.00)     $0.21 to $0.25
       

A reconciliation of GAAP forward-looking estimates to non-GAAP forward-looking estimates may be found in the tables at the end of this earnings report.

The timing and amount of certain material items, including restructuring charges, asset impairments, changes in value of deferred compensation assets and liabilities, impact of stock-based compensation from modification of equity awards, and the tax impact of non-GAAP adjustments, which are needed to estimate GAAP financial measures are either inherently unpredictable or outside the control of the Company, and may have a significant impact on the Company's financial results. Accordingly, Cypress cannot provide a full quantitative reconciliation for such non-GAAP financial measures included as part of the third quarter 2017 financial outlook to the most directly comparable GAAP measure without unreasonable effort and additional adjustments may be reflected in our non-GAAP results for the third quarter of 2017. Cypress has qualitatively described below, under the section "Non-GAAP Financial Measures," the anticipated differences between the non-GAAP financial measures and the most directly comparable GAAP measures.

CONFERENCE CALL AND WEBCAST INFORMATION

Cypress will host its quarterly conference call on July 27, 2017 at 1:30 p.m. Pacific Daylight Time to discuss its second quarter 2017 results and provide an outlook for the third quarter of 2017.

All interested parties may dial 517-308-9119 and provide the passcode "Cypress" to listen to the call. The event will be broadcast over the Internet and may be accessed through Cypress' website at www.cypress.com/investors. The archived presentation will be available for two weeks immediately following the event.

FOLLOW CYPRESS ONLINE

Join the Cypress Developer Community, read our Core & Code blog, follow us on Twitter, Facebook and LinkedIn, and watch Cypress videos on our Video Library or YouTube.

ABOUT CYPRESS

Cypress is a leader in advanced embedded system solutions for the world's most innovative automotive, industrial, home automation and appliances, consumer electronics and medical products. Cypress' programmable systems-on-chip, general-purpose microcontrollers, analog ICs, wireless and USB-based connectivity solutions and reliable, high-performance memories help engineers design differentiated products and get them to market first. Cypress is committed to providing customers with support and engineering resources that enable innovators and out-of-the-box thinkers to disrupt markets and create new product categories. To learn more, go to www.cypress.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated unaudited financial results presented in accordance with GAAP, Cypress uses the non-GAAP financial measures listed below, which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in more detail below.

Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of the Company's operations which, when viewed in conjunction with Cypress' GAAP results, provide a more comprehensive understanding of the various factors and trends affecting the Company's business and operations.

The Company presents non-GAAP financial measures because management uses these measures to analyze and assess the Company's financial results and to manage the business.

There are limitations in using non-GAAP financial measures including those discussed below. Moreover, the Company's non-GAAP measures may be calculated differently than the non-GAAP financial measures used by other companies. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP financial measures. The non-GAAP financial measures supplement and should be viewed in conjunction with GAAP financial measures.

As presented in the "Non-GAAP Results" tables in this press release, each of the non-GAAP financial measures excludes one or more of the following items:

Acquisition-related charges: Acquisition-related charges are not factored into management's evaluation of Cypress' long-term performance after the completion of acquisitions. However, a limitation of non-GAAP measures that exclude acquisition-related charges is that these charges may represent payments that reduce the cash available to the Company for other purposes. Acquisition-related expenses primarily include:

Share-based compensation expense: Share-based compensation expense relates primarily to employee stock options, restricted stock units, performance stock units and the employee stock purchase plan. Share-based compensation expense is a non-cash expense that is affected by changes in market factors including the price of Cypress' common shares, which are not within the control of management. In addition, the valuation of share-based compensation is subjective, and the expense recognized by Cypress may be significantly different than the expense recognized by other companies for similar equity awards, which makes it difficult to assess Cypress' results compared to its competitors. Accordingly, management excludes this item from its internal operating forecasts and models. However, a limitation of non-GAAP measures that exclude share-based compensation expense is that they do not reflect the full costs of compensating employees.

Other adjustments: These items are excluded from non-GAAP financial measures because they are not related to the core operating activities and ongoing operating performance of Cypress. Excluding these items, which can vary significantly from quarter to quarter, allows management to better compare Cypress' period-over-period performance. However, limitations of non-GAAP measures that exclude these items include that these adjustments are often subjective and may not be comparable to similarly titled non-GAAP financial measures used by other companies. Other adjustments primarily include:

FORWARD-LOOKING STATEMENTS

Statements herein that are not historical facts and that refer to Cypress or its subsidiaries' plans and expectations for the future are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We may use words such as "may," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "future," "continue" or other wording indicating future results or expectations to identify such forward-looking statements that include, but are not limited to: statements related to our estimated non-GAAP revenue, non-GAAP margin, non-GAAP operating expenses, non-GAAP EPS, net interest expense, tax expense, capital expenditures and depreciation for the third quarter of fiscal 2017; the expected benefits of our acquisition of Broadcom's wireless IoT business, including revenue growth and margin improvement; sources of revenue for the third quarter; the expected impact of our lean inventory initiative on fab utilization, inventory levels, cash flow, pricing and profitability; estimates of certain GAAP to non-GAAP reconciling items for the third quarter; the demand environment for semiconductors; the expected impact of our margin improvement plan; the impact of seasonality on revenue; cross-selling opportunities in the automotive business; our ability to meet our targeted range of inventory; the expected synergies related to our merger with Spansion; expected or anticipated uses of cash flow, including to pay dividends, repurchase shares of common stock, or pay down our existing indebtedness; and plans to reduce excess inventory. Such statements reflect our current expectations, which are based on information and data available to our management as of the date of this press release. Our actual results may differ materially due to a variety of risks and uncertainties, including, but not limited to: global economic and market conditions; business conditions and growth trends in the semiconductor market; our ability to compete effectively; the volatility in supply and demand conditions for our products, including but not limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities; the impact of acquisitions, including but not limited to the continuing integration of Spansion and the acquisition of Broadcom's wireless IoT business; our ability to attract and retain key personnel; the unpredictability and expense of legal proceedings; and other risks and uncertainties described in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in our most recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We assume no responsibility to update any such forward-looking statements.

Cypress, the Cypress logo and WICED are registered trademarks and EZ-PD is a trademark of Cypress Semiconductor Corporation. All other trademarks are property of their owners.

 
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
  July 2, 2017   January 1, 2017
 
ASSETS
Cash, cash equivalents and short-term investments $ 108,771 $ 121,144
Accounts receivable, net 336,547 333,037
Inventories 311,774 287,776
Property, plant and equipment, net 289,458 297,266
Goodwill and other intangible assets, net 2,244,900 2,344,033
Other assets   452,660     488,615
Total assets $ 3,744,110   $ 3,871,871
LIABILITIES AND EQUITY
Accounts payable $ 214,222 $ 241,424
Income tax liabilities 55,110 49,552
Revenue reserves, deferred margin and other liabilities 460,938 493,164
Revolving credit facility and long-term debt   1,168,851     1,194,979
Total liabilities   1,899,121     1,979,119
Total Cypress stockholders' equity 1,843,935 1,891,828
Non-controlling interest   1,054     924
Total equity   1,844,989     1,892,752
Total liabilities and equity $ 3,744,110   $ 3,871,871
 
 
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
ON A GAAP BASIS
(In thousands, except per-share data)
(Unaudited)
 
  Three Months Ended
July 2, 2017   April 2, 2017
Revenues $ 593,776 $ 531,874
Costs and expenses:
Cost of revenues 357,594 332,814
Research and development 89,736 88,481
Selling, general and administrative 81,243 73,847
Amortization of intangible assets 49,354 48,249
Costs and settlement charges related to shareholder matter 12,043 2,267
Restructuring costs   898     2,572  
Total costs and expenses   590,868     548,230  
Operating income (loss) 2,908 (16,356 )
Interest and other expense, net   (16,407 )   (19,359 )
Loss before income taxes and non-controlling interest (13,499 ) (35,715 )
Income tax provision (4,504 ) (4,927 )
Equity in net loss of equity method investees   (4,835 )   (5,076 )
Net loss (22,838 ) (45,718 )
Net gain attributable to non-controlling interests   (66 )   (64 )
Net loss attributable to Cypress $ (22,904 ) $ (45,782 )
Net loss per share attributable to Cypress:
Basic $ (0.07 ) $ (0.14 )
Diluted $ (0.07 ) $ (0.14 )
Cash dividend declared per share $ 0.11 $ 0.11
Shares used in net loss per share calculation:
Basic 329,860 326,964
Diluted 329,860 326,964
 
 
CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except per-share data)
(Unaudited)
 
 

Table A: GAAP to Non-GAAP reconciling items: Three Months Ended Q2 2017

       

Costs and

     

settlement

Research

SG&A and

charges related

Amortization of

Interest and

Income tax

Cost of

and

Restructuring

to shareholder

Intangible

other

(provision)

revenues

development

costs

matter

 

assets

expense, net

benefit

GAAP [i] $ 357,594 $ 89,736 $ 82,141 $ 12,043 $ 49,354 $ (21,242 ) $ (4,504 )
[1] Stock based compensation 4,833 11,274 14,226
[2] Changes in value of deferred compensation plan 137 563 896 (1,584 )
[3] Merger, integration, related costs and adjustments related to assets held for sale 1,336 (96 ) 1,193
[4] Inventory step-up related to acquisition accounting 167
[5] Losses from equity method investments 4,835
[6] Settlement charges 3,500
[7] Imputed interest on convertible debt, equity component amortization on convertible debt and others 3,507
[8] Amortization of debt issuance costs 920
[9] Amortization of intangible assets 49,354
[10] Restructuring costs 898
[11] Tax impact                         227     1,421  
Non - GAAP [ii] $ 351,121   $ 77,995   $ 64,928   $ 8,543     $   $ (13,337 ) $ (3,083 )
Impact of reconciling items [ii - i] $ (6,473 ) $ (11,741 ) $ (17,213 ) $ (3,500 ) $ (49,354 ) $ 7,905 $ 1,421
 

Table B: GAAP to Non-GAAP reconciling items: Three Months Ended Q1 2017

 

Cost of

revenues

 

Research

and

development

 

SG&A and

Restructuring

costs

 

Costs and settlement

charges related to

shareholder matter

 

Amortization

of Intangible

assets

 

Interest and

other

expense, net

 

Income tax

(provision)

benefit

GAAP [i] $ 332,814 $ 88,481 $ 76,419   $ 2,267   $ 48,249   $ (24,435 ) $ (4,927 )
[1] Stock based compensation 5,331 11,771 8,835
[2] Changes in value of deferred compensation plan 166 597 1,008 (1,558 )
[3] Merger, integration, related costs and adjustments related to assets held for sale 1,350 (1,479 )
[4] Inventory step-up related to acquisition accounting 2,864
[5] Losses from equity method investments 5,076
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others 3,489
[7] Amortization of debt issuance costs 858
[8] Amortization of intangible assets 48,249
[9] Restructuring costs 2,572
[10] Tax impact                 415   2,125  
Non - GAAP [ii] $ 323,103   $ 76,113   $ 65,483     $ 2,267     $     $ (16,155 ) $ (2,802 )
Impact of reconciling items [ii - i] $ (9,711 ) $ (12,368 ) $ (10,936 ) $ $ (48,249 ) $ 8,280 $ 2,125
 
       

Table C: Margin %

Q2'17 Q1'17
GAAP Non-GAAP GAAP Non-GAAP
Revenue [i] $ 593,776 $ 593,776 $ 531,874 $ 531,874
Cost of revenues (See Table A, B) [ii] 357,594   351,121   332,814   323,103  
Margin [iii] [ii - i] $ 236,182   $ 242,655   $ 199,060   $ 208,771  
Margin % [iii / i] 39.8 % 40.9 % 37.4 % 39.3 %
 

Table D: Operating income (loss)

   
Q2'17 Q1'17
GAAP operating income (loss) [i] $ 2,908 $ (16,356 )
Impact of reconciling items on Cost of revenues (see Table A, B) 6,473 9,711
Impact of reconciling items on R&D (see Table A, B) 11,741 12,368
Impact of reconciling items on SG&A (see Table A, B) 17,213 10,936
Settlement charges (Table A) 3,500
Impact of Amortization of Intangible Assets (see Table A, B)   49,354     48,249  
Non-GAAP operating income [ii] $ 91,189   $ 64,908  
Impact of reconciling items [ii - i] $ 88,281 $ 81,264
 

Table E: Pre-tax profit

     
Q2'17 Q1'17
GAAP Pre-tax loss $ (18,334 ) $ (40,791 )
Impact of reconciling items on Operating income (see Table D) 88,281 81,264
Interest and other expense, net (see Table A, B)   7,905     8,280  
Non-GAAP Pre-tax income $ 77,852   $ 48,753  
 

Table F: Net income (loss)

     
Q2'17 Q1'17
GAAP Net loss $ (22,904 ) $ (45,782 )
Impact of reconciling items on Operating income (see Table D) 88,281 81,264
Interest and other expense, net (see Table A, B) 7,905 8,280
Income tax benefit (provision) (see Table A, B)   1,421     2,125  
Non-GAAP Net income $ 74,703   $ 45,887  
 

Table G: Pretax profit margin %

       
Q2'17 Q1'17
GAAP Non-GAAP GAAP Non-GAAP
Revenue [i] $ 593,776 $ 593,776 $ 531,874 $ 531,874
Pre-tax (loss) profit (see Table E) [ii] $ (18,334 ) $ 77,852 $ (40,791 ) $ 48,753
Pre-tax profit margin % [ii / i] (3.1 )% 13.1 % (7.7 )% 9.2 %
 

Table H: Weighted-average shares, diluted

       
Q2'17 Q1'17
GAAP Non-GAAP GAAP   Non-GAAP
Weighted-average common shares outstanding, basic 329,860 329,860 326,964 326,964
Effect of dilutive securities:
Stock options, unvested restricted stock and other 15,822 14,852
Impact of convertible bond 18,208 17,304
Weighted-average common shares outstanding, diluted 329,860 363,890 326,964 359,120
 

Table I: Net income (loss) Per Share

       
Q2'17 Q1'17
GAAP Non-GAAP GAAP Non-GAAP
Net income [i] (loss) (see Table F) $ (22,904 ) $ 74,703 $ (45,782 ) $ 45,887
Weighted-average common shares outstanding (see Table H) [ii]   329,860     363,890     326,964     359,120
Non-GAAP earnings per share - Diluted [i/ii] $ (0.07 ) $ 0.21   $ (0.14 ) $ 0.13
 
 
CYPRESS SEMICONDUCTOR CORPORATION
SUPPLEMENTAL FINANCIAL DATA
(In thousands)
(Unaudited)
   
Three Months Ended
July 2, 2017 April 2, 2017

Selected Cash Flow Data (Preliminary):

Net cash provided by operating activities $ 32,447 $ 25,721
Net cash (used in) provided by investing activities $ (14,992 ) $ 21,650
Net cash used in financing activities $ (30,184 ) $ (46,043 )

Other Supplemental Data (Preliminary):

Capital expenditures $ 15,577 $ 13,772
Depreciation $ 16,045 $ 16,157
Payment of dividend $ 36,217 $ 35,537
Dividend paid per share $ 0.11 $ 0.11
 
 
CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FORWARDING LOOKING ESTIMATES TO NON-GAAP FORWARD LOOKING ESTIMATES
     
Forward looking
Forward looking Non-GAAP
GAAP estimate estimate
(A) Adjustments (B) (C)=(A)+(B)

Amortization of

intangibles

 

Share-based

compensation

expense

  Restructuring  

Other

items

Margin % 40.0% - 41.0% % 0.9 % % 0.4 % 41.0% - 42.0%
Diluted earnings per share $(0.05) to $(0.00) $ 0.14 $ 0.08 $ $ 0.02 $0.21 to $0.25
 

Cypress Semiconductor Corporation
Thad Trent, 408-943-2925
EVP Finance & Administration and CFO
or
Joseph L. McCarthy, 408-943-2902
Director, Corporate Communications

Source: Cypress Semiconductor Corporation

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