Cypress Semiconductor Corporation - Shareholder/Analyst Call

May.10.13 | About: Cypress Semiconductor (CY)

Cypress Semiconductor Corporation (NASDAQ:CY)

May 10, 2013 1:00 pm ET


T. J. Rodgers - Co-Founder, Chief Executive Officer, President, Director, Director of Cypress Envirosystems, Director of Agiga Tech and Director of Bloom Energy

Unknown Executive

So we ask that you take that and find that with all of our Risk Factors described in our public filings and all yours, sir.

T. J. Rodgers

Thank you. Webcast is running? Okay. I want to talk about 2012 and what we're going to do going forward. I think it's no secret from you who owned shares, and I am the second largest shareholder of the corporation, that the stock went down and we didn't have a great year. And I want to talk about why that was and what we're going to do about it.

First of all, the cover of the annual report celebrated 2 things that were both noteworthy. Our third year anniversary as a company. And secondly, our transformation as -- from an SRAM company as depicted by 6 generations of SRAMs from here to a systems company shown by a picture of PSoC 4 here, the block diagram for that chip and what's on it as shown now. I'll talk more in detail about that later.

We opened up -- I opened up I read the report every year, personally. I opened up the annual report by getting directly to the point with the following words. In last year's annual report, I made some statements that looked reasonable 1 year later such as we have increased -- can we get the other mic? Okay.

[Technical Difficulty]

T. J. Rodgers

In last year's annual report, I made some statements that look reasonable 1 year later, such as, "We have increased our dividend to $0.44 per year making [indiscernible] stock an attractive investment that can provide a reasonable return even during semiconductor dips ". Other statements of mine did not age well over the year. For example, "We believe Cypress has become an attractive equity only investment." "We expect Cypress to grow more modestly in 2012." My volume is saturating. So turn down the volume on my microphone, please.

[Technical Difficulty]

T. J. Rodgers

Other statements of mine did not age well over the year. For example, we believe Cypress has become an attractive equity only investment. We expect PSoC to grow modestly in 2012 and finally, "TrueTouch revenue will hold a high watermark achieved in 2011 with the chip only -- with the new chip only engineers could have made touchscreen generation for TSG4." The realities in 2012 turned out to be contrary to the statements above. TSG4 chip did not ramp into production quickly enough to replaced our blockbuster TSG3 chip causing our touchscreen revenues to drop $103 million year-on-year. That was the problem if you wanted to name 1 problem for 2012. PSoC revenue dropped accordingly. Combined with the significant slowdown in the static RAM market, the TSG4 problem led the declines in 2012 revenue going from $995 million to $770 million. EPS going from $1.25 to $0.55 and consequently, share price $15.89 going to $10.50. Thus, Cypress was not an attractive equity investment in 2012 because obviously, the stock went down. The TSG4 problem exposed these fundamental weakness in our software development organization that delayed our TSG4 entry into the market by 6 months, long enough to lose almost all the TSG4 revenue on our 2012 operating plan. The software development problem has been rectified by a major reorganization that appears to be working. Our next-generation TSG5 chip is already in the market with software that was ready when the chip came out. We have fixed the company. It is not yet visible to you in the form of revenue and profit.

This graph shows revenue and profit in millions of dollars by quarter, from 2009 through Q4 2012. So the drop from the heyday of TSG3 to the problem with TSG4 as shown by these 4 quarters, which are lower in revenue. Interestingly enough, the lowest quarter, we made a profit, we had a little bit lower quarter in the first quarter of 2013 at $172 million. We also made profit. We are going to get through this trough without losing any money me as you can see the last trough in 2009 that was not the case. We lost money in Q1 and Q2 of '09.

This is our revenue. This slide goes over a decade. I'd like to have a longer-term view so I put 10 years at the bottom, Cypress' revenue over a decade. The problem were talking about here is $225 million drop, $100 million for touchscreen, $50 million for SRAMs and the rest, general market is a tough market in 2012, but we could have performed better regardless of the market. So this is the problem in 2012 that we will work our way out of in 2013. Look that in another way, if you take Cypress' revenue over the last decade, you get at flatline, that's the least squares line, it's almost perfectly flat. So we're not growing, we're not declining either, and I wanted to discuss the dynamics that it turns out there's a lot going on, some good things and some bad things canceling each other out causing this graph to be flat.

Over the last decade, also from 2003, our least squares lines shows that our earnings per share has been increasing 6.4% per year. So we've been more profitable in hard times than we were before, in hard times. We have been more profitable in good times, $1.25, than we have in prior good times. And the net result is $0.064 per year of EPS growth although what have you done for me lately because your earnings got cut in half last year.

Our operating expenses have been methodically driven down over the last decade. This again, is a least squares line, showing that our OpEx, our overhead R&D, sales, general and administrative has been driven down at a rate of $5.2 million per year.

We have a second target and that is the OpEx, operating expense as a percentage of revenue and our target is 30%. As you can see in 2011, we got very close to our target. We also made 24% profit that year. What I've shown here is an estimate of OpEx for 2013. We have a plan inside called OpEx [indiscernible], meaning we will drop our OpEx to 80 times 4 or $320 million for the year. We will achieve that plan. That is a non-negotiable -- I do not negotiate that when I'm talking about what we're going to do and not do in order to make that plan. Once we make that plan and beat it, we will match the best OpEx we've ever had, 33.5%, in the fourth quarter of 2013. That's a forecast. Obviously, all forecasts have risk. It assumes the revenue of about $218 million.

Although PSoC went down, I don't want to give the impression to you that PSoC is not the really hot product we've always thought it was. This graph goes back a little farther because we shipped our first be PSoC in 2001. And we got our first significant revenue in 2003. I'm showing units here, so this is 4 million units. The first big ride was CapSense, that was the hallmark design there with the Apple, iPad, the one with the click wheel that was done with our touch circuitry. We had a plateau in 2007 through to 2009 and then TrueTouch took off as touchscreens and cellphone and we moved up to 366 million units in 2012, we matched that with 361 million units. Think about 361 million units divided by 4. That's 1 million -- divided by 365 days in a year, that's 1 million units per day. So PSoC is all over the place. We're shipping 1 million units a day all over the world. That's a big success and I don't want to negate that with the financials that we've given down year. However, if you look at PSoC revenue, over exactly the same period, you have the same shape except you have a down year. And this is really where we lost the $103 million in revenue because we lost business in cellphone touchscreens, which are chips that are over $1. And we gained the business in other PSoCs that are cheaper. So we had, if I go to the prior graph, flat units shipments but we had a down year in revenue and that is really the same problem stated in another way.

On the other side of the fence -- so the PSoC problem I have discussed, and on the other side of the fence was SRAMs. This is our shared market in percent and over the same period, you can see we've continuously grown share up to 39% market share in 2012. We're #1 in the world. This good news is offset by this news. This is SRAM total available market. So at first, for example, in 2001, the total market worldwide for SRAMs is $3.7 billion, and it dropped to $2.5 billion in 2002, et cetera. If you fit an exponential curve, to a least squares fit to this data, the SRAM total available market has been declining at an average rate of 15% per year for more than a decade. The reason for this -- the technology reason is that SRAMs are becoming easier to design in the chips and customers that used to design a chip and buy an SRAM to hook up to the chip and are now designing the chip and putting the SRAM into the chip. We call it integration.

As all exponential curves never get the origin and we think this trend is starting to flatten out. Thank God. Now, if you take getting more and more market share times a market that's getting smaller and smaller, multiplied and that's revenue. And this is a graph of Cypress' SRAM revenue. So they've done a great job, I think. And if you look, the revenue is nearly flat, so they've offset the effect of the market share decline with improved -- excuse me, the market, total available market decline with improved market share. So those are the 2 forces. PSoC, growing. We had a bad year last year, with PSoC that graph is upward and to the right, and SRAM's declining at a linear rate of about $3.2 million per year and we put those 2 together, it gives you a flat line. So that -- there's this mighty struggle underneath that flat line. It's not just flat there's something growing and there something shrinking. They were fighting. Did they have one shrink slower and one grow faster? But there was a decline last year and the market decided that they didn't want to live with that and the net result was a share price decline. This is our share price versus 2011. So on the first day of the year, we had 0% share price gain and over the year, our share -- our stock went down and lost 37.8% a lot during the year. And if you want to say, is that good or bad, you can look at the stocks of semiconductor index and see that it gained 3.4%. So on a relative basis, we underperformed other semiconductor companies for the reasons that I've just given.

That's the end of the bad news part. We're now going to the good news part. There is some good news and there's a solid plan for progress. First of all, this is a graph of relative share price but it's not for just 1 year, this period I just showed where the stock price went down. It is for a 4 and a quarter year period going back to the end of Q3 '08 when we spun out SunPower. This is when Cypress became a stand-alone semiconductor company again. In effect, the new Cypress, rebirth of the company. And we had our good days and as I've described, we've gone down in the last year, but the net result is, if you were a Cypress shareholder at the time of the SunPower spinoff of September of '08, your stock would've appreciated 17.9% per year, which is a great number and the stocks depreciated 5% per year, which is not bad. We've outperformed the semiconductor market over a longer period of time if you just don't look at the last year. This is a more conventional graph. I picked this graph since the SunPower spin out non-year end because that's the way we spun out as a new company with the new equity stretcher. But if you look at a more conventional graph, a 5-year return, the fact is that a 5-year return has been 12.4% compounded versus the stocks, which is actually going down. So over the longer term horizon, we still performed well and if we turn this around, that good performance will be even better.

This is our lifetime share price. It goes back to our IPO in May of 1986. It's been adjusted first because some parts spin out in the split. You can see the various ups and downs. There's a PC boom in 1995 and a crash there after, there was a .com bloom in 200 that you all know about and double crashed thereafter. There's a SunPower peak that was unique to Cypress and a crash thereafter, and then this is the Cypress gain and decline that I've shown you but basically since the Cypress spin off, this number's up. After we spun out SunPower, the world was wondering, what were we going to do and our stock went down actually a little bit below $3. One point first, last year, I reported to you that our IPO price is $0.71 and it had gone to $16.89 over the year and the CAGR was 13.2%. This year, I'm reporting that the stock price was $10.50 at the end of the year and our CAGR is 10.7%. So this curve represents the 10% -- 10.7% CAGR. Now the points down here at the bottom. One of the reasons I'm a large shareholder of Cypress is that when we were at the bottom and people were wondering whether or not we'd make it, I wrote a check for $3.04 million and bought 1 million shares of stock. I remember very clearly the meaning, it was the analyst meeting and I've said, it'd been, "You have to file when you're an officer of the company and you bought stock." And I mentioned that I had bought stock and now, there's a long pause and one of the guys said, "So, how good are you at investing?" And others are still questioning. Now, well the answer is clear now. Now, the stock's at $11 today but let's say $10 at the end of the year and I've more than tripled my money, including the performance of the last year.

When SunPower spun out in 2008, they created 70 million more Cypress shares. Our investors were given $2.5 billion worth of stock and Cypress employees to compensate for the loss in the value of their company were given $70 million shares of stock in a normal spin out transaction. That stock drove our share count from $166 million prior to the spin off, up to $198 million. And all during this period, we've been buying that stock and at the end of the last year, we've managed to get our share comp back to $165 million. So despite the creation of $70 million extra shares of stock during the SunPower spin out, we ended the year with 165 million shares. That's the second best we've done in the decade. So we're very proud of the fact that with regard to shareholder value, we've maintained a low share company. This would have bulked up to well over 200 million shares if we hadn't done something about it.

We've also been giving capital back to our shareholders. This is the reverse chronology of what we've done since the SunPower spin in the end of 2008 up through 2012. So there's shares we bought. We bought a total of 99 million shares back. We bought them back at $12 a share. We spent and put back into the market $1.2 billion in cash to buyback those shares and we pay dividends amounting to $2.6 billion. The first and biggest dividend, of course, was the SunPower spin out on itself, which was worth $2.55 billion to shareholders. 3 years later, we turned on a dividend midyear 2011 and paid out $29 million for shareholders in that year. And last year, the first year of our dividend, with an increased dividend of $0.11 per share per quarter, we paid out $63 million. We intend to continue paying this dividend.

So we have been returning capital to our shareholders. One of the things going forward that's going to make a big difference in the company is the new chip called PSoC 4. That was the one on the cover that I showed you. It's the most important new product we've done in a decade. PSoC 4 has got a 32-bit ARM computer in it that's as powerful as personal computers were in the late 1980s. It's got 32 kilobits of RAM, 256 kilobits of Flash and a volumable [ph] memory, 32 kilobits of ROM. It's got programmable blocks in it that do CapSense up to 36 button of that capacitive touch. Programmable digital/analog converters, serial communications blocks, 2 of them -- this is the I2C and SPI type blocks, 4 counter timers and pulse with modulators, 2 of our analog competitors, 12-bit analog digital converter that continues time block translation to amplifier, programmable digital circuitry, 4 universal blocks, each of which has 2 PLDs and a data set in it, programmable I/O including a high-speed switching matrix, 36 programmable I/O buffers that take on different voltages to match into your systems and 2 analog multiplex buses which can bring analog signals. This is a list that you would find on a typical board 10 years ago. You'd have dozens of chips that have all this functionality. I understand many of you doesn't understand the jargon I was using but I wanted to go through it to emphasize the point of how much stuff there is in PSoC4. The cool thing is that it sells for $1, all that stuff for $1. And then you ask yourself, of course, I'll hedge up and say "starting at $1" because some of the fancy ones are more than that but not a lot more than that. So your answer is are you going to go out of business and how in the hell can you sell something so cheap? There's the answer. That's my hand at 8:00 last night. And that's a PSoC chip on my little fingernail. The PSoC chip is 6.9 square millimeters and my best estimate of a nearly square fingernail is 69 square millimeters. And that's the little finger I'm pointing out to you. So that's how you can sell it for $1.

What can you do with it? Here's one example, and it includes our software, High X [ph], when you use a chip. There are 4 design steps to use in PSoC and this is a PSoC for example. Let's suppose, and this is an appliance center process, so in another words, you want a chip to run your oven, your refrigerator or your microwave oven and you want 1 chip to be the whole shell for $1. Okay, well, you want your controls to be touch controls and if you're doing an oven or a stove top on a counter, you're going to want it be wet and you're going to want it to be not interfered with by noise nor will it govern and allow you to create noise when you touch the button. These are complicated engineering problems. You also don't want a nice square block, you're looking at an engineering interface, you want a curved interface, and the curve makes it harder. So you want to touch and a curved interface with thick overlays with water on it. You want it to work as it's going to turn on your oven or not. Well, first thing you do is you call up the CapSense component. So in our design software, you pull up a little box like that, it says CapSense CSD. It's got a shield on it. The shield is what you use, as a special pseudo random signal comes out of there. High tech stuff. And you hook that pseudo random shield around one of the buttons and it's the thing that allows you to filter out the water noise, the drop of noise from the actual button touch. You go into the graphical user interface. This shows the slider. You can see it -- now, this would be like a slider volume control and you configure it by doing the pop down menus and you say what you want the CSD block to do. You program your PSoC chip. Our best engineers can program a chip In less than an hour and turn it into what you want. Because all those components I talked about, most of them are programmable. I want an amplifier, okay? I want an amplifier to gain a 10, okay. I want an amplifier to gain a 10 at 10 kilohertz. And I want the gain to fall-off at, say, 6 decibels per octave below 10 kilohertz. And I want it to be flat up to 30 kilohertz and I want it fall-off the 6 decibels per octave above 30 kilohertz. That's all engineering stuff and you go play with it and you get that. So these new program, the insides of the chip, part by part as if you're designing a chip with this in a computer. Then you got to make it work. So what you got here, there's a PSoC 4 chip. There's the little daughter card here, so you can plug in PSoC 3 or 4 or 5 in there. This bigger card is the PSoC, it's that development kit. This little patch board where you can put in your wires. There's the little screen that can tell you what's going on inside. You plug your power in there. So here you can see it says step #1, you can play with stuff. Then plugging it over here, this is a second kit, we plug it in. There is the button -- touch button and you see a slider, so you can plug this in and you just -- fingers on button 1 and this is telling you it's on button 1. So you can debug your system and make it work right there. Then you put it in. And it's got other features. For example, proximity. You noticed this button's lit up. You don't want that light on all the time. It will burn off the light and it burns power. So you have second thing, which is an almost touch or what we call proximity features such that when you get inches away, the stove senses that you're about to touch it and it turns on the light. So you know exactly where the button is. We control the screen and of course, this whole thing right here uses up about 10%, 20% of the capabilities of PSoC chip and the rest of the chip can be used to run every thing in the oven. Of course, we don't run power through PSoC but we can run the control circuitry that would turn on power, or turn on an automatic electric valve which will turn on gas, for example. So this is how you design the PSoC and of course, once you see an oven like that, you'll never buy another oven with a knob or switch sticking out, getting gunk on it again. Spaghetti sauce in the switch is not good.

New opportunity, number two, for growth. USB, and Cypress is #2 in USB. We have 8% share. SMSC now acquired by Microchip is #1. And we are planning on taking back first place position there. The new market share battle will be fought over USB 3.0 There's been USB 1.0, 1.1, 2.0 and 3.0 and 3.0 is just now turning on.

Our USB 3.0 chip is called FX3, and it's a big chip and it's hard to copy. This is what FX3 does. This is a 32-bit bus you can attach to somebody's 32-bit computer. And its a programmable bus, so you can attach the different computers talking different languages and hook it up programmably. This is USB 3.0, so here you've got the high-performance USB 3.0, which also by the way contains USB 2.0 in the connection coming out. So this is where you hook up your USB plug. This is where it talks to your computer on the other side. And there's 2 more interesting things in the storage down here, where for example, you can put in an SD card like the cards used in digital cameras, or you can put in a NAND Flash or other devices. You can have a hard disk drive down there. You can have a solid-state disk drive or you can have a normal disk drive.

So this is a pretty generic chip, where you can hook up any thing over here, your toy, whatever it is. You can you connect USB over here, you can store stuff down here. So in example, you can bring USB in, and you can store it on an SD card here on in a NAND flash here. And you can store content -- songs, pictures, movies, whatever -- and not interrupt the end function over here. The machine over here can create data, put it through here and put it on the USB line. The USB line can command and state data directly into the machine, your machine. Or you can have storage in the middle. You can be talking to USB and storing here, and you can be taken from this storage and talking to your machine at the same day.

So this is a very flexible chip.

It's got 2.4 million gates of logic on it. USB 3.0 operates at 5 gigabits per second, which is nontrivial. It's got 4.5 megabits of SRAM and 53 different SRAM blocks, so the Lord giveth and the Lord taketh away. We've integrated 53 SRAMs in this one chip, 53 different separate SRAMs. That's good news. They're all in one chip. Bad news is we didn't get to sell 53 SRAMs for these guys because that's up. And that's the integration I'm talking about. And it runs a very powerful ARM computer that's a 208-megahertz computer.

USB 3.0 started out really being connectivity when video started happening. I mean, if you go -- USB 2.0 is 480 megabits, USB 3.0 is 5 gigabits. And if you say how long does it take to load a song, well you improve your time from a 0.1 second to 0.01 second, you go, well, if it doesn't cost anything, I'll take it, but I don't care. But when you get out to an HD movie, it takes 14 minutes to load an HD movie on USB 2.0, and that's starting to matter. And it's down to a minute with USB 3.0. So this was the driving -- this is the logo of the Special Interest Group. This is the driving force that is causing USB 3.0 to take off.

Here, I've shown a picture of a high definition image. And these are 2 real pictures, and what we've done is there's a big picture, which is a field of flowers. And then if you zoom in on one of the flowers to see what it looks like close up, these are actual pictures of the 2 flowers. And on USB 2.0, you don't have the bandwidth. You need about 2 gigabits per second of bandwidth in order to do an HD picture. And USB 2.0 does not have that bandwidth. So you have to do what is called video compression. I know a lot about video compression because I was of the board of the original video compression company called C-Cube. And you can see here, and what video compression does is it basically says, I don't want to use 2 billion bits per second. I'm going to crunch it down. So if you think about me as a picture, probably the chip work, well, I'm moving. So if you want me to move, you've got to capture me. The screen's not changing. This is not changing. The logo is not changing. So what you do is you'd only send differences for change.

And there are other things were, for example, on that screen, the background is white. You wouldn't stand 1 million bits of white pixels. You'd say, white, the whole line's white. And you send 1 bit of data that would make a white line. That's how video compression works the problem is you have to pixelize things, and as you see, you can see this rough jagged edge, there's a pixel right there. Now again, if you stand way back from this thing, the flower doesn't look that bad, but this is the same picture of USB 3.0. So you just don't screw around. You send a high definition picture right on through and don't compress it, which is to harm the image. This is one driving force that's going to make USB 3.0 a big deal.

Here's another driving force. There's a company, a startup -- it's making a lot of noise right now -- called Leap Motion. They have major design wins with personal computer companies. This is a person with his fingers are being captured by the Leap Motion imaging system. It's down here, you can't see it. But it's the little dongle. It's got 2 image sensors in it. And it takes the picture of your hand in stereo. And then, that picture goes into the computer, which processes the image, and it captures your hand. And here you can see the pictures of this guy's fingers. This will allow us to get away right now touching -- touchscreens are 2-dimensional and move X and Y. This will turn touching into 3-dimensional. So if you remember Tom Cruise in Minority Report, whipping pictures around in 3 dimensions, I don't know if a printer is there yet that print things in there in 3 dimensions. But the fact is this thing will sense in 3 dimensions, and this will change the way people interact. And guess what, there's a whole lot of bits in 2 cameras taking stereo pictures of your hand, and there's a whole lot of bits in the USB 3.0 to connect with a computer. And this is one of our big wins.

I showed you this slide last year, and we had USB 3.0 last year. It was just up. And I said, and this is design opportunities, I said, after introduction, we had rapidly increased the 400 design opportunities. So I now want to show you what happened since last year. 400 design opportunities have gone to 900, but more importantly, the second aspect [ph] has got the dollar sign on it. And these opportunities, which were no revenue, turned on in 2012 into revenue, and that revenue is now up to almost $2.5 million a quarter, almost $10 million a year. So this is one of the growth vectors for Cypress that's going to get us off from the flat red line.

I concluded the report the following way. In 1992, Cypress suffered its first-ever revenue decline and loss. We had grown rapidly and lost startup intensity. Some employees wondered if we would be another "Silicon Valley miracle" that went public and then got acquired.

One might -- on one return flight in Japan, I worked my way down to the very last item in the "emergency" reading material I always keep in the bottom of my briefcase. It was a paper "Organizational Vision and Visionary Organizations," sent to me unsolicited by Prof. Jim Collins of Stanford Business School -- well before Collins and his co-author, Prof. Jerry Porras, wrote the blockbuster hit, "Built to Last," in 1994.

Although Cypress had a very strong culture, I learned how important reinforcing culture was by reading what I still consider to be the most important business paper I've ever read. And I hired Collins and Porras as consultants, and I spent the next 6 months talking to small groups of employees in an effort to formally codify the common beliefs that Cypress people held, that is, our Core Values.

After refinement and wordsmithing, our statement of Core Values now framed in each floor of every building at Cypress. Our employees know that almost all of Cypress' EVPs are long tenured engineers who truly believe in our Core Values and have worked their way up to the top.

Our Core Values are embraced by Cypress employees. For example, Cypress Core Value No. 2 reads as follows: "We are smart, tough and work hard. We tell the truth and don't make excuses. We value knowledge, logic and reason. We admit to and solve problems quickly. We deplore politicians," and here, I refer to the corporate type of politicians. Thank you. I hope it's for both kinds, but I didn't want to say that politically incorrect.

The first sentences in Cypress' Core Value No. 1 -- the first sentence of Core Value #1 reads, "We do not tolerate losing." Period. That's how we feel about 2012.

By year-end 2013, the word "losing" will be erased from our investors' vocabulary.

And I always bring the last statement out from the last report. When I write it, I always know I'm going to have to state it the next year and write the little thing like I wrote upfront. Well, I said this, but it really didn't happen. So I thought really carefully about how much I could say there before I wrote it down.

ISS, Institutional Shareholder Services. They opined on proxies. They're proxy advisory services, and this is their one for this meeting. There are 2 -- the first 2 key takeaways were the estimated costs of the company's equity compensation program is excessive. And based on that, they recommended to cut off our options granting program. And two, a pay-for-performance misalignment is identified due to excessive CEO total pay in conjunction with significant company underperformance.

So I don't care much what some people in San Francisco need to say. I care about my shareholders and my board and my employees. But they recommend voting on the proxy vote we took earlier, and they've made some serious mistakes, and I'd like to show them to you now.

This is their advisory vote to ratify named executive officers' compensation. This is my compensation, and this is the reason they concluded that we pay too much. One of the things I've never done is rip off my own company. I've been here for 30 years. I'm intently wealthy, and I don't need to rip off anybody. So I took offense at this. But even then, if it were meaningless with regard to running the corporation, I would have ignored it. But it isn't because they are widely distributed, and people read their stuff.

Okay. It says my base salary is $727,000. That's wrong. My base salary is $600,000. I know that I've memorized it, and the reason I know it is because it's been $600,000 for the last 3 years in a row. Because I haven't taken a raise, in particular in 2012, because I didn't think I deserve one. I'll pointed out that base salary is about 1 -- yes, the average NFL player's salary and about 1/10 of the average quarterback in NFL, and I would equate myself at least with a quarterback.

So how can you be the Internet -- Institution, ISS Shareholder Service, and get the President's base salary wrong? Simple. You're in a hurry and you're kind of careless. And you don't read the footnote that says, the President got $127,000 last year in vacation days. You see, I don't take vacations very much. In about once every 2 or 3 years, I get the note from the HR department that everybody gets, "Your vacation is piling up and you're going to lose it if you don't take it." So then I faced the choice of going on an 8-week vacation, which I don't want to do or taking the money, and I took the money. So there's not a $127,000 vacation payment there. And they kind of lumped it in the base salary. Close enough.

They said, I earned $4.79 million last year in restricted stock. The fact is I earned $1.76 million in restricted stock, that is stock I got a compensation for working here. They were off by 63%. Well, how can they make a mistake that big? It especially says the difference between those 2 numbers is outlined in writing in our proxy, which I ignored. The answer is simple. When I get a stock option grant, as granted by our Audit Committee -- approved by Audit Committee, they're fairly tough about it. And they don't say, you get stock for breathing. They say, you get stock if you perform, and if you don't perform, you don't get stock. So this morning, we reviewed in the board meeting about half of the 1,000 numbers that was shown aboard during this board meeting. And after this meeting, we will review the other half of the numbers. And I already told you, we didn't perform well last year. Therefore, even though I had the possibility of getting $4.7 million worth of stock, it's pay-for-performance at Cypress. There are no exceptions, and I got cut back by more than half. So I actually was paid $1.76 million shares.

So they say my total compensation is $5.476 million. In reality it's $2.5 million. So my base pay is slightly below actually the minimum wage for an NFL player, it's about $650,000. This is for a ground [ph] lineman who doesn't start. In my conversation last year, it's below the average NFL player. I think it's reasonable, and I'll show you in a minute why I believe that.

Point is, this looks like a chart. It looks like it's confidently done, and it's not. And they're misleading people. And then they conclude the CEO is overpaid and, therefore, we should cut off our stock options program. It's dangerous.

Here's another graph. The company's CEO total pay is 1.25 times the median of its peers. So these are other CEOs in the peer group, paid $2 million, $6 million, 25th percentile point, 75th percentile point. I'm within the box except for they didn't bother to look what I actually was paid. They looked at what I could have been paid had the company made its plan. And of course, if the company has made its plan, the stock would be 18. You'd all be happy, and we wouldn't be having this discussion right now.

Any of high concern. Well, if you look at what I got paid is there, and the fact is on this scale for whatever peers they picked -- they aren't named -- they would put me second from the bottom, the low, the 25th percentile. This is the fact. And I was paid therefore, 0.57x my peer not 1.25x. And they're highly concerned. I would be too. There are a lot of numbers that are incorrectly calculated that would concern me.

And in their final graph, they've got a pretty good graph: performance. So this could be what revenue share price on a relative basis to other people in pay in percentile. And then they've got this band in there that says low pay, low performance, high pay, high performance. And they show me there: high pay, low, below average performance. And of course, if you put in the actual pay, I don't know exactly when their scale is, so I just put a number in here. And clearly -- oh, I put it in there because in this other graph, I went between number low and #1 and #2. So I did the same thing here as an approximation. So there's number low and that's #2. And then clearly, they put me in the band, and probably with pay below what performance was.

So here are the facts. Cypress revenue decreased 23% in 2012. Talk about that. Cypress share price decreased 38%, I showed you this graph. CEO cash compensation decreased 48%. CEO stock compensation decreased 80%. CEO total compensation decreased 75%. So our pay, according to our formal policies of our Audit Committee, was in line, actually a little bit more severe than being in line with the performance of the corporation. And I've got to say here that one of the things that bothers me about this is they've actually criticized our Audit Committee. Our Audit Committee is pretty tough. Bad news is I have a base pay of $600,000 a year. Good news is, I have a bonus potential of $1.05 million a year, so I could make $1.65 million a year. Of the $1.05 million I could make in bonus, get [ph] so much I took home based on the Audit Committee's recommendation. He says 0 kind of quote. I got $15,000, so out of the $1.05 million. So I think one of the things that bothers me -- the implication that I ripped off my company bothers me -- but the criticism of good men who work hard and are very diligent and very tough on it because of bad data bothers me more.

ISS reported $5.47 million in CEO compensation. Actual compensation was $2.511 million. ISS refused to return our calls. Do we have that piece of paper here? I think you picked up my piece of paper. So if I could kind of get your attention. When they say, we're going to shut off your Stock plan, you won't be able to make offers with a stock option to your future employees. And then you'd call them up because that kind of matters in Silicon Valley, where everybody makes offers with stock options. And you talk to them and try to say, "This is a big mistake. We have some data we'd like to show you." I just showed you the data, some of it.

Here's the reply we got through our Controller, Neil Weiss. "Dear Neil: From Kathryn Cohen of ISS. Dear Neil: Thank you, for detailing your concerns, which as I wrote in my e-mail to you, we would use to determine on the need for a call. Please note that I did not promise a call. My exact response for the e-mail trail below is this, 'Please send us the questions, which will help determine whether a call is needed. And if so, who needs to be on it.'"

She doesn't offer a stock option plan, and this is the e-mail we get from a peon sitting in a cube in San Francisco.

We're getting pushy yet? Albert's having a heart attack, okay. Get the CPR guys in here. Hit him on the chest.

So ISS sent us a "no need to talk" e-mail. They never did return our phone call when we tried to clarify and give them the data. We requested no stock options, didn't ask for any stock. We've got enough stock for 2 years. Nonetheless, they recommended the cutoff for existing stock options. Not only do you not get new stocks because you didn't ask for it, but the stock you've already been granted by a vote of the shareholders, you can't use anymore. That was the recommendation.

These are facts I'm willing to stand behind. Some of the facts, I conclude the following. ISS is incompetent. They can't do numbers right even when the numbers are written in black and white in the proxy. ISS is arrogant. They do major things or try to do it, and they don't even talk to you. And finally, they're out of touch with reality, thinking they cut off the stock to a Silicon Valley company.

Fortunately, and I thank our shareholders, our shareholders saw through it and voted against ISS. In the past, you always get worried that there's a lot of stuff on the proxy, government-mandated, hyper control of corporations, and that people simply go push the ISS button without thinking. We called our shareholders and they supported us on these issues.

So while they're doing their thing, criticizing the value of our company and how it's run, the one redeeming factor, the one thing that keeps me going, the one thing after this short rant will cause me to forget about it, is while they're doing that, nothing, we're creating the wealth of Silicon Valley down here. Thank you, very much.


Question-and-Answer Session

T. J. Rodgers

Wait till you get the mic so you can be heard.

Unknown Attendee


T. J. Rodgers

So why am I not going on a crime here? First of all, 2 board guys just fell out of their chairs, and even the CFO is starting to have a heart attack. It's not worth it. If you look at the value created in this picture and what it means, it is super important. Our company's worth $1.6 billion and that's created from nothing. Our company has put $2.5 billion back into the market, more than we've taken out. That is if you take all the investments that have ever been in Cypress and take all the dividends and givebacks we've given back to our shareholders. We are $2.5 billion positive to the market; we're long. And that's much more important than quibbling with some government extension, FASB-headed bureaucrats that don't matter that much. I'd tell you. If they have succeeded with what they tried to do, I would have been out on the road and I would have said -- I would have been less pleasant than I am right now. Come on. Promise I'm not going to stall you if you ask your question, unless, of course, if it's a stupid question. There is in the back. You've got to get your microphone.

Unknown Attendee

You still run?

T. J. Rodgers

Yes, I ran 4 days this week. And at 3:00 today, after I get rid of my board, I'm going to go out and run again.

Unknown Attendee

Any report, discussions, internal startups. What one thing can you tell us about a great one?

T. J. Rodgers

What one thing can I tell you?

Unknown Shareholder

A good one.

T. J. Rodgers

All right. AgigA Tech is making non-volatile memory, big ones, biggest in the world, and they're starting their revenue ramp of a few hundred thousand bucks a quarter. And they will either not make it or they will be a very important company, where the server industry adopts their type of product. So that's one of those deals. Babe Ruth, the year he set the home run record also set the strikeout record, right? So it's going one way or the other. DecaTech is currently making chip-scale packages. They're revolutionary in the way they are made. They will change the industry. They're having execution problems right now, and I'm looking forward to a year of hard work in order to get them running the way I'd like to run. But their technology is really good. We're working with a battery company that we are investing in, and that they're in a quiet phase. That one is a long shot, making a better battery because it's a big deal but we're working with them on making a battery. And once we have a proof of feasibility, and we'll probably come public with that, then it will probably take us 1 year, 1.5 year. What did I miss? That's where we are. I've got to remind you, home runs, out of the park home runs like SunPower, probably once-in-a-lifetime event. But I still think we can hit some triples going forward. That's it? Thank you, very much.

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