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Cypress Semiconductor Corporation (NASDAQ:CY)

Q4 2008 Earnings Call Transcript

January 22, 2009 11:30 am ET

Executives

T.J. Rodgers – President and CEO

Brad Buss – EVP, Finance and Administration and CFO

Chris Seams – EVP, Sales and Marketing

Norm Taffe – EVP, Consumer and Computation Division

Ahmad Chatila – EVP, Memory and Imaging Division, Manufacturing

Dinesh Ramanathan – EVP, Data Communications Division

Analysts

Tim Luke – Barclays Capital

Douglas Freedman – Broadpoint AmTech

John Pitzer – Credit Suisse

John Barton – Cowen & Company

Glen Yeung – Citi

Adam Benjamin – Jefferies

Uche Orji – UBS

Chris Danely – JPMorgan

Sandy Harrison – Signal Hill

Operator

Good morning, and welcome to Cypress Semiconductor’s fourth quarter earnings release conference call. Your lines have been placed on a listen-only mode for the question and answer segment. This call 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 fourth quarter. We'll follow our usual format. First Brad Buss, CFO on the numbers; Chris Seams our VP of marketing and sales on state of the market as we see it. I will give a little bit of detail on the business and we will go to questions as quickly as we can. Brad?

Brad Buss

Thanks, T.J. I want to thank everybody for attending. As usual I just want to give the standard disclaimer related to forward-looking comments and they obviously entail a lot of risks, especially in this environment that we are currently in. So we would really encourage you to look through the press release in good detail and make sure you take a good luck at all of our SEC filings and in particular all of the risk factors. We have the recon of all the GAAP to non-GAAP stuff in the press release as well. So I will take you through what kind of went on in Q4, we will do a little bit of an annual wrap up and then we’ll jump into the guidance.

So just levels that everybody, we did the spin-off with Sun Power which actually was in the first day of our fiscal Q4. So everything related to Sun Power has been stripped out and is treated as discontinued operations which you will see in the financials.

So the Q4 numbers, the Q4 balance sheet is a 100% new Cypress as I would call it. So you have got your first look at the clean Cypress and overall I think it looks real good.

So revenue for Q4 is $165.6 million. That was a decrease of 26% sequentially or 20% on a year-over-year basis. We ended up at the bottom of our revised guidance due to a pretty rapid reduction of customer orders as well as distributor and supply chain inventory reductions. Again pretty consistent, which I think we are seeing across the board in the whole semiconductor food chain.

MID decreased 22% sequentially. DCD decreased 22%, and CCD which has the most consumer exposure decreased 30%, and don’t forget it went up pretty nicely in Q3 while a lot of other semiconductors were meddling around.

PSoC remained our largest patient line on a revenue basis in Q4 and although PSoC and West Bridge decreased sequentially in Q4, for fiscal year ’08 PSoC was our largest product line by revenue and we also set annual revenue records in PSoC and West Bridge even with a very difficult Q4, which I think was a great result for our flagship products.

On a consolidated GAAP basis we posted a net loss of $424 million or $2.94 as share and it was driven by a lot of one-time events that are non-cash related. The first one, we did a big review of the goodwill. We took in charge – that is a preliminary charge of $357 million. And again most of that was from legacy acquisitions that really aren’t driving our core business. We actually wrote of goodwill for companies we don’t even own anymore. And so I wouldn’t read too much into that.

We had a FAS 123R charge of about $31 million, which again if you remember a big portion of that is related to the adjustment of the options due to the spin. It is not due to us granting new options or anything like that outside the norm. We also had $8.1 million of investment impairments and we also have some charges that will impact cash going forward of about $9.4 million for restructuring and we had about $6 million in final transaction costs related to the Sun Power spend.

Our non-GAAP operating loss for Q4 was $5 million. So the non-GAAP net loss was $10.9 million and it resulted in a loss per share of $0.08 which was actually up in the mid range of the guidance even though the revenue was at the bottom. So, I was (inaudible) pleased when that came in and that was due to the lost of cost controls that we have implemented and myself and T.J. will take you through a lot of the stuff that we are doing in that area.

The non-GAAP gross margin for semiconductor was 42.8%. It was down 7.7 percentage points and again it was up in the midrange of my revised guidance. So I think we told you that we’re going to be very proactive on reducing inventory that would obviously have an impact on utilization and have an impact on gross margin. But we think it is a really temporary as we balance inventory with the demand which we really think is the right thing to do in this market.

The one positive trend that we saw in Q4 that our average selling prices in what we call product margins actually remained very stable which was a good thing and it shows kind of the strength that we have with the proprietary products and Ahmad will talk probably further on SRAM prices you know, being somewhat decent.

Okay. We have also taken our wafer starts down pretty hard in Minnesota to levels that we haven’t seen in a long time and also just to remind everybody our wafer fab in Texas we began end of life builds in early 2000. It has completed its mission and they were not producing any wafers after November 2008. It is being treated as a discontinued operation and I wanted to thank the employees there that – I think they just did a fantastic job in their mission throughout the year. And we are grateful for what they’ve done there. The remaining equipment, building, and land, we’re in the process of taking bids and negotiating deals to divesting all of that and we anticipate receiving net cash proceeds of around $20 million to maybe $25 million once it is all complete.

We’re managing the fab cost structure very aggressively and we’re very confident that will be back above our 50% gross margin target once demand recovers and we can bring our utilization back up. And again the utilization will not be at the same levels that we were in 2008 and Shahin can talk about that later. We’re bringing those levels down as well. Even though we had the tough Q4 we still ended up for fiscal year ’08 with the non-GAAP gross margins of 49%. So to my point I think we will be well over 50% again once demand recovers.

Turning to the non-GAAP operating expenses, they decreased by $13 million when compared to last quarter, but there are a few one- time events that you need to take into consideration there before you get too giddy. You know we had about $5.8 million of what we call an accounting benefit due to the deferred comp plan which really offsets through OIE which really has no net EPS benefit. So you have to kind of really add that back into the base of the expenses. We also were very proactive in reducing nondiscretionary costs. We had bonus accrual reversals. We had shutdowns that went on through the quarter and we also had some reductions in headcount though they all had positive benefits into the OpEx as well.

Just to kind of put some of it into perspective and T.J. will cover a little more later but you’ve already reduced our headcount by about 10% since Q3 and we are at their lowest level since mid 2005 and that reduction includes the reduction in the fab as well. About 60% of our headcount is offshore and we expect to reduce their headcount further. And just a side note that we expect to probably have more people in India than San Jose in this current year.

For the fiscal year 2008 Cypress posted total revenues of $766.3 million or if you adjust for the distributor conversion that we did if you remember in Q1 it was $787 million which would have been a decrease of about 4%. Again pretty good considering where the world has gone. On a GAAP basis our fiscal year 2008 diluted net loss was $293 and our diluted earnings per share on a non-GAAP basis was at $0.21.

Turning to OIE, we had a loss of 5.2 and again that had the other side of the deferred comp charge of 5.9 million in there as well. The bond interest is pretty small now since it is pretty small and that was about 200,000 and we had about $1.5 million in interest income.

So taxes for Q4 were 800,000 and even though we’re in a loss position there are minimum tax payments that you have to pay under various international tax structures hence the reason for that number.

As we turn to the balance sheet, which again is the first time you’re seeing semi [ph] balance sheet. It is a very solid balance sheet and we’re very focused on managing the cash and the working capital as you can see and we generated very strong free cash flow in Q4. So the cash, the cash equivalents and total investments including short and long-term totaled $273 million. If you strip out the auction rates that we classified as long-term and just look at the traditional cash in short term it is $237 million. We are remaining an extremely conservative portfolio. It is very heavily invested in treasuries and government and money market funds. We had some financial exposures, financial stock exposures that were about 5.8% of the portfolio but we have sold most of those down since the end of the year at a gain. And we’re out of that area and we’re not going to be worried about what is going on in the banking world. So very conservative portfolio and I am very happy where it is at.

Inventory again, one of the bigger bright spots. So if you look on the financials the net inventory was $125 million, down $7.2 million, but if you adjust for the last time builds and you adjust for the capitalized FAS 123 R charges are true what I call operating inventory really decreased $13.6 million. So that is a pretty substantial decrease and really is the right thing to do when we look at inventory going down again in Q1. I’m sorry; I was really pleased with where that ended up.

On the Texas fab the last time builds associated with that were approximately $24 million and that is fully reflected in the net inventory balance. It is in the financials. We took some additional inventory reserves and we will continue to monitor the quality of our inventory going forward but we think it is in pretty good shape.

Our deferred income increased $14.7 million. There are a couple of components to that. We moved some more guys onto ship and debit from our independence. So that kind of had a write up there and we saw a channel inventory drain of about $16 million, which again is good news because I really think the channel inventories are getting pretty low out there.

Accounts receivable is another bright spot. It was down $47 million or 34% which was actually greater than the decrease in sale. Our DSO dropped and our aging remains really good and we have a very tight look at all of our customers to ensure that we don’t have any accounts receivable issues. So between the inventory and the AR we generated a lot of free cash flow due to strong working capital management.

The CapEx was $8 million for the quarter, (inaudible) was $14.7 million. And just so we are clear, I have had a few comments, we own 0 Sun Power shares, 100% of the Sun Power was distributed on the 29th.

Turning to the convertible, we had a lot of activity there. It is down by $40.7 million. We were able to buy some out of the market slightly below par and we had some put to us in accordance with the terms of the indenture resulting from the spin of Sun Power. We have about $28 million left and the conversion price on that is 564. There is still a remaining call spread that will reduce any dilution up to a price of 6.37. And the counterparties on the call spread haven’t changed. It is still Credit Suisse and Deutsche Bank. And the current convertible holders will have the rights to convert after June 15 2009 when it is fully matured in September of ‘09 and as you can see we have plenty of cash and I am not concerned on that.

We generated cash from operations of $47.4 million and free cash flow of $39.4 million in Q4. Our net cash position, which includes all of our cash and short and long-term investments minus our debt, is very strong at $246 million and we have more than ample cash to run our business, repurchase shares and pursue any other strategic activities as we determined to be appropriate. We’re 100% committed to managing the cost structure and remaining free cash flow positive for the fiscal ’09 as well.

I’ve already talked to you about the goodwill and just turning to valuation lies. Our valuation like a lot of companies is pretty low considering the environment. Just to put a few things in perspective our net cash is equal to about approximately 40% of our basic market cap. We have an enterprise value to sales ratio well below 1, and you know our free cash flows have been pretty good and we are very confident that as we recover, we are going to have some extremely strong free cash flow going forward.

So, turning to the share count. Due to the loss we incurred in Q4, you will use only the basic share count for EPS. So we repurchased 24.5 million shares in Q4 at an average cost of $4.03. Our weighted average basic count was 144 in Q3 due to the buyback that we ended Q4 at a basic share count of 132.5, which was a decrease of 14% from Q3. We still have an open authorization, we have plenty of cash and we could purchase additional shares in the quarter.

I am no going to flip over to the Q1 guidance you and I don’t think it is any surprise that is pretty difficult in this environment to give guidance. We think it is important to give guidance and you know our book to bill was 0.7%; our backlog was just north of $100 million. Both are levels that we haven’t seen in quite a long time. We’re pretty confident along with the new design winds and new product introductions that the other EVPs will talk about. And just keep in mind that Q1 is normally a down seasonal quarter of 5% to 10%. We obviously expect that to be worse due to the macro issues and hence we’re going to give a little wider range of $115 million to $130 million, which is down 21% to 30%, which again is pretty hard to judge right now, but we hope that will be the range that we end up. We expect all divisions in most product lines to decrease sequentially. Gross margins will come down a little bit as we take the utilization down and inventory like I’ve already talked about. So I would expect to see the non cap gross margins around 40% to 42%. I do expect inventory to go down another 5% to 10%, which will be good news as well.

We do expect the product margin ASPs to remain relatively stable and to my earlier point, you know we are confident we will be back to about 50% as demand increases. So in OpEx again we had some of those one- time events related to the deferred comp plan that are hard to predict. So, I generally give my guidance assuming it is neutral. We also have the payroll taxes that we set in Q1, but will be offset by other cost reductions. So I would assume OpEx around an $81 million to $83 million level. And I will expect the OpEx to decrease from that level as the additional cost reduction measures that we will talk about come into play.

Our semiconductor OIEs should be around 0.5 million. Taxes, I would assume another 800,000, and the basic share count I would assume around 140 million shares I should say. But again we will be in a loss position so you want use the fully diluted but just to put it in perspective if we had a fully diluted share count and we are in a profit position it probably would be in a range of 165 to maybe 170. So it is a far decrease from a lot of 200, 210, 220 numbers a lot of you were concerned about post the spin. And that is a factor of how we are managing stock. It is a factor of the stock price. It is the factor of the buyback et cetera, et cetera. So that is good news from that perspective as well.

CapEx for ’09 should be around $22 million to $25 million down from the $42 million in 2008 and for Q1, I would assume CapEx of around $5 million, depreciation of $14.5 million. You push all this together and you will get a non-GAAP loss per share in the range of $0.19 to $0.26.

A lot of factors can change that we will see where it goes. And I will just turn it over to Chris now and he will take you through the markets.

Chris Seams

Thanks, Brad. Let me go through the some of the usual indices I give you guys. Revenue splits by geography, Asia Pac which is our largest ship to geography declined to 50% of our shipment. It had the largest decline quarter-on-quarter because of the market exposure to consumer and PCs. North America remained 21% down just a point from last quarter. Europe and Japan had the least declines in terms of end geographies and grew to 18% and 11% of our shipments.

Units decreased about on par with revenue down to 128 million units. Brad talked about the pricing environment which right now in the fourth quarter still remains stable for us. Our ASP average actually increased $0.01 to a $1.29 in the fourth quarter. Brad gave you the book to bill and backlog numbers both of which were declines quarter-on-quarter.

In terms of end-market I talked a little bit about it in the geography splits, but all end-markets for us declined, again it was most severe in the consumer and PC segment. One bright spot our customer design activity remained fairly healthy and we set records for those metrics that we keep internally in the third quarter and we weren’t far off those numbers in the fourth quarter which is normally sequentially down from the third because of customer activity and their cycles.

We had just shy of 9000 PSoC customers which was significant growth quarter-over-quarter and year-on-year and probably the biggest highlight in the customer design activity as we really made a strong launch with our True Touch touchscreen solutions and we had over 30 significant customer design wins during the quarter, the first quarter of the year and we expect that to continue to grow as we go out into 2009.

Our visibility for the quarter and for the year is frankly very limited but we think we may have hit a bottom in terms of the booking patterns. They have strengthened to the point in the first three weeks of the year where we have a firm backlog not declining for the first time since mid September. Now let me turn the callback to T.J. for some more details on the quarter.

T.J. Rodgers

I will give some business details and then I want to address cost-cutting and share price and then questions.

On the business details as you know, PSoC is a flagship product. That business is a record for us year-on-year. We now count 8826 customers who have given this revenue in the last year. As people fall off the list we haven’t received money in the last 12 months. That is up 6.9% quarter-on-quarter and 41.9% year-on-year. Our shift as a company from a RAM company to programmable and proprietary product company now accounts – it causes us not to have 77% of revenue in that area.

IMS Research named Cypress the market leader in touch sensors. So touch sensors as capacity sensors you could think of the click wheel on an MP3 player. Interestingly enough we entered that market big time in 2005 with a product, a PSoC product that was designed in 2003, the power of a programmable solution, brand new market, fast time to market, and ramp volume.

The next thing big for us is what we call TrueTouch. It is a touch screen. You can think of the prototype example as being the interface from the apple iPhone. It is becoming pervasive. Again, we took a PSoC that existed and we created a software program for it. It was not simple. But we created a software program for it and we have – we believe the best touchscreen solution in the industry in both price and performance and that is one of our big upsides for 2009 and we are getting as Chris said lot of design wins, 30 and those should come to revenue hopefully for the Christmas season next year.

We have shifted our IP protection towards programmable products having just received our 750th programmable solutions fab. That is little bit less than half of our total 1650 fabs. We introduced Hi-Fi [ph], Cypress high fidelity and RF solution link, where you take it, pop it into a personal computer and you can hook up with a PSoC in another radio and there won’t be pretty much anything for the personal computer. And we released the first touch kit that allows you to hook up sensors, temperatures, humidity, lights, motion sensors, anything you can name to a personal computer literally in minutes. If you want to go on our web site you can actually get a streaming video where I took the new solution on a morning went into my winery and I wired up a bunch of sensors essentially created a small industrial sensor network in my winery myself in about 2 hours. We videoed it, got it down, and you can get a feeling. This I think is pretty important capability where they are going to download that one.

Brad Buss

To our website.

Chris Seams

Main webpage.

T.J. Rodgers

So, we go to our main web page. Somebody – I apologize for not having prepared. Somebody gave me the exact instructions for getting into the internet please.

Brad Buss

The hi-fi just described was named as the top 100 products of 2008 by EDN magazine. That is one of our big ones. In the captions they described it received a Readers’ Choice Award from ECN magazine. Another programmable product that we have is we call Antioch or West Bridge. That is the peripheral controller that connects your cell phone to the network through a personal computer to download movies and songs rapidly. Blackberry brought out a phone called Bold and they have the fastest PC phone multimedia file transfers tested. It can download a feature length movie in 2 minutes and furthermore the West Bridge chip allows a phone to operate and inform you what is happening. That download rate is 3 to 18 times faster than competing multimedia phones.

A Chinese company called Legend Silicon and Cypress worked together to make a first of its kind USB Dongle Reference. Basically you pop a Dongle in your personal computer and in the Dongle is the USB interface in your personal computer and therefore a screen into a television receiver. So you turn a PC into a TV. Given the thing they said this morning, there are three things that fall into a bigger picture. And that is personal computers are now one of the best cheapest systems available in the history of mankind. The high data rate poured into a computer is called USB and we are number one in the USB in the world.

We are now focusing less on – we of course make the interconnect electronically. But we’re focusing on systems that interface with the personal computer. So Hi-fi describes a radio, proprietary radio through USB, hooking up to another proprietary radio in a PSoC that can hook up to anything and connect you to a computer. Software is the key there, quick and fast. The TV I just said is TV through a USB Dongle is West Bridge again is coming from a USB port.

Changing topics, we have intelligent lighting solutions again enabled by PSoC and powered PSoC which is nothing more than a PSoC with one ampere, 36 power transistors on it. And we have now got three of the top five LED producers in the world, Nichia and Osram are the new ones and (inaudible) is the first as such that we can drive their light emitting diodes with PSoC and powered PSoC.

What that means is the light emitting diodes are in the infancy of manufacturing and they have high variability. So they have many, many events. Typical events related to the light output, the efficiency, and the color. So if you want the perfect white color and if you want to have high efficiency you must pick up them and if you do that you get charged extra for it. If you can pick (inaudible) which are cheaper and if you can compensate the drive for them with electronics you can be more flexible in your manufacturing. And that is what PSoC does because of its programmability. So, there is not a lot of money coming in yet driving LEDs but we think that would be in our future an energy saving event that will drive business for us.

Changing topics one more time we have a startup called Cypress Envirosystems inside that was called the Cypress Systems before. They changed their name because in their first product offering about 6 of them, they discovered that green is where the money is. So they have changed their name.

I talked before about the wireless gauge reader basically a camera that you put over a gauge like a pressure gauge or any gauge that there are thousands of them in most factories. It reads the gauge with an in situ television monitor and image sensor converts it by pattern recognition to where the needle into a number puts it on one of our radios, radios to a central station which is a cheap little part you put in the corner and plugged into the internet. So, for example, I can walk on the hallway and tell you what the pressure reading is on an oxygen tank at an Genentech plant here in Silicon Valley.

Finally, on a less happy note for me anyway, it is good news for our investors. The Department of Justice closed its grand jury investigation into possible antitrust violations in static random access memory industry. We along with a bunch of other companies were being investigated. No charges were ever made against Cypress, nor were there any ever warranted. The reason I am not happy is that it took me $4 million to prove that I shouldn’t be charged with something.

By comparison Texas Instruments sued Cypress about a decade ago for patent and I fought an entire patent trial, won it in Dallas, Texas, for less than that amount of money. There is something wrong when I have to prove that nothing is wrong when I have not been charged with anything with $4 million of your money.

Changing to bigger topics, I want to talk about cost reduction. Intel announced this morning the closing of a couple of fabs in the United States and an assembly – a couple of assembly and test plants offshore. I want to remind everybody that we have been working on this for a year. We have been making announcements almost on a quarterly basis that I have longer list there and I will briefly go over it.

Our headcount is down 10% already, you have heard that. We have shifted a lot of our research and development, not manufacturing but research and development to Bangalore India, where we have a very competent design center. We shut down our Texas fab, (inaudible) wafers two months ago. We have decreased the production and cost dramatically in our Minnesota fab. We have decreased production and costs in our Cypress Manila assembly and test plant. We have closed our Moscow Idaho Design Center. We are in the process of closing and it will be closed this quarter. Our Mississippi design center, we are consolidating our R&D into fewer larger centers for efficiency and cost reduction goals.

We are forgetting raises and bonuses this year. That is the known part of operation. I wanted to mention it though. We have been reducing our headcount since July. We have had three weeks of shutdowns during the quarter were reported. That is why our losses are $0.08 non-GAAP. Because we – we had actually took unpaid – or actually forced people to take vacations which was unpaid.

And just to show you the level of detail at which we are watching costs right now. We typically have an event in January where we bring in managers from all over the world and we have a managers’ meeting where the executive staff presents are planned to our managers worldwide and coupled with that the company part and it is a event, a nice event. And I learned how to do that from Jerry Sanders of Advanced Micro Devices, but it cost $400,000. We shut that down. We are going to do our communication to the plant by the web and you will not see the $400,000 to Cypress bottom line. Cypress donated that $400,000 to the Harvest Food Bank.

Going forward this new quarter offers a new challenge for revenue. I look at it as a new opportunity. We were patting ourselves on the back and I think deservedly so for all of our cost reductions we have done over the last year. We now have an opportunity to do more and ask harder questions, ask do we really need to do this. Going forward and I – and this will be done quickly in the next quarter, implemented this quarter implemented. Another headcount reduction of 10% to 15% particularly focusing on overhead sales, general, and administrative. We’re passing by a raise again our local reviews this year. We are again going to ask people to draw down on the PTO, the paid time off for which we have already paid them. And we’re reducing another 30% across in our Minnesota fab. Furthermore, we have transferred the fab manager who was a hero in fab two, that was 6 inch fab with profit for 23 years. We transferred the fab manager who made fab two extraordinarily cost efficient (inaudible) 6 inches as late as 2008. And we transferred him to Minnesota to do the same thing again. We hope for Minnesota and he has actually made lot of progress so far.

Final note before questions on share price. If you go on the investor website, you will find our price to sales ratio. Remind you that in order to calculate price to sales ratio daily which is the graph you can find in the website, the valuation of the company was equal to the fully diluted shares in the last quarterly report times wherever that price is you can calculate it continuous evaluation in the corporation and the sales and the denominator is last quarter revenue times 4. With that formula at any time you can calculate price to sales ratio in the graph that is on our website you can find Cypress’ price to sales ratio everyday since we went public on May 29, 1986.

There are three lines on the graph that represent after our period of euphoria price to sales ratios of 6 to 8 as a startup. There was Black Friday, Black Tuesday, when was the day when the market went down in 1987. We started doing statistics on that day and therefore when I give you 90th percentile point price to ratio reflects the lower level since that time. Our medium price to sales ratio is 2.34 since 1987 October. Our 10th percentile P/S ratio is 1.05 and our 90th percentile ratio is 3.9.

So in the gloom of 95, we were up to 5, and in the crash of 96 we dropped to 1.45. In 1998, just before the boom we got down to close to 1.15. In the boom of 2000, which is the highest were have ever seen our price to sales ratio got up to 7.7.

The lowest we have ever been is in the crash of 2001 and we achieved a price to sales ratio by my definition of 0.57. I give you that those – all that data to try to give you a feeling for where things are. Our price to sales ratio this morning when I came in when our stock was at $4.35 as we speak it is at $4.39. The price to sales ratio was 1.12. So our current price to sales ratio is below 10th percentile point significantly. Despite it is not anywhere near the 0.57 in the 2001 crash. So, right now we are having bad times but it doesn’t look as bad from a share price point of view as it did in 2001 although I fully believe we are not through this yet.

So if by the way, if we ever went to the lowest price to sales, daily price to sales ratio we ever had, our stock price could go as low as $2.22 to match the prior low. I personally view this as a buying opportunity and I will put my money where my mouth is.

We are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Tim Luke. You may ask your question and please state your company name.

Tim Luke – Barclays Capital

Thank you. Barclays Capital. Just in terms of some detailed I was wondering if you had the book to bills for the different segments and then guiding to the 115, 130 range, I was wondering if you could give us a flavor of which segments might be down more and which down somewhat less than the broader percentage; and then separately maybe this is for T.J. I notice that in the release you said that the ordering patterns of customers have yet to stabilize and then I think that Chris was alluding to the fact that in the last three weeks he had seen some strengthening or stabilization in the order patterns. Could you just sort of clarify what you had seen in the past three weeks?

T.J. Rodgers

Well, first of all let me answer the last question. In this environment, I started writing that press release about a week ago and I wrote down what I – what was true a week ago. Frankly, I heard the news this morning as Chris gave it to you that our backlog has stopped dropping and has started stabilizing and both things are true and the variable is 5 business days.

Chris Seams

Tim this is Chris. One thing that hasn’t recovered is the long-term bookings further out. Our customers are showing signs of their end environment and ordering with shorter lead time request than they have in the past. That is the one thing that is not stable in that environment. Let me answer your – first part of your question the book to bill by division, Consumer and Computation Division was just below 0.6 and Memory and Imaging was just above 0.7 and Data Comm. division was just below 0.7.

T.J. Rodgers

I don’t think the book the bill, we give it to you because we know you just want it and I got unhappy with the SIA and actually one of the reasons I left the board of the SIA is that they stopped giving book and bill. I believe in giving out information having said that the book to bill collapses for reasons that aren’t about real time consumption of units. What is happening now, Chris said it, but let me elaborate what happens now is everybody knows they can buy anything they want with short lead times. They know prices are going to fall in the market, therefore the switch in mentality to ordering just in time because they know, one they don’t inventory because they don’t what [ph] end demand is. Two, they know the later they order the higher probability they will get a lower price. So, what happens when you step over the edge and start going down is the – you collapse on your book to bill ratios. We don’t have a crystal ball but after a whole lot of years of looking at this, the one index we look at is our backlog and that – what I said that collapse is the backlog because what happens in quarters or next quarters evaporate and your backlog it appears – we count backlog as orders typically in the next 6 months. If you watch the backlog we try to do it every single Wednesday night, slice and dice different ways. The backlog – as the backlog goes down you know you got trouble because your backlog is what they are serious about. That is what they want. They put an order on you. They know you are going to ship it to them. They know they are going to get this critical inventory if they don’t ship it. So that to me reflects real demand in tough times. And as long as that is dropping, then you don’t know where the bottom is. What Chris just said and I didn’t see it last night because I was in a meeting and I couldn’t tender operations reviews that our backlog stopped dropping one week in a row. So – and why is the environment like that, take that data point the way we should have, which is not high but things seems to be stabilizing but you can’t really say so right now. Hence the wide range on revenue and the low number because we just don’t want to screw up and capture – preannounce this quarter.

Tim Luke – Barclays Capital

Any feel for the segments in terms of degree of decline which will be higher or lower?

Brad Buss

Yes, in terms of segments Consumer and Computation were the two leading segments for declines for us from the third to the fourth quarter. They again will lead the decline from the fourth to the first but not as severe at it was in the Q3 to Q4.

T.J. Rodgers

I will just go back to my comment in book to bill again. So you looked at a book to bill for consumer at 0.6ish and you listed a book to bill for RAMs at 0.7 plus and the fact is the dynamic of why do I order? I don’t want to, I won’t order until I need it, is pronounced in consumer, with the RAM business you know shipping to data communication companies for example, tends to be more stable and therefore would be higher when this impact of canceling product backlogs are not placing from backlog happens. Now as I don’t think you can conclude anything about the strength or weakness of these sectors based on those book to bill numbers.

Tim Luke – Barclays Capital

And could you – having seen the 25% down in the fourth and now sharply lower first quarter, having seen this a few times before do you think that the framework of expectations broadly sort of flattish June period or do you think that you would anticipate some recovery in the revenue period there? Or how do you see it?

Brad Buss

First of all and the most important thing you should understand is I don’t know. If I look at prior crashes like ’01 and as you know we keep a lot of numbers and we keep asking ourselves what do things look like. We’ve already modeled, for example, this year based on the revenue recovery patterns of how were quarters in our 26 year history. Based on that we – if I had to pick a highly uncertain set of numbers for you and state that again I would look for a modest revenue increase quarter-on-quarter all year long with the seasonally down fourth quarter. Ask me what is the number; I will say I don’t know.

Tim Luke – Barclays Capital

And do you have a sense of where OEM and channel inventory is and when you might see some reordering there?

Chris Seams

Tim this is Chris. In terms of the OEM it varies account by account. I guess probably read the press some accounts. You know we are having more business problems than others, but in general the OEMs did a pretty good job of traveling back as they saw their demand signal begin and in the distribution channel it was mildly up quarter-on-quarter and given the steep decline in revenue they did a pretty good job of managing their inventory as well.

T.J. Rodgers

When we make a comment that one of the things that exacerbated prior downturns is channel stuff – that gave yet another few months to wait before they finally need the products. Those days at least for us are pretty much behind us. I think the industry is better. The end market we saw the problem was personal computers. You could name Dell I think as the primary mover in that and basically I don’t you’re your inventory until I need it and I am going to make it – ship it, I am not going to hold it. As a matter of fact I am going to hold the inventory for such a short period I am actually going to get my money for my machine before I pay you for the price you made it. So we’re seeing the Dell model if you want to call it that, come across other industries. For example, the DataCom guys were not that way. They got burnt pretty bad in the 2000 downturn and they are doing a lot better job. Another thing is changing, how many consignment customers we got?

Brad Buss

I don’t know.

T.J. Rodgers

I believe we have about 40 consignment customers. Another thing is changing. Is that companies demand from us consignment inventory. If we put a little bit of inventory there and they draw down from that so that they don’t have to worry about it. They order it and it is supplied. And the net result is we watch that inventory and it is really a better way of doing business in the supply chain. So a lot of our big customers have consignment inventory and we’re switching over to that. We don’t fight that anymore, we used to. We don’t anymore. Finally, distribution we have already had, always had the right recipe there. We don’t recognize distribution revenue until the distributor ships it. Therefore, the sort of only revenues was with distributor at very high prices. That never shows up in your numbers. Also the fact you charge distributors a very high price to force them to add special discount on an order by order basis means that they’re very reluctant to stock a lot of inventory because they have a lot of cash it. So I described three channels, the distribution and consignment and the Dell model to the OEM model that our company as we said has pretty much eliminated channel suffering. Our inventory is down and we think our inventories out there are lean. So, we think we are making products at the rate it is being used. Not putting it in somebody else’s inventory.

Tim Luke – Barclays Capital

Thank you very much guys. Good luck.

Operator

Thank you. Doug Freedman you may ask your question and please state your company name.

Douglas Freedman – Broadpoint AmTech

Great. Broadpoint AmTech and I guess I will start off with a really easy one Brad, can you talk about what your CapEx budget is going to be for 2009 and if you could give us a full year depreciation number?

Brad Buss

Yes, 22 million to 25 million, somewhat in that range give or take a few million or what carries over. So that is down pretty substantially. And what was about for depreciation?

Douglas Freedman – Broadpoint AmTech

Yes, what the depreciation number will be.

Brad Buss

Yes, around 50 to 54.

Douglas Freedman – Broadpoint AmTech

Okay, so that is the easy one. Can you talk about what impact this newly announced headcount reduction is going to have on OpEx? What should we think of the OpEx curve looking like for the year, clearly Q1, you just got it up due to the one-time nature, what should we be thinking of the curve on the OpEx lines, R&D and SG&A for the balance of the year?

Brad Buss

It will be down in Q2 nicely and I think you will see it go down in Q3 and stabilize off. Again that is the caveat depending the business things up in the back and you know you have different commission payments and variable stuff for a couple, but I don’t think much. We are talking some pretty substantial dollars.

Douglas Freedman – Broadpoint AmTech

All right. And then just quickly a question for Chris, Chris you know just to get away from sort of that book to bill and what is happening as far as inventory you know, do you guys take any swing at what you think the product consumption is by your end customers, we know that that consumption is declining at the present time as demand is weaning, but what level do you think the right number if you were to sort of strip out the inventory burn, what is the consumption level right now?

Chris Seams

I am going to the fifth according to T.J. on that one because I won’t get that answer right. The best answer I have is I notice it in terms of the bookings statements I get from them on a weekly basis.

T.J. Rodgers

We think our revenue rate and the real consumption rate are pretty close for all the reasons they gave about general stuff a few minutes ago. There is another validating data point for that, in PSoC one of the really nice things as you got these design wins, somebody’s toothbrush and somebody’s MP3 player. And you know you are shipping, you know what plan it goes through and you know what they are shipping and pretty much you are shipping on a run rate basis, on a weekly basis typically to a subcon manufacturer and what we see in this almost 100% approximation. We don’t – we are not losing design wins. All – we are shipping to all of the design wins we started shipping directly to but what we are seeing is their business is down. Sometimes it is less than half, sometimes to 35%. So basically we are watching individual big design wins and shipping we believe real time to them. And therefore our output and revenue reflect real consumption.

Douglas Freedman – Broadpoint AmTech

All right, terrific. Can you give an idea, you mentioned T.J. you know in this environment people are sort of hoping or going to just in time orders for in hopes of ASP erosion, can you give us any insights into whether you are seeing ASPs erode, are competitors being overly aggressive here or starting to be and what your expectations are for sort of ASPs throughout the year?

T.J. Rodgers

Okay, First of all let me give you the ASP for the quarter, for Cypress 129, a quarter ago 128, Q2 134, Q1 140, Q4 of ’07 126. So, we are up quarter-on-quarter and we are up year-on-year. So if you were looking at the graph I am looking at you see the graph is flat to slightly up and it started going up in Q4 of ’05 and it has gone up from a buck in Q4 of ’05 to a $1.29 to date. There was a little bit of noise on the curve, but it is pretty much bona fide. So, why is that? The answer is we were RAM guys and Moorse’s Law guys. Gordon Moore was honored last night by the Harvard Business Review in San Francisco and Moore’s Law says everything is cheaper, a factor of two to 4 for 2 years and that is what we did. We always just said the prices are going to go down and we are going to run along more faster when the prices go down. We hired a consulting firm to teach us about pricing because we weren’t that good at it, and that was last year and we implemented a price – two years ago actually and we implemented a price control system including a value added calculator where when you price something, you price it at value as opposed to cost plus margin. It was a painful transition. Some of our sales guys didn’t make it and that along with new products that have higher value added has driven our ASPs from $1 to $1.30 and frankly we would be in the pink [ph] a lot more today than we were if we hadn’t done that program. Having said that, what the dynamics of the pricing, we are actually the financer. We can give you derivates of the pricing as you go over the edge, are that in the first quarter the recession, when you really get hammered, the prices stay flat and the volumes go down dramatically. And then in the next quarter, they start beating on you for prices. There is a second issue and that is many of our large customers have pricing negotiations in the first quarter. So that hits you too. So, we are expecting our prices to go down but we are not a RAM company anymore. 77% of our products are proprietary and programmable and you have a holding for negotiation when you have PSoC design for example. They are already getting it for a $1.4. It does their entire system for them and they say, well, we have got to have a $1. No that is unreasonable, we can’t go down that much and their choice is to sign to out. Buy another microcontroller from microchip and some linear integrated circuits (inaudible) and some other logic and then put it all together, redesign the board and hope they can get down to a $1, which they can’t anyway. At the end of the day you fight for a while, you explain the value from a value calculator and you come up with a reasonable number. So the conclusion of what I said assembling data is that you are ignorant with proprietary products. You don’t have any given price, because there is only one show in town after you. So, when you got that design win, you have to be reasonable, you have to treat your customers well. You have to accept the fact that they may be losing money and you have to go down the prices. But you don’t get hammered with the commodity sale, if you don’t go to this price we are not going to buy your product. We are going to buy everything from your competitor. So down, anybody want to pull a number up? Nobody wants to pull the number up a $0.01, you know, it is going to be a modest number, less than a nickel.

Douglas Freedman – Broadpoint AmTech

All right great. With that I will pass it over to the next. Thank you guys.

Operator

Thank you. John Pitzer, you may ask your question. Please state your company name.

John Pitzer – Credit Suisse

Hi, guys. It is Credit Suisse. Thanks for taking my question. Couple of questions, Brad first just on the gross margin guidance, guiding down about I think 1 to 300 basis points on another big revenue drop and I am assuming utilization continues to fall because you are drawing down backlog in the March quarter, that factor is fairly impressive. I am just trying to understand is that because of the offsets of cost reductions in Minnesota closing the Texas fab. I am just trying to understand given that you had a 700 basis points drop in the December quarter on a similar revenue drop gross margins are holing up better, can you walk me through some of the math there?

Brad Buss

Yes I think it is two fold. And obviously the cost reduction is a big effort like T.J. talked, we have already planned before the economic crisis and obviously responding very quickly. So we’re going to take a pretty big chunk out of that and that will bode well for the upside, you know, we will be able to put more through foundries on the upside going forward. That is the big chunk of it and then you know on the way down it is harder and then once you have flattened out and if you see a pick up in inventories, which again I think are getting near dangerously low levels between us and the channels. We will start building more for the back half of the year and you will start that in Q1 with the wafer start. So you will be getting a little higher utilization hopefully as we exit the quarter. Is there risk around that? Sure, there always is but you know I think right now we think we have got the plans in place to make it happen .We have done a pretty job of estimating gross margins so far.

John Pitzer – Credit Suisse

And Brad I am understanding, if you look at the incremental cost cutting here, where do you think the right break even level is for the company is $165 million a quarter kind of break even when these incremental cost cuts are done?

Brad Buss

You know, we are assessing that now between you know there is obviously the big swing as the margins and then OpEx. I think it is a decent level. I would like to see it lower. But you know, we are still accessing all that.

John Pitzer – Credit Suisse

All right. Sounds right.

T.J. Rodgers

It seems like it is going to be very aggressive. And you know more importantly I think we want to remain free cash flow positive. The reason you are getting a little bit of a (inaudible) for the answer is that we have sort of taken all the low hanging fruit and in this next round we are going to have make some hard choices, for example, one of our favorite projects or start up and say we are not going to make that anymore. And we are halfway through making those decisions right now, will be done before our board meeting which is in 3 weeks. We are going to announce and implement before the end of the quarter. So, we don’t have that number you asked for right now. Your estimate is ballpark.

John Pitzer – Credit Suisse

And then guys a little bit just the linearity in the March quarter that you expect that maybe dependence on turns and how that changes December going into March?

Chris Seams

It is Chris again. In terms of turns required we are about 70% booked to our guidance going into the quarter. So we do need some turns and we are saying that all my comments in the backlog. Typically during this quarter the order pattern is that it remains weak for the first half and then strengthens right after Chinese New Year in the second half of the quarter and that is what we have got to see.

John Pitzer – Credit Suisse

And then I guess my last question, CES this year, clearly muted for obvious reasons, but touch screen was clearly kind of a – one of the high points of the conference this year. I am just kind of curious when you look at the TrueTouch can you help me understand given the design activity you are seeing today, when does that start to flow into top line and I guess do you have an expectation for revenue this year that you might be willing to share.

Norm Taffe

Yes, John. This is Norm Taffe, (inaudible). So relative to CES we can’t obviously talk about the customer names, but we did have significant introductions there that use our technology to drive some very important wins. It is a small contributor to revenue in the past year in 2008. It will be one of the most significant increases going in for 2009 and I am hesitant to put any numbers around it but it will be one of the big growth drivers for PSoC in 2009.

John Pitzer – Credit Suisse

Great. Thanks guys. I appreciate it.

Operator

Thank you. John Barton, you may ask your question, and please state your company name.

John Barton – Cowen & Company

Thank you, Cowen & Company. The topic is customer design activity. Of course you had mentioned that in December quarter design activity remained robust. And I realize the world is paralyzed now as far as production, procurement et cetera. Are you starting to see that impact your customers’ thoughts on design activity going forward or do you expect that the impact going forward and what I mean by that is there any probability of them trying to keep old designs around longer. Are there R&D headcount reductions or is it the alternative where they are going to try new products out faster to marketplace which could potentially benefit you?

Brad Buss

Hi John. Good morning. The answer is we are seeing some signs that people are cutting back on the number of programs they’re doing and obviously from all the press releases their headcount reductions and all in a lot of our end accounts. We are expecting that that is going to result in fewer projects you know, frankly what you alluded to in terms of getting to market faster they all care about and we think we can help every single one of them do that and save costs along the way. So we believe that our activity at least won’t go backwards because of this and we think we are going to grow year-on-year on design activity.

John Barton – Cowen & Company

Great then T.J. I like just to go back to response that you made with regard to a question of shipment, your shipments versus consumption and you basically said they were in essence in lockstep. I just to make sure I understand your response. I believe what you are referring to there is the fact that you components at Cypress are shipping almost identical to the number that have been put on the boards you used I think the toothbrush as an example. First, let me clarify if that is true and then secondly what are you thoughts with respect to is there an inventory purge taking place of finished toothbrushes in the channel and hence you still are shipping below consumption. Do you have any feedback from customers to substantiate that one way or the other?

T.J. Rodgers

Okay, so the Dell model plus the consignment model plus recognize the revenue is shipped for distribution, I believe, locks our shipments to the OEMs, our customers such that our shipments – our shipments and their consumption are pretty close. You used the word lockstep. That maybe a little bit too strong but very close. Where we lack visibility and by the way you get surprised by this one, where look at 2000, where somebody there came back and said we got enough routers in inventory in the grey market to supply to the internet needs for 2 years. So I don’t know if somebody is piling up toothbrushes or routers and of course, therefore, we watch right on the net like you guys watching those companies, trying to take you out if we had a problem with one of them.

Brad Buss

John, the other thing we have done is you know Chris and the marketing guys are going out to all the big CMs, our kind of top 150 customers, one to be able to do our forecast, but to see where you are going and we are all going is really trying to end – understand the end consumption where it is going. So that is a lot more work then we normally do. We get a lot of feedback and you know we are seeing people across the board very, very conservative. I mean the thing that I have been encouraged. I think the industry and like T.J. talked about the supply chain has really matured and they reacted wickedly fast in my opinion, you know, in this first, really kind of this first half, which I think is good. Let’s get the paint [ph] done, let’s get things aligned. Let’s move the cost structures and move forward. And I think it’s the right thing to do.

John Barton – Cowen & Company

And then last question and the topic is share buybacks. Obviously you guys bought back almost 25 million shares the last quarter. T.J., you bought shares personally. What is the thought process or what is the spreadsheet that makes you decide what you’re going to buy going forward and or, Brad, what is the minimum amount of cash you are willing to carry [ph]?

T.J. Rodgers

Every year some guy out of Stanford with an MBA (inaudible) comes into my office and explains the evaluation metric. And they get more complicated, they get computer based. The data I gave you before on price to sales ratio is the only data that exist that I am aware of that allows the company to look at its price for its entire 26-year history. The data – that data while it doesn’t necessarily drives us, for example, I think price is – share price is driven by price to earnings ratio or maybe it maybe free cash flow and in good times it’s certainly driven by price to sales ratio or just maybe price to book, other ratios during bad times. But you can always look at the price to sales metric and you can compare companies to other companies and you can compare your own company in time. So, Cypress Semiconductor in its 26-year history has had a higher share price than today, 95% of the trading days. So, that to me is real data and that’s why we are buying back. That’s why I bought. And therefore I am expecting to make money. I didn’t do it to show the flag. I did it because I think the share price is undervalued in my own opinion.

Brad Buss

Yes, John, and I think to the other point of your questions I think I am very comfortable running the company south of $100 million in cash easily because I – to my point, even in a tough period, which I think we are in, I really still think we’ll be free cash flow positive. I think we’ve taken the actions we’ve needed and we’ll continue to take more. We’re managing the working capital extremely tight and I don’t see a need to pile up a ton of cash on a going forward basis. And as far as valuation, us buying the stock I mean obviously we have extreme confidence in where we are going with our products. PSoC3 and 5 will be coming out. That’s going to be an annuity on revenue and gross margin expansion point [ph] going forward as well. And the valuation metrics we had, price we had trading below book value for quite a while and we got tons of cash. So, we are very confident and I am still very confident at these levels of where we are at.

John Barton – Cowen & Company

Thank you very much.

Operator

Thank you. Glen Yeung, you may ask your question and please state your company name.

Glen Yeung – Citi

From Citi. Hey, Brad, do you think that PSoC can grow in 2009?

Brad Buss

Let me turn that over to Norm because that way he will be fully committed to that answer. Let me answer for Norm. Norm’s bonus depends upon PSoC growth in 2009. We grew ’08 and ’07. We are not growing as fast as we like. Right now growth in the kind of markets we are in says you are gaining share, but you can put some color on, if you like.

Norm Taffe

I guess the only color I’d add is I plan on making a bonus this year.

Brad Buss

Well I think – yes I think –

Norm Taffe

Well I will add a little bit of color on it.

Brad Buss

(inaudible).

Norm Taffe

I think that even in 2008 we actually gained share in my controller market because the market went down reasonably, significantly and we grew in the year. It didn’t grow as much as we expected. In 2008 though we really only had a few million units of touchscreen based sales and just started design wins there, so we have a strong base business between core and CapSense that grew a little bit, started to have a little bit of sales of touchscreen. But in 2009, that touchscreen business will add on the top of that. My only caution of course is the same caution every else had, which is the market is not very visible from perspective of what it looks like in the back half, but in terms of design wins if hadn’t been for the economic conditions over the last quarter, I’ll be expecting quite bullish growth in 2009 based on design wins. So that’s the only hesitation. I still expect we will grow.

Glen Yeung – Citi

And it’s still a relatively concentrated business, but if we look at the numbers that we’ve seen or expect to see from your two big PSoC customers, is it safe to say that you are not that concerned about end market inventory?

Norm Taffe

It is safe to say that. I think the only thing I would kind of hesitate to, is I am not sure where the number two came from. We actually have a fairly significant Top Ten and not that big of a delta between the top Number One and Number Ten.

T.J. Rodgers

What’s the percent of our sales to our biggest PSoC customer?

Norm Taffe

I am trying to think what we ended up. It’s around 15%.

T.J. Rodgers

Okay. So that’s significant, but we’ve been diversifying dramatically. That’s the whole point. PSoC with 8800 customer – 8800, yes, customers – is not be in the RAM business where your Top Three customers all get to play you against Samsung.

Glen Yeung – Citi

And do you expect then that in 2009 that Number One customer will be less than 10%, for example?

Norm Taffe

I think so. It’ll be about there.

Glen Yeung – Citi

And then T.J., just to clarify. I mean, lot to talk obviously about what you think is going to happen in the next couple of quarters, but just to clarify. You alluded to the fact that potential that the June quarter obviously with a high degree of uncertainty could see a revenue bounce. But is it fair to say that that’s really based on your assumption about the supply side of the house versus the demand side, i.e., inventories will be down substantially at that point that – that is more likely, or are you really expecting that there actually is some kind of demand improvement?

T.J. Rodgers

The basic assumption is we’re are not piling up inventory, so we are not going to be digging our way out of a hole in Q2. I think that’s reasonable with a caveat that in our customer’s inventory we don’t know that well. We’ve got only design wins Norms was talking about and we’ve been piling them up pretty fast and therefore we’ve got some fresh growth coming in. Those are the things that allow me to make a weak prediction of growth quarter-on-quarter during the year. But right after that I’ll go back and say this is a very uncertain economic environment, not yet at the record levels of 2001 but pretty scary to start to make predictions.

Brad Buss

I think by the end of February us and the rest of supply chain is going to have a lot better feel. I think it’s still too early to call.

Glen Yeung – Citi

Brad, do you think Chinese New Year sales are going to play an important role in the way you see the rest of your Q1?

Brad Buss

I mean I don’t think so, but I’d ask Chris for his input.

Chris Seams

Well, it will just – it will create a small blip, but it won't be the determiner in terms of what the Q2 and Q3 will look like. I don’t think. That will be a more macro economic.

Glen Yeung – Citi

And then last question, Brad. Can you talk about break-even in terms of utilization and what you think that levels needs to be?

Brad Buss

We are kind of looking through that, but I would just say the steps that we are taking are the right steps then they will be flat [ph].

Glen Yeung – Citi

Okay.

Brad Buss

I think the levels that we’ll have when we are done probably down 30% to 40% in utilization through the actions that we’re taking will put us on a very good spot and more importantly to leverage on the upside that we can get through the foundry partners, will be very strong for gross margins.

Glen Yeung – Citi

Okay, actually but let me ask you to clarify one more thing. You said earlier we are all trying to get to where end demand is. I don’t know if that’s exactly what we are trying to get at. One of the things I am trying to determine – and I am not sure if that’s clear on this call, is whether or not you believe your customers are still working down inventories that are either Cypress products or have Cypress products in them. And I know T.J., you’ve said that you think that you are shipping to end demands and I put them in quotes, of course you can’t see that. But point being is there a presumption that the end market inventories are coming down? I think that’s an assumption on the side of the Street. I don’t know if you guys see it that way or not.

Chris Seams

Glen, we absolutely – this is Chris – we absolutely know of accounts where that is exactly true. Do not have a complete view of all of our customers that way.

Glen Yeung – Citi

Okay, that’s a good answer. Thank you.

T.J. Rodgers

Yes, one thought I had coming to work this morning, everybody gripes about the quarter mentality [ph] Wall Street estimates again. But I was thinking this morning how remarkably fast the entire supply chain in our industry any way has snapped onto the new reality. We’ve done it. I listened to a report this morning about Intel closing plants, et cetera, and I think the drive to be profitable, to have positive earnings per share, to have positive cash flow and the fact that you guys are poking at us on a quarterly basis has caused the industry in this downturn to react more quickly, certainly Cypress more quickly than ever in the past. So, to give you a little anecdote, in the fourth quarter of 2000, we shipped $370 million and we had bookings over $400 million and there was pie in the sky and we were building stuff as fast as we could and auctioning it off as we couldn’t make enough. Two quarters later, our bookings went from $470 million to $30 million in the second quarter of 2001. That’s kind of a big swing, bigger than what we are looking at now. And at that time, instead of saying, what the hell is going on? I got my Board to pass a resolution I wanted to make sure they understand that we would keeps our fabs running full blast because after all this little inventory correction and the downturn we didn’t want to lose our market share in the back turn. So we just keep cranking our fabs full blast, which we did for the next six months, the $30 million worth of bookings. Those days, the cowboy days are over and I think across the board you are seeing companies aligned to the new reality very quickly.

Glen Yeung – Citi

Great. That’s very helpful. Thank you.

Operator

Thank you. Adam Benjamin, you may ask your question and please state your company name.

Adam Benjamin – Jefferies

Jefferies. Thanks. T.J., to that point, if you look at the semiconductor business basically since 2004 when it was about $940 million of revenue, it’s been on a steady decline since then, finishing 2008 in the 700 levels and obviously irrespective of the downturn it has declined – ’09 is obviously probably going to be in the five levels, but excluding that you look at this business going forward, how should we be thinking about in terms of how you’ve sized it from a fab and operational level? And in terms of products, how should we be thinking about it in terms of what it’s capable on a revenue basis on annual run rate?

T.J. Rodgers

It takes your mindset. Cypress broke the billion dollar mark in 2000, went back under water. This year, 2008, I think we are going to hit $2 billion, right? 2008 we hit it, including Sun Power.

Brad Buss

Oh yes.

T.J. Rodgers

Now, we divested Sun Power. Now we are back on to the $700 million and change again. To me, I am kind of embarrassed running a company that’s not over a billion dollars. So we are going to get there. The reason the semiconductor business on a macro level has gone backwards is that we were an SRAM company. In 2000, the SRAM business was $6 billion and we had market share about 10%. And what’s happened is we’ve increased our market share to something north of 25%, congratulations to us, but the SRAM business has shrunk from a $6 billion business where it stands today do you think Brad.

Brad Buss

$1 billion.

T.J. Rodgers

From $6 billion to $1 billion. So, to use a phrase Tom Werner of Sun Power used at that time, we are the biggest benches [ph] in the room. And therefore we decided to make some changes. Sun Power divest that works out. Cypress MicroSystems divest that worked. But we are up to a couple of hundred million bucks at least this quarter annualized and we just got to be patient for that to grow. But I am embarrassed we’ll grow a million dollars that is $250 million a quarter. I won't make cuts that will prevent that from happening in the future, even when I am doing some pretty sever hacking. And our goal is to get back there. That’s a – and I think the key, Adam, right I think as you well know I think we are PSoC playing, where PSoC3 and 5 will take us, where touch has taken up. It’s taken up – call it what you want, $15 billion to $20 billion aim that a couple of years ago we never played in. I think the growth that we’ve had there has tracked well ahead of certain other microcontroller companies in their inception. And we are very confident I think to T. J’s point where that can takes us down the road.

Adam Benjamin – Jefferies

Alright. And just to clarify –

T.J. Rodgers

And don’t forget, we have divested quite a few companies, probably about $110 million worth of revenue, to allow us to focus where we want to focus and to grow on these bigger TAMs. So we got out of TAMs that were ugly and shrinking to reinvest in TAMs that were huge and moving. And you got to remember that we’ve hunted about $25 million to $30 million a quarter in revenue to restructure the company. That was really the driving force (inaudible) talked about earlier. They weren’t made in anticipation of a downturn. I didn’t know it’s going to happen.

Adam Benjamin – Jefferies

Right. But just to clarify, T.J., I mean your SRAM business in the last three, four, five years since ’03 or ’04 timeframe has really been about $300 million business. So that really hasn’t been a drag on you growth and so I am just trying to get an idea of where you see this business going forward from a size perspective. Obviously you think a billion level – anything below that is embarrassing, but realistically how do you get back to those levels given where your businesses are situated with some growth in PSoC and West Bridge? Outside of that, how do you see yourself getting back to that billion dollar level?

T.J. Rodgers

Okay. Well you are right. The RAM business is $300 million. We’re – and it’s not going to grow a lot, but work is better managed that it has ever been and we are focusing on creating cash, with that to fund the rest. Just a point, where PSoC is more than a microcontroller, the reason we are taking share when we are compared to microcontrollers companies, we are – the microcontrollers plus analog plus programmable digital – the reason we are taking share is that we are offering systems solutions that can – one chip to make your board kind of solution as opposed buying chips from four different companies and making the board themselves. Being the Number Ten microcontroller company in the world does $600 million of business. So right there just in the microcontroller business, forget West Bridge, there is $600 million and $300 million, there is $900 million. Rest of Cypress puts you over a billion. It’s very straightforward. We need to focus on our two growing businesses, West Bridge and PSoC, and get the design wins and do our work and move forward. Meanwhile, we’ll keep the SRAM business healthy and profitable.

Chris Seams

If there is tuck-in acquisitions that make sense, I think to help us expand, we’ll look at that. We’ve got the balance sheet. But I don’t think we need to do that. We have a lot of organic strength. Harry and his Cypress Envirosystems is here and he will be contributing and there’s always a few other things in the hopper.

Adam Benjamin – Jefferies

Okay. That’s helpful. And then Brad, I guess just a question for you on the gross margin front. T.J. kind of indicated that he thought he would see some growth in the June and September quarters and then a sequential decline, normal seasonality in December. Depending on how big those growth rates are will dictate where you get back to on a quarterly run rate, but I think it’s conceivable to suggest you probably don’t get back to what you did Q4 at one sixty five range. So given that, I am just trying to get an idea of how you expect to get back to the 50% gross margin range and is that an ’09 target or is that something we should be thinking about beyond ’09 really?

Brad Buss

We are not going to predict seeing [ph] it but we believe the possibility of getting the level one sixty five quarter. This year it’s certainly in the card. And there’s just not an uncertainty. We – if you ask that question the next quarter, we’ll give you an answer with more data behind it, but I think lot of promise. That certainly is a modest target for near term that we could exceed.

Chris Seams

Yes, definitely. I mean it’s a factor of demand to move the utilization of this one, cost cuts that we are going to taking out are going to be given. You are going to have a nicer mix of product. I think the areas that we look at growing are definitely our proprietary products, which have higher margin profile. And we do start to see some depreciation roll-off in the back half of the year.

Adam Benjamin – Jefferies

Got you. So it’s a 2009 target of 50% on the gross margin?

Chris Seams

I wouldn’t say for the fiscal year. I think that would be a challenge. I think for hitting that in the back half of the year, the demand aligns, and the things we talked about happen, I think there is a very high probably we could get there.

Adam Benjamin – Jefferies

Got you. Alright guys. That’s all I have. Thanks.

Chris Seams

You got it.

Operator

Thank you. Uche Orji, you may ask your question and please state your company name.

Uche Orji – UBS

It’s UBS. Thank you very much. Just a couple of questions, one is on SRAM and the other is on Touch Sense. On SRAM, T.J., can you just talk about a dynamic fab and are you still seeing opportunities to gain SRAM market share if it’s just too difficult to tell now with the current inventory the stocking?

Ahmad Chatila

Okay. This is Ahmad. Let me answer the question. First on inventory, no we do not see any inventory. Actually if anything, we declined in inventory. We reacted since September to ensure that we are lean in that regard. From a market share perspective I think we have the momentum as I have been saying for the last three years. So every quarter we come in, we gain market share just by the dynamic of the industry, people not having the roadmaps and the markets consolidating. However, our reaction is we will not attack our competitors head on. No one gains by having price wars. However, we will defend our position aggressively. So, that’s been our strategy. I said it last time, and I say this time. Everybody is behaving and I am very happy about it. That’s our product margin are very, very good. We expect of course pricing to always decline in SRAM because that’s the nature of the deal. But our comp target will decline – in lockstep with the pricing. So I don’t know if I answered your question, but –

Uche Orji – UBS

No you did. I mean just a little bit more on the cost targets. I mean, considering (inaudible) on CapEx, how do you plan to keep the cost at that rate the way you kind of described it? What will the factors that will help you to keep driving cost down within that business?

Ahmad Chatila

Very good question. Actually we have a task force for the last two years called Work That Cost [ph] and we are reducing cost targets across the board. In logistics, I will give you an example, we are reducing the cost by 40% year-over-year. If you look at our fabs, which again runs it, we have excellent cost management there, even in our Philippines plants where we had a layoff and we are reducing costs. We also renegotiated a lot of our contracts with our subcontractors. They gave a significant price reduction that we’ll only see in 2009 as we consolidate our supply base. And we are at 65-nanometer in foundries in 2009. So actually if you look at all these things and including adding business like nvSRAM, which is a proprietary business from Simtek, all of a sudden our gross margin management is becoming a lot more powerful and I think we are going to be in a very good shape throughout 2009 and beyond.

Uche Orji – UBS

Right. Can you just remind us what your target is for gross margin for this business?

Ahmad Chatila

For the Memory and Imaging division our aspiration is to be above 50% in three years from now, and we think we can reach it, no question about it.

T.J. Rodgers

Low to mid 40s is kind of what I think you can think about in the interim.

Uche Orji – UBS

Okay. That is helpful.

Brad Buss

And more importantly strong profit cash flow from it.

T.J. Rodgers

At what gross margin do you achieve 20% pre-tax profit?

Uche Orji – UBS

Right. That’s –

Ahmad Chatila

I will achieve 20% pre-tax profit on SRAM by itself. That’s around 35%.

Chris Seams

So, one point I want to make is our Bangalore site we have offshored not just R&D but our commodity businesses we’ve offshored the SG&A part as well or at least the marketing G&A part as well. So, we are no longer, for some businesses, thinking that 50% gross margin, 30% OpEx, and 20% pre-tax is okay. We are creating another model where we can transfer our legacy businesses such that we can do 35% gross margin, 15% OpEx and 20% pre-tax. And we will be moving business units this year into that mode where they are literally run out of Bangalore, which is – from a time zone point of view is closer to our customers right now, anyway.

Uche Orji – UBS

That’s great. Just a different question on touch. I mean there are two questions. (inaudible) When I look at the capabilities you described with your touch solution, a lot of that seems to kind of sound like what is in the iPhone today and to what extent are there any potential IP issues with Apple given they – yesterday on their calls, they were talking about going after anybody who seems to conflict any of their IPs. So is it possible for you to just describe what you’ve achieved with your products and why – any comfort you can get around any potential conflict with Apple.

Norm Taffe

This is Norm. Relative to the IP in this area, one of the things I’d emphasize is that Cypress has very substantial amount of IP that we’ve independently developed in this area for – actually for many years. And if you have noted, T.J., noted earlier that we jut our 750th patent granted in the programmable PSoC area. It turns out that a very large portion of that actually is based on capacitive sensing, touch sensing, those kind of technologies we’ve been doing for many years. So we are very comfortable and confident that the IP we use to offer the capability is IP that we own and we built ourselves.

T.J. Rodgers

Let me describe touchscreens from technical level for a minute.

Uche Orji – UBS

Sure.

T.J. Rodgers

CapSense, you put copper wires on a printed circuit board. You touch the copper wire, you add capacitors to it and the PSoC extents it and says you touch the button. You can put a linear stripe of multiple capacitors inside your finger croset [ph] and calculate where your finger is on an array of let’s say 32 buttons that are all lined up in the next slider. So you turn – dim lights with that, for example. And then you can do two dimensions and make a thin that looks like a trackpad for personal computers, all CapSense, whether or not you’ve got one button, or a row of buttons or two-dimensional array of buttons. The touchscreen is divided into two parts. One is a CapSense part where instead of copper on green print circuit board, the conductor is indium tin oxide, which is transparent, and glass. So the sensing part of a touchscreen is nothing more than buttons sliders and two-dimensional arrays on glass being interpreted by a PSoC, and we’ve been doing that for a very long time. Once you interpret what they are poking a finger at, then you go change something and you drive underneath it a display. So the buttons underneath it are controlled on the display. So when you poke something, you think you are poking some sort of button through this task. In reality, you are simply hitting a CapSense that’s invisible to you because it’s got clear electrodes. You are hitting nothing but a touchscreen display. So we are in the touchscreen part of it, which is nothing more than a CapSense part of it with a different kind of CapSense. We do not drive the screen. We do not create software that connect to CapSense input to the screen output and all of that.

Uche Orji – UBS

Right.

T.J. Rodgers

That’s a system level thing. It’s very complicated. It requires computers and CPUs and all kinds of other chips. So the part we are on is CapSense on clear electrodes and we’ve got – we are inventors, not users in that market.

Uche Orji – UBS

That’s great. Thank you very much.

Operator

(Operator instructions) Our next question comes from Chris Danely. You may ask your question. Please state your company name.

Chris Danely – JPMorgan

Thanks. JPMorgan. Hey Brad, just real quick on the inventory, it sounds like you guys are going to bring it down pretty aggressively here over the next couple of months. In terms of days, are you – what exactly are you shooting for? I think before the Sun Power happened you guys were sort of running in the 50, 60, 70 day average. Is that kind of what you are shooting for coming out of this?

Brad Buss

We are running higher than that. I mean it’s – I would say in total probably, yes, I mean the mix varies, depending on the business unit. The other thing, keep kind too, it’s like half our business is going through distribution now. So that can kind of get chunked around depending on how much they buy and what those is deferred income versus the inventory on the balance sheet. Our inventory in days in the quarter just reported was 126 and it’s been flat in the 120 range for the last year. Our model for the corporation, which I stated in these meetings often was 65 days. That number came from a benchmark study we did a decade ago where at that time Advanced Micro Devices was a pretty good, TI was pretty good. We’ve recently done a new model. Of course if you go look at programmable logic companies, if you look at Xilinx the days are way in the three digits. And that’s because when you have a proprietary product, you are the only person that can ship. You can't screw up. So if you are allocating RAMs, they can go somewhere else to get the RAM. There is no such thing as allocating PSoC. If you shut down somebody’s MP3 player, that’s not good. People have bad days for that. So you tend the programmable products to have more days of inventory. The risk is less. The inventory, the design wins are there. They use the product. We’ve recently done a – how many days of inventory should we have per business unit. The number is lower for – very low for commodity RAMs, a little bit higher for sync [ph] RAMs, which are high performance, proprietary, and higher yet with PSoC. The current weighted average number for the corporation for the model is 85. 85. So the answer is we got 125 or 126. We should have 85. And we are in the process of reducing our inventory. The hard part of course is at the first turn down you don’t overshoot your inventory in the first downturn. We got that one done. So our inventory is bigger than we want. Target is 85.

Chris Danely – JPMorgan

That’s perfect. Second question on West Bridge. Lot of talk and questions on PSoC for ’09. Do you guys have a goal for West Bridge revenue in ’09?

Dinesh Ramanathan

Hi, this is Dinesh Ramanathan. We are actually being fairly conservative in not guiding on anything on West Bridge. Our goal from last year, we achieved it. We want to make sure that we try to grow it from where it was last year, but I’d just leave it at that given the existing market conditions right now.

Chris Danely – JPMorgan

That’s fine. Can you guys give us a sense of what the year-over-year growth was for PSoC and West Bridge ’08 over ’07?

T.J. Rodgers

PSoC was single digit percent. West Bridge in percent was –

Dinesh Ramanathan

373.

T.J. Rodgers

370. So, you know the denominator is a real small number. So that’s where we are. We guided 40 to 50 on the West Bridge, if you remember, and we came in at the top of that.

Chris Danely – JPMorgan

Sure. And then last question, and probably for Brad. So, rather than I guess ask you guys what your sort of sales and revenue levels will be in the second half can we assume Brad that – you’ve been talking about getting back to 50% gross margin in semis. Can we assume that that’s – that revenue level is $160 million-$170 million? Do you have a specific revenue level and goal after all of these cost reductions to where you can get the 50% gross margin?

Brad Buss

I think it’s in the 160-ish range. I think more importantly if we can get up to that level, get the utilization up, the cuts that we look at doing, we are back in the black.

Chris Danely – JPMorgan

And so I mean I think and you guys talk about this downturn being as – at least almost as bad or similar to the ’01, ’02 and if I go back to ’01-’02, I mean it took us three years for revenue to recover during that time period. So if I apply that now, then we are not looking at $160 million in revenue until 2011. I mean is that something you guys are considering or what happens if that scenario plays out?

Brad Buss

We are not considering that at all. I mean I think the other bigger issue back then was inventory and so we had a control everywhere as well. And I personally think inventories have over shot, my personal belief. And if revenue levels are different for whatever reason, maybe growth is slower, but not as much leverage in the world, whatever it may be, we’ll manage our business accordingly.

Chris Danely – JPMorgan

Got it thanks.

T.J. Rodgers

You are right in that in the 2000 crash it was a three-year recovery, it was long. But companies got well, so they weren’t scared of reported three years. But with regard to actually recovering revenue, you are absolutely right, we didn’t get back over the $1 billion mark until – actually it was early in 2004.

Brad Buss

We had a vastly different product profile then too, right.

T.J. Rodgers

Yes, that was the point I was going to make is that that was a RAM company recovering from a recession where we are putting a lot of RAMs and DataCom equipment that entire supply chain and stuff. Right now we haven’t stopped our RAM supply chain. Our RAM business is stable. It’s now down $2 billion. So we are not looking downward from $6 billion to $1 billion, which is what happened at that time. We think the RAM business is stable with a potential for a small amount of growth. We are gaining market share in that. And then what – what will happen to our revenue on top of that is that we’ve got PSoC and West Bridge, which are bright lights and they are growing. So we are literally a different company. 70% programmable and proprietary products and this – and I also want to – this recession at least yet is nearly as bad as 2001. It may get there, but is not. And therefore I don’t see a three-year scenario, but your guess is every bit as good as mine.

Brad Buss

Again, just the whole PSoC3 and 5 that will come out this year, will not drive the kind of revenue in ’09 but the design win, when you pile that up with touch design win and core PSoC design win, you are building a pretty big annuity in growth going forward. Even if generic markets are slow, we are playing into new markets. Just look at cell phones. Cell phones are going to go down whatever percent this year. Our cell phone business will be up year-on-year just because of the new applications that we have in (inaudible) TAMs that we’ve never played in.

Chris Danely – JPMorgan

Hey, Brad, actually there’s one last question on the PSoC now that you’ve mentioned the new products coming out. Will that take your ASPs up a little bit on PSoC with the new products? Do you see that to sufficient?

Brad Buss

Takes time.

Chris Danely – JPMorgan

Great. Thanks.

Brad Buss

The PSoC1 products are what can change, and the PSoC3 products, which by the way, one of our customers or one of our most important customers is playing with as we speak, will have an ASP in the range of $3. And the PSoC5 product, which we are planning on taking out within a few weeks, will have an ASP in the $6 range. So, yes, our ASPs are going to go up. Now got to remind you that higher ASP chips are bigger and cost more, but in general you are going to make better gross margin in the 32-bit market than in the 8-bit market.

Chris Danely – JPMorgan

Got it.

Operator

Thank you. And our last question comes from Sandy Harrison. You may go ahead and please state your company name.

Sandy Harrison – Signal Hill

Thank you. It’s Signal Hill. T.J. , we were talking in a lot of subjects here in generalities and I guess one of the questions I had is typically in prior slowdowns you’ve seen either older products stuck with longer or new products pulled in quicker because this gave people the chance to depart from their older products more quicker than they had planned. What’s your – what’s kind of your stab in the dark here sort of what it looks like coming out and with that in mind, what’s sort of your views how that impacts Cypress’ growth prospects, both positively or negatively.

T.J. Rodgers

What you – what you described is what we call the treadmill in sight and what we are striving to get away from is the treadmill. The opportunity, as you said, is if you’ve got a hot new product and everybody is trying to get a leg up then you can get that design win and sort of sling shot out of a recession and if you don’t, you can get hurt. The big wins we’ve had in CapSense, for example, started in 2005 with double digit millions of dollars per quarter where a software program that we put on a chip that we had shipped since 2003 the touchscreen stuff that I talked about earlier, which is going to be the new big thing for PSoC is actually going on a chip that – when did we design that (inaudible)?

Chris Seams

2004.

T.J. Rodgers

2004. And so the new dynamic, one of the primary reasons we’ve moved to programmable products is as the market gets ever faster, we want to respond to our customers not by targeting the silicon which takes a year, but by putting a software program on existing silicon and getting out there. So we look forward to an upturn in which time-to-market with a solution differentiates companies because I don’t need to design a chip anymore to solve a big problem. By the way the same chip family I was talking about is only – the classic PSoC this one takes very same chip runs the motor in the eBike where we selling over 5 million units in China, and drives the coils in a motor, controlling a 48 full battery to drive the electronic bicycle in China. The same one I have been talking about for CapSense and touchscreen. So it allows you in a market where you don’t know what’s going to be hot, to dive in and program your part to read on some new things couldn’t possibly anticipate.

Brad Buss

Yes, I think the big thing in ’09 this thing with distinguished semi companies is product introductions, right. And if you look at us, we have the strongest product portfolio this company has ever had in its life time and it will be addressing TAMs bigger than we’ve ever been able to do in our lifetime. And more importantly, we got a lot of the design win backlog that Chris touched on. We’ve been hammering away at it for two years. And a lot of them will come to market regardless of the environment and you’ll be adding kind of new ones with all the product stuff.

Sandy Harrison – Signal Hill

Got you. Thanks for that. And then last, so T.J. , I didn’t have time to kind of look back on prior purchases, but your comments about buying a pretty big slug of Cypress here recently, how have you proven as a stock picker, historically? I guess have you bought big ones before and how has it turned out or I didn’t have the chance to go back and look at you history.

T.J. Rodgers

I don’t speculate in the stock market very much. The only stocks I own are those that I get from the venture capital firms on whose advisory boards I serve. So basically I get to co-invest and then every time they take some public I guess slug of stock. So I primarily trade in Cypress. I will just tell you that I bought a million shares at $3.08 a share and it’s looking pretty good even today.

Sandy Harrison – Signal Hill

Got you. Okay. Well, thanks for taking my call.

T.J. Rodgers

Okay. One more comment. The video on the radio, by the way, we’ll be glad to ship you a free sample if you email me, tjr@cypress.com. It’s a wireless connection. You pop the dongle in your pc and then we give you a little board and little – and the board is actually a little weather station. It will tell you temperature, humidity, the ambient light level, what’s the other one? And pressure – and the atmospheric pressure. And that’s a little radio dongle that’s – a little radio board a few inches long and basically you throw that anywhere you want and you pop the dongle in your computer and your computer is reading all that stuff. So – you can throw it in your attic at home. You can play with it and get a feeling for it.

If you want to see the video of me wiring up a small industrial site, namely a winery, by myself in two hours, go to cypress.com/video and you can see it. If that causes you to be interested, give me an email, I will send you a chip. Also, if you go to the investors' site, price to bill information I showed you should be on that. I asked that to be posted this morning. If not, it will be there before the end of the day.

That’s it. Thank you very much for calling in. It’s tough times. We – I realize we are talking kind of bullish this morning. Cypress is always that way. We respond best when times are tough. We are feeling pretty good about ourselves. We are not feeling good about our numbers, but we’ve been working all year long. We plan to get through this. We’ve got a good bunch of that done and we will implement the rest of it this quarter. Thank you very much.

Operator

Thank you for participating. That does conclude today’s Cypress Semiconductor conference call.

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Source: Cypress Semiconductor Corporation Q4 2008 Earnings Call Transcript
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