Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cypress Semiconductor Corporation (NASDAQ:CY)

JPMorgan Technology, Media and Telecom Conference Call

May 15, 2012 10:00 am ET

Executives

Brad W. Buss – Executive Vice President, Finance and Administration and Chief Financial Officer

Analysts

Christopher B. Danely – JPMorgan

Christopher B. Danely – JPMorgan

Next up is Cypress and this being Boston. I consider Cypress to be the Rajon Rondo of semis. They're kind of a small company. They pay one of the best yields in all of technology, not just semis. And then also have a nice balance between the slow – not the slow, but I guess if you consider semi-slow, but your sort of steady businesses that are growing nicely, combined with a nice growth business in touch.

So here today is Brad Buss, the Grand Poobah of Finance, so the CFO at Cypress. I'll kick it off just Brad; just kind of give us sort of the condensed update from the most recent conference call in terms of what's happening at Cypress. And how you guys view this cycle and then we'll just sort of jump into specific Q&A.

Brad W. Buss

Well, condensed from our conference call, that means it's a half an hour that.

Christopher B. Danely – JPMorgan

Yes, exactly.

Brad W. Buss

I mean I think as most of, let me Q1 was about ugly, right, I mean we had the unfortunate pre-announcement, most of it was centered around the tablet end of the market and one of our touch customers in North America. So really, I think we’ll probably touch a lot, here, as I am getting a lot of questions, but we see no changes in the competitive environment and there is no pricing things in our Q1.

It was really just kind of the wrong customers, I think having sell-through challenges from that end of it, Distis were weak, mostly in Europe and Asia. I don't think a lot of surprise. And then com was a little weaker, no surprise, you’ve been hearing that coming out in space.

I think the good thing is, it was the end of it. We had a monster book-to-bill of at 1.33 designs have been very strong our Gen4s take it off and we guided you know we probably had one of the best guys. I think in Q2, now keep in mind because I am getting a lot of question, oh my gosh, the street as you growing so much in 2002 and 2003.

Do forget the Q1 based were routine from right, so I would be pretty disappointed if we weren’t guided and being where we’re at I feel very comfortable in those number as we sit here.

Christopher B. Danely – JPMorgan

Sure an so, how do you sort of CS in terms of the overall cycle, specific to the semis and also to Cypress? I mean what gives you confidence.

Brad W. Buss

Up into the right, baby. You need a bigger minivan and might you need to become a Winnebago, I think, eventually. But no, I think take the macro side for a second, which I think none of us can, I mean it drives me us everyday looking and seeing what's on TV. But I think if you try to just isolate the macro end of it, I think from a product offering perspective, we're extremely good shape, probably one of the best we've ever had.

Whether it's the touch end of it, whether it’s the USB 3.0, 3 and 5 that’s, starting its ramp after a big design cycle and the consolidation that we see in semi market. Competitively, I feel very good and it’s not a one-hit story. I mean a lot of my questions are touch as they should be because I think it will be the fastest growing area in semis for many years to come, but there's also something going on everywhere, including our emerging tech. So I don’t have to bet the farm, just on one thing.

Christopher B. Danely – JPMorgan

And what do you see as far as distributor inventory and OEM inventory out there now versus historicals?

Brad W. Buss

Oh, my gosh, I mean extremely low, I mean we saw on the Disti end of it, they’ve declined in dollars three quarters in a row, which interestingly the Q1 decline was the biggest percentage decrease sequentially.

Christopher B. Danely – JPMorgan

Yes

Brad W. Buss

So you’ll think would be big and kind of slow down, it was kind of big, biggie and then bigger. So I think they pretty much hit bottom and what we're hearing from them they think so as well I mean I think the dollars are extremely low in that channel, some of the Asian guys who tend to hold less are down in the 10 days and 2 week period, which is not sustainable.

Its fine when lead times are short, which they're very short for us and really I think across the industry we are not hearing really any lead-time paranoia across our customer base. And I think eventually, as you expose all the time those will start to pick up, but I don’t see that happening, may be late summer and the fall, I don't really think that’s going to be an issue until then.

Christopher B. Danely – JPMorgan

Yes, if you look at sort of the typical progression of how the year goes in inventory, when do the OEMs and distributors start to take on a little more inventory to account for back-to-school, Christmas, et cetera.

Brad W. Buss

Exactly, I mean I would expect like Q2 I would expect to see a little bit of increase finally in the Distis I'd be surprised if they were down again, may be there would be timing thing. But usually the end of this quarter into the early part of the next quarter, I’d except to see kind of that upturn to your point to build for Q3.

Q3 is seasonally our biggest quarter and I don’t expect any real change there. And same thing with the OEMs we are seeing that across the board I mean I have met personally with the handful of the bigger guys, just to try to understand their logic in thinking and its very similar. Lead times are low across the board. Nobody wants to sit on a lot of inventory because of an uncertain demand environment and until it becomes an issue, they don't plan on raising it up.

Now we are seeing an interesting thing, where a lot of companies that have had challenges what some of the natural disasters where the boards and some of the Senior Management are starting to say, hey, why jeopardize revenue, which is very competitive by being cheap on inventory. And some of that’s starts to change and we have definitely see that in some of the Japanese customers where they’ve bit pretty hard. And money is cheap, why not hold a couple of extra days, but we're not seeing that happen yet.

Christopher B. Danely – JPMorgan

Sure, and then how do you guys feel about the different end demand markets out there, which do you feel a little bit better on, which are you more concerned on, because you play into so many of them?

Brad W. Buss

Yes, I mean I think it, exiting Q1, I mean the com was squarely right and we saw that across the board. We see that getting much better in the second half. Part of it end demand, the carriers spending more, I think a few of them went on strike in the first half. They're trying to figure out how they're going to get a decent return out of all these investments, which I think personally is prudent. And then I think we have some good dynamics going on with Samsung doing the end of life on the SRAM and then the ITC lawsuit that we have with GSI will come to a head at the end of July.

Christopher B. Danely – JPMorgan

Okay.

Brad W. Buss

So I think those will be positive for the com end of it. The handsets, we're very bullish on, obviously, the touch end of it, but as well as our CapSense products that go into that, including some of the bigger flagship phones, I think we're very positive on that. We see very good growth opportunities there. And the eReader and even the tablet stuff, we see that coming back as we enter into a very new and large prominent customer in that area.

So I think we feel pretty good. And industrial tends to ebb and flow with our Disti business more than anything. So I think that's one that has done okay. And I think that will continue to grow. And then auto is, we're very under-penetrated in auto historically and that's a major push for us over the next few years and we start to see very good design traction there with PSoC, but also the TrueTouch. I mean, we've probably won the majority of design wins last year in the auto space. So they take a couple of years to though, but…

Christopher B. Danely – JPMorgan

Great and then how…

Brad W. Buss

We don't see any one market really weak or substantially weaker really than anything else.

Christopher B. Danely – JPMorgan

Okay and how about Win 8 in terms of the touch capabilities…

Brad W. Buss

Yes…

Christopher B. Danely – JPMorgan

…there in PC space? How does that impact you guys and when do you see that starting to ramp?

Brad W. Buss

That's a good question. And we are very opportunistic on Win 8 in really two areas right I mean historically we've done a goose egg really in notebooks an ultrabook, whatever the names are, that's a whole couple of hundred million TAM for us. And obviously, we play in the tablet end of it.

So whether you buy tablet or an ultrabook, or this kind of book or whatever book, we have an opportunity to get a couple of bucks in every single one of them and specifically on the Win 8 stuff whether it's the actual touchscreen or the Trackpad that goes with it all these Trackpads are all going to be multi-touch Trackpads. And I think it some of you know when into that business we started about two-years ago.

We've got a couple of good beachheads with multiple design wins and we would expect to be actually next year dealing with all the major players in that area. So that’s going to be another growth opportunity that you really historically have seen very limited in our revenue numbers right now, so we don’t think its going to be barnburner this year. I mean you are going to get some of the first few coming out. I think you're going to see pricing challenges from a consumer end of it, but I think what we look for the design pipeline is in the effort that's being put into it. We think it's going to do very well next year, for sure. And that's really going to be just the start of, I think, a multi-year ramp.

Christopher B. Danely – JPMorgan

So just to continuing to talk about touch, a couple of your competitors announced they're getting into the market a while ago and two of them seem to start backing off on that.

Brad W. Buss

Yes.

Christopher B. Danely – JPMorgan

Little bit during this earning season. So what are you seeing as far as the competitive environment goes?

Brad W. Buss

Again, no changes and that was no surprise. I mean, we've been dealing with the competition paranoia for many years. It probably will never go away. I mean, I think there is more guys making apps processors than there are doing touch chips. So I don't know what all the hoopla lot is. Competitively nothing's changed, right. I mean, it's been Atmels and [Atpics] and us. Melfas who got a prominent win at Samsung was in at Samsung before Atmel or we were.

So there is not like some new guys came in out of nowhere and to your point, whether it was [SLAB] or whether it was Maxim or it was [Illtech] that got the first design win, none of them are able to keep them. There's technology issues, right, there's quality issues, there's customer usability issues, right. Once you start getting a handful of returns on these, costs are going out the window. And competitively, I think it's actually better than it was a year ago because to resolve these little guys, including a couple of the big guys that could have been real pressure. I mean

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

Yes. Every semiconductor market, anyone place and has multiple competitors I mean cap cense and we’re in all those Galaxy phones doing the four buttons at the bottom weather it the home is there and there is 19 guys planning absence and we have 30, 40 market share so…

Christopher B. Danely – JPMorgan

And anybody…

Brad W. Buss

Not concerned at all.

Christopher B. Danely – JPMorgan

Anybody now you see getting in from Taiwan, U.S. or otherwise.

Brad W. Buss

No. Let me – I mean there is always going to be guys playing and trying to play, but it's the ability, getting one phone doesn't do you squat, right? I mean if I was doing $80 million to $100 million, which is a substantial business, I would lose money. And we've been doing it five years and we're pretty efficient at it.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

So you're a new guy coming in, right, and it was really attractive when ASPs were $3 and tablets were $10 to do a business plan. And then, its two years later, I got one design win. Oh boy, the ASPs went down, no kidding, they were going to go down anyway and all of a sudden, you can't repeat. It's a very costly venture to keep doing.

Christopher B. Danely – JPMorgan

And then you hear about a lot of the microcontroller companies trying to "integrate touch." I mean what about the technical difficulties there, just integration in general?

Brad W. Buss

Again, not concerned. I mean that's so much analog in this and as you move into in-sell and on-sell, you need to get closer to the stack, not further away from it. And there's different process geometries. There is many things that I think would impact a lot of that. There's nothing that I could see in the near horizon at all. I mean there's always the opportunity to integrate certain things, like I said, with us.

Maybe there's a CapSense chip and a controller chip, we can integrate both of them because we do both of them. And they're both controllers that we do, right. That's one of the things that sets us apart more competitively, is that we can do CapSense, we can do touch, we can do the Trackpad, and we can do fingernail. There is not one competitor that can do all four and all four of ours are programmable. And they're all able to be stacked together. So I don't see a lot changing in the near-term horizon.

Christopher B. Danely – JPMorgan

And how do you see your share progressing in touch this year? And then can you give us the appropriate or approximate mix of handsets versus tablets versus other for your touch?

Brad W. Buss

Sure. I mean, I think competitively, we're probably, again, in a better position than we were historically. We probably, I think, have the broadest number of customers, which is good to hopefully dampen some of the volatility that we had. We're adding a couple of bigger new guys this year, that historically we've done nothing and a couple of guys that we had a smaller share, I think that'll increase. I think we'll probably grow better than the market in the second half than the first half. I mean that Q1 was so – that was such a big drop.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

It’s not about how hard to dig out. So year-on-year, we've said the business will be down, which I think has frightened a lot of people. But considering, I don't remember what it grew, 160%, 170% last year and then I think we'll be growing faster than the industry exiting the year.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

And then I think the 2013 growth rates will continue to remain strong. And then specifically, most of it will be cellphone, eReader, tablet stuff, I would say 90% plus still this year. But the non- cellphone, non-kind of tablet business is really starting to pick up as well. I mean we see another $1 billion to $2 billion unit opportunity outside of cellphones within the next five years. And it's a matter of just time and ability to get to all of these different areas. Like I said, we've cleaned-up and autos, cars – I'll have a cappuccino too, please.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

And you are seeing the GPS, the whole white good industrial medical thing hasn’t even been touched yet. And there is a tremendous amount of demand out there. We have different channel programs we're putting in place to attack all of those markets over the next couple of years. And quite frankly, the ASPs are as good or better than the cellphone because they don’t have the volume, right.

I mean, some guys buying 40 million or 50 million chips, that's one of the bigger reasons and the main reasons why the ASP would go down versus ankle-biters pressuring stuff. We historically have said hey, yes, if this guy wants to do it $0.10 cheaper and you're willing to deal with the quality and you think he can give you support, go give him a phone and guess what, 90% of the time they come back just like that certain Samsung phone that we're taking from someone that –

Christopher B. Danely – JPMorgan

Certain someone.

Brad W. Buss

Couldn’t handle it.

Christopher B. Danely – JPMorgan

I think a certain angle.

Brad W. Buss

Yes. And our prices actually slightly higher than it was before.

Christopher B. Danely – JPMorgan

Nice. And then I think on the call between tablet and cellphone, it was you were enormous that said, I want to say it was 10% to 15% tablets this year, is that in the right ballpark for you guys for (Inaudible).

Brad W. Buss

I would think 10ish. You read your tablet, you call that.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

Like we look at is large form, anything larger than five inch we call large touch and then small touch and thing. So yes, I would think that 10% is probably a decent number. And then probably growing for the year. And then probably exceeding slightly higher because we are ramping in a couple of nice designs there in the second half.

Christopher B. Danely – JPMorgan

And what's the latest on pricing in touch? You mentioned that sometimes it goes up. Obviously, there is pressure out there and how do you see that over the last six months.

Brad W. Buss

I mean the last six, it really hasn’t changed. I mean, you went through the metamorphosis last year, right. Like any end market you go into, your ASPs are higher, your pricing is higher and as you know, it takes two, three, four years and then you get down to a normal range. That gets magnified in the handset industry just because of the volume, right. So from where the ASPs are we’re exiting the year to where we see them now, we don’t see a lot it changes for us, right. We didn’t play a lot in the super high-end phones and those went down pretty dramatically, right. And so some of the competitors I think we’re feeling some of that pain.

Christopher B. Danely – JPMorgan

Yes.

Brad W. Buss

And then you have the ASPs in the multichip tablets that were $10 and $12 going down in that $4 to $5 range, right. So that transition is pretty, much I think happened across the Board. And then what you are going to see going forward really is kind of three segments. I think you will have the notebook/tablet kind of ASPs that are running a few dollar range, depending on size and the technology.

Then you’ll have kind of the cellphone, higher volume, multitouch cellphones in that $25, $50 range. And then the new opportunity is going to be the low end, right. I mean there is 1 billion cellphones with no capacity touch on it, right. Who knows where that will settle down but I think $0.80, $0.90 even, if it’s in that range, I mean that’s literally another $800 million market opportunity that if I can take 30% or 40% of.

We’d be very happy and more importantly the margins be very good in that area because that will on kind of like Gen2, Gen3 technology which we’ve been cost reducing early for the last three years. And one of the advantages I think we have versus the competition is we run the Flexfab model and we’re very good at taking fast out, right. I mean we do clocks at $0.50 and we make 65% gross margin. So we’re very good on that older technology and taking the cost out. And I see that being a highly gross margin accretive business and we’re playing pretty strongly in that area with some of the Chinese guys and then some of the major guys are playing in that low-end market. And I think that’s just going to – you’ll see that grow over the next two to three years as well.

Christopher B. Danely – JPMorgan

Yeah, how the gross margins trended on touch over the last three, four quarters and how do you expect that for the rest of the year?

Brad W. Buss

They've been very steady. I mean, other than customer mix, I mean, like I said, I mean most of the ASP stock that’s happened, again internally and I can't speak for the competitors, we've been able to cost-reduce at a same rate or better so to preserve the margin. And I mean obviously it impacts your TAM a little bit, but I don’t see any gross margin degradation. And you actually saw it in my Q1 numbers, if you looked at my group where the touch was, that was one of the lower-margin groups, but they have a lot less touch.

Christopher B. Danely – JPMorgan

Yeah.

Brad W. Buss

Right, when that touch is in there, those margins tended to drive up more, plus that group had absorbed more of the factory, because they're taking on most of the burden of the factory, since SRAM has gone quite heavily into the 65-nanometer, which is at foundries.

Christopher B. Danely – JPMorgan

Yeah. Speaking of foundries, some companies are saying there are charges, some companies aren’t. What’s your whole take on wafer availability, how do you…?

Brad W. Buss

I mean it's an issue at the leading edge, which we don't play anywhere near, right. 65s are most advanced, that's at UMC. I mean I could triple my SRAM business overnight, but I don’t think it would be an issue at all.

Everything else right is 0.08, 0.13 or 0.18 I should say 0.13 and the same thing between our fabs and our foundry partners. We have plenty of capacity, I mean, we don’t see any capacity issues you know for quite a years in the older stuff. And as everyone keeps going leading edge, there's more as 45 – all of that starts opening up for us, trailing edge guys. And you get good way for pricing that’s the other beautiful thing on that low end of that other billion cellphones go capacitive.

All of that increase in that revenue for me is going to go through a boundary. So my step pricing in the foundry, just like it is with your handset customers, goes down and down with volume. I mean, I’m going to get a much better wafer cost not only for touch, but then that will go across my entire foundry base with all my other products as well.

Christopher B. Danely – JPMorgan

Nice.

Brad W. Buss

Yeah. So I think it’s a net-net benefit.

Christopher B. Danely – JPMorgan

And now, maybe just give us an update. It’s a nice transition on the SRAM business. We've got some companies exiting the market. How do you see that playing out, how the margin's been, what do you see going forward, maybe layer in a little bit of your commentary on how that affects the SRAM business?

Brad W. Buss

Yeah, sure. Well if you look at our Q1 margins we reported right, I mean it was one of our worst quarters in the memory business and a long time in and a very strong gross margin quarter around 60 right. So pricing wise, there has been no issues there I mean obviously it’s been a fairly consolidated market price degradation is minimal, you know, SRAM only shares three letters with DRAM. That's about it. There is no other characteristics.

It’s concentric as you well know. And we’re the dominant guys across every big com guy. So no matter if it's Cisco winning or Huawei or Lucent or Juniper, whoever, whoever we tend to win across the board. So competitively with Samsung leaving, which will be this – they'll be out of the business probably by the end of the year is good for us. The GSI lawsuit, like I said, will come to a head and we felt very good leaving that trial. So competitively and pricing-wise, I think it's good. We just need the com guys to come back to live.

And you know we drive a very strong operating margin out of that business and is virtually, which is bizarre for our memory business it’s literally a 100% free cash flow business I mean there is a very limited CapEx that we put into that business I mean we'll go to the next node and maybe spend $3 million to $5 million on CapEx. Testers is the biggest thing we spend in SRAM. So we don't have the process technology burden like good old Cypress used to have. I mean, we really in the core business takeout investments in our emerging tech, really only need to spend $30 million, maybe $40 million a year on capital.

Where in the old days we were spending a $1.53 regularly that’s why it converts where our best friend back then.

Christopher B. Danely – JPMorgan

What do you see as your long-term CapEx to sales, what should we be thinking about that? Like, will...

Brad W. Buss

Literally just look it as dollars. Take the $30 million to $40 million and then you can bend it into your own revenue model. But I don’t really see a need to do that and a lot CapEx, I would say over half of it will be back-end test and assembly type of stuff versus front-end I mean our fab in Minnesota, it's stuck to the walls. I mean, there is no room left and we're not in foreign country. Every incremental bit of capacity will end up coming out of their – our foundry partners. And we’ve qualified two more guys on all the S8 which does all of our PSoC, all of our Touch. And then we have UMC like I said for the SRAM business, I mean the SRAM market could double, which are not going to happen right. And we would still not have an issue there.

Christopher B. Danely – JPMorgan

And you said, you have two new foundry partners.

Brad W. Buss

Yes.

Christopher B. Danely – JPMorgan

Is Intel one of them?

Brad W. Buss

No, no not yet.

Christopher B. Danely – JPMorgan

Not yet.

Brad W. Buss

Maybe in about 24 years.

Christopher B. Danely – JPMorgan

Exactly. Hopefully, I'll be retired by then, by the way.

Brad W. Buss

But that’s a very good point, I mean I think those guys, the Siamese, those guys are going to be morphing into that. I mean the (inaudible) law party train is coming down to an end in a few years I think for a lot of the bigger guys and all of us trailing hedge guys I mean you are never going to I don’t think we’ll ever see 28 years.

Christopher B. Danely – JPMorgan

Okay. I hopeful.

Brad W. Buss

You'll have grandkids by the time the Cypress is on 20.

Christopher B. Danely – JPMorgan

I just hope I’m able to retire in 20 years at the rate my business is going.

Brad W. Buss

You will, you will.

Christopher B. Danely – JPMorgan

It’s always (inaudible) I could move to France, right?

Brad W. Buss

That’s right. And we’ll hire you. I might need an IR guy one day. You got to get more positive on me though.

Christopher B. Danely – JPMorgan

It can work for Neil.

Brad W. Buss

That wasn’t a bribe. And anyone on a fin ride or anybody I actually like Chris' star ratings because he keeps my consensus numbers down.

Christopher B. Danely – JPMorgan

There we go. At least I'm good for something. (Inaudible) in my life. Just one quick question on SRAM and price. So as Samsung exits the business…

Brad W. Buss

Yes.

Christopher B. Danely – JPMorgan

Yeah, I looked at your SRAM margins, just sort of the long-term margins over the last seven or eight years since you got there, and it's been a pretty nice progression up.

Brad W. Buss

Yep.

Christopher B. Danely – JPMorgan

I mean when Samsung exits, are there opportunities for some more margin leverage in that market. What do you see as the long-term margin there? It’s been a pretty decent progression upward?

Brad W. Buss

Our goal like I’d like to see the Company around 58% to 60% and grow twice the industry. So I think you could extrapolate that over there that if the margins could go up and I think it will more not because of pricing, because again it’s really not a huge factor right now. But it’s going to be more volume, right. If we can take more share I think we get better efficiencies out of it. I think there is an opportunity for them to grow, but I don’t think the time more, probably a few points there. And then the question is do we use that margin opportunity to grow the business or maybe go into some other areas. I think that [will remain] to get told, but we're moving into some of the military aerospace into the SRAM market not a big market $50 million $70 million extra TAM, but we've pretty much ignore that historically like auto and we’re starting to go more into those new markets as well.

Christopher B. Danely – JPMorgan

Nice margins there.

Brad W. Buss

Very good (inaudible). Not right some times.

Christopher B. Danely – JPMorgan

They pay $900 for a toilet seat, they might pay a couple of grand for that’s fair.

Brad W. Buss

Oh my god, hire eight grand. Beautiful way for though we are going to put that involved.

Christopher B. Danely – JPMorgan

On that note, let’s open up to the audience for questions. Anybody out there right here in front.

Brad W. Buss

Would you mind doing the mic just for the webcast.

Christopher B. Danely – JPMorgan

I can repeat it if you don’t feel like getting it. Yes, full service here.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Christopher B. Danely – JPMorgan

So the question was around, why are the expectations low?

Brad W. Buss

I think again from its any kind of new technology right. It just – look at tablets, right. Remember one CES, oh my god, how many tablets were there, but you can touch them, they got to come out. So I think it’s just a natural bringing them to market. But quite frankly, I think our internal view is just pricing in general still probably won’t be there for the mass adoption that we think, and then there's always the first rev of form factors. So I think it's a combination of really all of it. It’s just a timing of it, mostly, but I like we said we see a very big opportunity to (inaudible) we’ve always been big the viewers and the window stuff and I mean if you look at across the board I mean how many hundreds and millions of us use that software and if you could transport that plus your personal needs into one package, that’s really (inaudible) and nobody wants to run around with two phones and two other gizmos. And we think it’ll be a big market opportunity. I just don't see it being this year. I know certain other guys are thinking it, especially guys like put big chips in there. I wouldn’t say it’s not an issue. It's just timing. It's going to be a great roll-out.

Christopher B. Danely – JPMorgan

I think Intel talked about, it would cost $100 to add touch technology to a win a PC at this point, that's probably a little on that.

Brad W. Buss

Yes, depending on the size, and that's a lot of dough, right, you had to add in. But whether it's fully there, the Trackpad like I say its coming. And it's going to be an incremental opportunity for us. Obviously the chip and the touch end of it will be more than the Trackpad, but it’s not like it's a five to one delta. I mean we are very bullish on the opportunity and we're comparing for it.

Christopher B. Danely – JPMorgan

[Wayne], do you have a question?

Unidentified Analyst

(inaudible)

Brad W. Buss

You sound like Chris, man.

Christopher B. Danely – JPMorgan

Question on option expense.

Brad W. Buss

Could you play into so many of them?

Unidentified Analyst

It's my brother, come on.

Brad W. Buss

He’s got more hair than you do, pal. So, yes, I think – so the thing what TJ was getting at is, we look at it from a dilution end of it. And if you look at our net dilution from like what you care about, how many shares are going to that share count end of it, we’ve been running a net dilution which is gross versus cancellations, people (inaudible) literally under 0.25% on average for the last three years. And then the stock based comp stuff if you translate into that, the biggest thing there has really been our stock until the last few months, it’s done very well, right.

I mean, so if you look at the grants we give out, they've been flat to actually down, but the stock end of it went so (inaudible). That's what really impacted the stock-based comp. And then when you did the SunPower gross up, you'd had that overhang and that amortized down over the term. So I would say the SunPower piece of it by Q4 is virtually (inaudible) and then its just standard option grants depending on wherever the stock's at.

Like for the executive end of it, those of you that voted for (inaudible) we appreciate it very much. It got a higher score than approving the auditors. So we are like 98%, but we've cut the executive grants in half, the actual grants, what you care about that could go into the share count and half from last year to this year just to put it in perspective. And Chris actually might make more money than me this year. Highly unlikely.

Christopher B. Danely – JPMorgan

That’s (inaudible). I think my two year old is going to make more than me this year from this allowance.

Brad W. Buss

That’s right. And so we're clear, my balance sheet is in very good shape. I have no hedging and I am the Chief Compliance and Risk Officer with Neil. So we will guarantee nothing will ever get biased. And TJ can’t buy anything and he can't even sign checks, so don’t worry.

Christopher B. Danely – JPMorgan

On that note, Brad, so what are the plans you guys..

Brad W. Buss

What's a couple billion? And I'm a bondholder too, so –

Christopher B. Danely – JPMorgan

Yes, I can say a joke on that, but we're being recorded, so forget it. On that note, you guys pay a very nice dividend yield, how do you see usage of cash going forward which means the dividend versus buyback versus back to et cetera.

Brad W. Buss

Sure and I appreciate the yield coming. Unfortunately I wasn’t getting to 3% the hard ways, not the way I want my yield to get up there, mind you, just to be truth in advertising. But if you look at our model 2X the industry, 58 to 60 30% operating and I'd like to take about 80% of that free cash flow.

So on average over a couple of years and give it back to all of us, whether it's dividend, whether it's repo, it'll be some combination of that. I think the dividend we have the ability to continue to increase that, the buyback end of it. We have $220 million left on the authorization. I don't have to cash. I think it would be fairly expected that we'll take on some debt and know it won’t be a convert.

We will take advantage of some of the cheap revolver rates running around as I would say is highly likely. And then taking advantage of the stock price where it's at and/or some tuck-in acquisitions whatever presents itself opportunistically, I think, we'll use that in the right manner for sure.

And then I think going forward, I would want to keep raising the dividend as it makes sense, because I think we have very strong EBITDA. I mean we are close to $280 million in EBITDA last year. We have very limited ROEs up in the 50s, part of it – the earnings part of it is we've been buying back so much stock, right. I mean (inaudible) we keep buying it back, which would be interest accounting probably.

That’s really kind of our goal and I mean I think we are a leader in that area. We returned $1.4 billion in cash versus buybacks and dividends, I think, over the last five or maybe six years, then the SunPower spin was another $2.6 billion if you are smart enough to sell it at the time of the spin.

Christopher B. Danely – JPMorgan

TJ.

Brad W. Buss

No, he kept all of his.

Christopher B. Danely – JPMorgan

How about Deca Tech. Can you just spend a couple of minutes.

Brad W. Buss

Yes and then the subs right. Most of the sub investments we're taking care about as normal cash flow from investing. They tend to be over a couple of years. We have three of them in Emerging Tech. Deca Tech is still taking money. The other two, I think, will be done taking cash probably by Q3 and they're much smaller, their cash needs weren’t as big, but they’ve been added for close to three years. So they should become self-funding, so to speak.

And then the bigger opportunity is the emerging tech right now is really a call option that you need to value separately which I don’t think enough people do. And then that $0.03 to $0.04 I'm losing in EPS, will eventually get to breakeven and I’m hoping by Q3 of next year. So there is a $0.12 earning swing, which is north of probably 10% or 12% right. If I can just get that sucker to breakeven, I’ve got earnings growth outside of the normal business and then obviously those start either contributing or get sold or (inaudible) if we didn’t see the ability to drive the incremental EPS.

Christopher B. Danely – JPMorgan

When do you think we can expect to see material revenue from Deca Tech?

Brad W. Buss

He'll start exiting this year with some decent starter revenue. This year is really about [when] – he has a huge attach rate. And he is well north of 80% on talking to guys and getting them committed. We continue to have guys interested and buying into it. Customers as well as non-customers, which is to me, is always a very good sign. We are not looking at selling off any of it. I mean we think we got a tiger there and we're going to take it through fruition.

We are shifting parts. We have touch parts that are using that technology that are shifting into phones these days. So we are kind of the guinea pig and that’s very well. I think 2013 is the big year for revenue and then hopefully an IPO down the road.

Christopher B. Danely – JPMorgan

Okay. Thanks. On that note, the Brad and Chris show is now over. Thanks everybody for coming.

Brad W. Buss

Thanks for coming and joining the conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cypress Semiconductor's Presents at JPMorgan Technology, Media and Telecom Conference (Transcript)
This Transcript
All Transcripts