Cypress Semiconductor Corporation Presents at Barclays Capital Global Technology, Media and Telecommunications Conference (Transcript)

| About: Cypress Semiconductor (CY)

Cypress Semiconductor Corporation (NASDAQ:CY)

Barclays Capital Global Technology, Media and Telecommunications Conference

May 23, 2012 9:30 am ET


Brad W. Buss - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance & Administration and Corporate Secretary


Blayne Curtis - Barclays Capital, Research Division

Blayne Curtis - Barclays Capital, Research Division

All right. We'll go ahead and get started. Thanks for joining. Welcome to the second day of Barclays' Global TMT Conference. Next presenter is Cypress Semiconductor. You all probably know Brad Buss, Chief Financial Officer. He's going to do a couple of quick slides, but most of you probably know the story, and then we'll do some Q&A, and then I'll open it up at the end. There's no breakout so ask your questions now. Thanks. Brad?

Brad W. Buss

Thanks, Blayne. Glad to be here, even though I do miss the crown a little bit. So, yes, I'm just going to go through a couple of quick things. Obviously, the obligatory Safe Harbor for, not only this preser [ph] but everything I talk about. We do a lot of cool stuff in our 10-K, so we encourage you to take a look through that.

So I tried to wrap in this one slide what I think, we feel the proposition is for the company, and it also covers a lot of the stuff that we talk to investors with. Big focus on proprietary products, our PSoCs, even a lot of our USB. I mean, north of our -- 50% of our portfolio's really programmable these days, which is incredible. Big player in mobile phones and mobility. You go back 3 years, we did nothing in cellphones, obviously a monster market driven by touch, and I'm sure we'll touch on that quite a bit, as is in most of my meetings.

PSoC, which really birthed us and allowed us to get into touchscreen business, is a massive opportunity for us. I mean, we've grown very well on that and there's a $15 billion TAM between the microcontroller, the analog and some of the logic. So even if you're a total bear on semis in the world, and that stays flat for 5 years or even goes down; if you're a monster bear, we're going to be eating into a multibillion-dollar TAM for quite a few years. I'll be retired before I think we see a full penetration there.

And then again, touch is a big focus of what we've done. It's a big chunk of our growth. But it really is only about 20% of the company. A big chunk of what we do is also in the SRAM and the USB areas, and we're leaders in both of those. We've got a consolidation going in the SRAM end of it and we have the USB 3.0 coming in the USB end of it which is really the biggest opportunity that we've seen in USB in years.

Unlike a lot of other companies, especially in our very conservative semiconductor industry, we have a division called our Emerging Tech division.

We're very opportunistic, a lot of greenfield sites. SunPower came out of that, which fortunately we spun off years ago, for those of you that are still playing the solar. So we've got a couple of neat things in there, one of them being DecaTech, and I'll -- I'm sure we'll touch on that later.

The balance sheet's in great shape. We have plenty of room to lever up. We have a very high EBITDA and free cash flow situation. And we actually have a real yield out there. We're yielding, unfortunately, due to the stock price, more than increasing, but about 3.5%. So we're up there with all the big analog players, and I say, I think we have much better growth opportunities than some of those players as well. The stock, obviously, is near at a 52-week low. Our CEOs ponied up quite a few multimillions in buying some options and holding them. And the management teams combined owns close to 10% of the company.

I won't spend a lot of time on basically our organization. That's pretty detailed in our press release and in our financial stuff. The one thing I did want to touch on was just the cross-section of end markets. We play with a lot of the big players, and as you can see in the consumer white good area, we're in with really the guys that matter. If you're not in with some of these bigger players, as a semiconductor company, it's pretty tough. And I'm pretty excited that in our top 5, we have a couple of the major guys that I think we'll continue to see strong growth. We only have one 10% customer over the last couple of quarters, a very well known company in the handset area. And other than that, we're fairly diversified between end markets as well as the customer base.

Just to give you a look at kind of the PSoC end of it, right? This is our PSoC. Most of it's really been our PSoC 1. So we've had pretty strong ramp up in over 1.2 billion in units.

I like this chart here as it shows us we've ramped up pretty rapidly as to become the #6 guy in the 8-bit microcontroller area. And this is important because this is a very fragmented market. There's north of 30 guys who play in that. And as you start thinking of touch markets and that of the analog markets, it's a very similar case. So there's great opportunity for a new company and a lot of innovation like we're driving to continue to grow in those areas.

Here's kind of giving you a view of the TAM that I mentioned on the $15 billion for the combined PSoC. So PSoC 3 and 5, which is driving a big chunk of this TAM expansion, is really a very miniscule amount of our revenue and is really growing every single quarter and I think you'll see that grow literally for the next 7 years.

Neat opportunity for us in PSoC, is also getting heavily into automotive. I think as most of you know, automotive is a huge end market in the semiconductor area and it's one historically we've been way underpenetrated. We've done really only about $25 million a year. We should be doing $150 million, $200 million a year. We now have the products to go into that market. So not only are we going after it very heavily with touchscreen design wins, we cleaned up pretty much across most auto design wins last year, but we're able to get into all of these other player -- sorry, end markets where you're seeing semiconductors play.

The adoption of PSoC 3 and 5 has been really good. You need to download the software. You need to buy a kit before I can get a design win, and we've had very good penetration, as you can see in some of those stats. And to put it into perspective, the PSoC 1, where you saw the chart zipping up to 1.2 billion units over multiple years, we're ahead of the pace where we were with PSoC one by a good 9 months.

IP, big deal. Everyone suing everybody, not only in semis but especially in the mobile space. And if you look at our PSoC family, we have north of 500 patents in that area. And as the chart shows you, it's not only just hardware, but it's software. It's the process. It's firmware. There's a lot of opportunities we have to monetize that, and I think you can expect us to see us do that going forward.

So a lot of the focus is on touch, and rightfully so. I think it's still going to be one of the fastest-growing end markets in the semiconductor space for years to come. But beyond the touch, really what we're looking at is the whole user interface experience. How we're interacting with everything in our life, our phones, our PCs, your cars, your thermostat, and soon will be your white goods, et cetera, et cetera, can happen in many different ways. So you've seen it with CapSense buttons. Now it's gone into touch. You're seeing it in Trackpad, and you're seeing it in finger nav. These are really the 4 main ways. We're the only one out there that can do all 4 of it. We're the only one that has fully programmable solutions across the slate. So that's a big deal. And we've -- at this point, we're probably over 900 different million units that have been shipped. So we have a long history in it. It's very complicated. We have a very good reputation and a tremendous amount of IP.

So it all kind of really started back there with CapSense, and that's really been button replacements. We estimate we've replaced north of 4 billion buttons that are out there. We are the leader in this area. And we've got a pretty broad base of it. We've got north of 34% market share. We're probably the last guy to get into this space, and we have the highest market share. And again, as you get all freaked out on the touch business, I mean, there's about 30 guys who play in this area, right? And just because you play, doesn't mean you win. The innovation is crucial. Beyond pricing and quality, et cetera. And there's a lot of buzz on phones on the touch end of it. A lot of the phones actually have CapSense on it. And as you can see here, we're in some of the more prominent phones out there. We may not be the touch king controller, but we are doing the CapSense in that area. And we're the only guy that can integrate a touchscreen and a CapSense button into one chip. And I think you'll see quite a few solutions going forward.

As we now flip over into touchscreen, we've got a pretty wide portfolio. We think we have the widest customer base out there. We have well north of 70 people that we're shipping into. And again, it's everything from the cellphones to tablets, to eReaders, to cars, to cameras, printers, et cetera. I mean, we can see a north of 1 billion units-1.5 billion units outside of cellphones coming into the market really over the next 3 to 5 years. So a huge and growing opportunity, especially when you look at the low end of the smartphones. There's really 1 billion units in -- I'm sorry, in cellphone, there's 1 billion cellphones that don't even have CapSense yet. So that's going to start getting penetrated. We've been leading the technology drive here on our Gen4. And again, there's a lot of talk on in-cell and on-cell which is a trend that I think we'll see coming. It's very positive for guys like us that have one of the highest signal-to-noise ratios. And like I said, I mean, I think the applications really are unlimited. I mean, we've been one of the leaders in cameras, as well, and the ASPs there tend to be as good or better than they are in the cellphones.

A quick look at SRAM. Our market share's trending up into the 40s in that area. We've got Samsung and the lifeing [ph] and we're also in a pretty big ITC lawsuit with one of our other competitors there, so from a competitive dynamic, very happy. And then USB 3.0, again a great opportunity for us. We're all using more video, more data, more bandwidth, and USB's been really crucial in that area.

And I'll just stop and pause there, Blayne, if you want to ask some questions or take it out to the audience.

Blayne Curtis - Barclays Capital, Research Division

Yes, thanks, Brad. So maybe, I know we've got to talk about touch but it's been really -- dominates the story so let's just get it out there. I mean, I think we've seen competitors kind of come and go the latest being Flab but I think more so, the concern is just on pricing and kind of what's that going to do. Can you grow touch going forward? And then what does that impact have to margin if you could just stress a little bit right there?

Brad W. Buss

Sure, yes. No, I think it's a very valid question, I think, that comes up. I think it gets to be a tad overblown, I mean, when Flab and a couple of other guys were mentioned, like they were going to come in with gangbusters 1 year-plus ago. I think we're saying that's nice, but getting one win doesn't mean you're a player, right? And I think that's a born truth. It's very complicated stuff. Our Gen4 is out in market right now. Our Gen5 will be coming out this summer. So anybody new coming in have some pretty big leaps in technology to make. It's very hard. It's very costly to do. So you need to be prepared to make a tens of millions of dollars investment over a couple of years, and again, if I was in the same boat, and there's 3 very strong competitors and a distant fourth competitor, it's pretty hard to dislodge when you've already dealt with guys that are shipping hundreds of millions of units. It's not just the pricing. Its quality, it's IP, it's the ability to manage and implement the solutions with the end customers that really count. And then if you look at the ASP part of it, any time you introduce a new chip in the semi world, there's a pricing curve. You always start high, you shake the bugs out, volume comes, and the price goes down. Where we're at in ASPs and touch really are not that far off from where we expected to be, 3-plus years ago, number one. And I think, number two, if you looked at the multi-chip that was in the tablets, everyone in the industry said that would go to a single chip, so that ASP movement is not again was not a surprise by any stretch. And I would say really that the ASP movements are really consistent with the curve more than it is through alleged competition coming in. One guy comes in, he wants to offer a lower price to get in. Great, he can get in. That doesn't mean that the whole industry goes to the lowest common denominator. So I think it's overblown. I think the vast majority of the pricing is behind us. And now as you move more into in-cell and on-cell and more feature-rich solutions, whether it's waterproofing, it's Hover, stylus, et cetera, you have the ability to maintain or potentially grow, I think, the ASPs long-term. And you're going to have different segments, right? The low end, the billion of cellphones that don't have touch, the ASPs will be much lower than a smartphone, and maybe the blended ASP can move down, but the key thing, as you mentioned, is growth in dollars and margin. And the margins continue to remain very strong and we've been seeing our ability to cost down be as good or better than the standard price erosion that we expect.

Blayne Curtis - Barclays Capital, Research Division

And then you also said some one-time issues with tablets kind of had your...

Brad W. Buss

That was funny.

Blayne Curtis - Barclays Capital, Research Division

The tablet experiment, but that's behind you. March was the low point. You actually had very strong guidance into June. And if you talk about, is this just a recovery or are you, your Gen4, I think T.J. qualified it as a little delayed. Is that -- how is that going to play out? Is the growth just recovery or you're actually seeing some share gains with Gen4? And I think the other kind of concern on your company is that your low end, and that's where competition is, kind of maybe of talk about the success of getting more high-end phones?

Brad W. Buss

A lot of questions in there. So I think as far as the slope, right? I mean, the Q1 impact, were 100% due to end customer issues, right? I mean, the 2 tablet guys, the one North American carrier that's been in the news fairly frequently, a... And it wasn't a ASP issue. It wasn't a share loss issue. I mean, if anything, to your point on positioning, we see a wider broadening of our customer reach. We're going in with a couple of big customers that we hadn't done butt kiss with last year. That'll be no sources of growth and we're continuing to add an existing including the high end, as you mentioned, with our current customer bases, part of it is due to Gen4, part of it is due to the roadmap. I think we are definitely the technology leader and the customers are seeing that out there for sure. So I think you'll see us play in each end of it. Whether it's tablets, eReaders, the high end of the phones, the midrange and the low end. Our chips allow us and we have solutions across-the-board. One last question on touch.

Blayne Curtis - Barclays Capital, Research Division

Yes, as obviously, the initial Android tablets weren't successful, you have a new wave of large screen, maybe too, Windows 8 tablet. I think maybe the more interesting form factors convertible ultrabook, and if you talk about your positioning there? I mean, I'm fairly bearish as far as the opportunities this year, there seems more next year. How does that align with your timing of your products, and you weren't part of the initial group of -- as part of the certification but how do you stand -- picture in that large screen?

Brad W. Buss

I mean, I would agree with your assessment. I think the Win 8 end of it, we're very optimistic on. We think it's going to be very good whether it's an ultrabook or a tablet, or whatever the heck everyone's calling them. From our end of it, it's all incremental. I mean, our tablet revenue in Q1 was south of $1 million. And we do very limited content in notebooks right now, but between touchscreens for these devices and more importantly, the multi-touch trackpads and clickpads, we have moved into that area very heavily. Were getting very strong design momentum. So there is a $2 to $4 ASP opportunity depending on the solution in each one of those units. So we see again a couple hundred million unit opportunity. That basically is very small right now. So whether it's this year or next year, the trend is real. I think it is all going to happen and that's another area of a leg up in growth. That's why I'm very optimistic on touch growing over the next couple of years. And then specifically, on our timing, we chose to go bring out Gen4 and do a single-chip tablet solution for Gen4. So instead of certifying on old technology like our competitors did, we wanted to have the best solution out there, which we do. And we certified on that and we are certified and we'll see design wins and probably production this year as well but we tend to agree with you that the vast majority of the form factors will be next year. You'll work the bugs out on sizes. And then pricing, we still think will be a challenge for that space until they get some volume and some lower cost components.

Blayne Curtis - Barclays Capital, Research Division

Maybe one more question, and then I'll open it up. Just that -- there is another 80% of your business, maybe you could talk about. The -- just the general business environment. You actually you seem pretty -- felt pretty good about things, obviously, SRAM is leveraged a lot to the common market which has been slow. What are the real drivers when you look out to the rest of the year? Is it just recovery? Do you see some products that goes, you've mentioned USB 3.0, kind of where should we focus for the other 80?

Brad W. Buss

Yes, it's great, and it's -- and you're bang on. I mean, it's 80% of the business and a good chunk of the profits and I think as we sit here, we're probably in the best new product cycle that we've had, again, like I mentioned, that consolidation competitively in SRAM is a big deal. USB, the trackpads, all the PSoC. And even the Emerging Tech has started to give a little bit of revenue. I think we've got, not just a one product cycle story that you have to be worried about or concerned on. We had a tough Q1 but we had a very strong book-to-bill. Every division was north of 1.15. The touch stuff was close to 1.8, which is obviously very big. Yes, we have a decent comm exposure. I mean, handsets and comm are probably our 2 bigger end markets in the 20%-25% range, kind of a piece. The good thing is we're pretty much #1 or #2 with most of the bigger comm guys, so whoever is winning and losing, we tend to do okay. But yes, we'll ebb and flow, I think like the rest of the industry in comm. We expect the second half to be much better than the first half. Part of it is, obviously, an expectation on carrier spending, what we're hearing from them. We need to think, look at that and temper that with the macro but also share gains with some of the competitive dynamics that are going on. So we feel fairly optimistic there, and obviously, we're, like everyone else, trying to figure out each day where the macro is going in Europe. We saw some slowness in China, through our distributors, what's very similar to other people, that seems to be getting better. And as I sit here right now, I feel pretty comfortable how we're guiding and where we are looking, but you've got a lot to go through so, God, bless the euro.

Unknown Analyst

The Gen4 product that you're coming out with for tablets, which screen size does that support?

Brad W. Buss

Well, we can support any screen size up to about 13 inches in a single-chip solution. But they really just depend on the end customer. If you're doing a 7-inch eReader, you could potentially use a Gen4 chip for cellphones. You do something bigger, you may want a Gen4 tablet chip. And then we have a Gen4 XL, [ph] we call it, to go up to a bigger screen size.

Unknown Analyst

Can you talk a little bit about the Emerging Technologies, the Deca, and also you mentioned, I think in a meeting I had a few months ago about the battery technology.

Brad W. Buss

So here's the thing on Deca. Deca is kind of our move into electronic interconnect, and the first focus there is really on wafer level chip scale packaging. So that's the big deal for the industry. It's one of the fastest growing, and it's very focused on mobility, right? Everything is wanting to go mobile, everything is wanting to go smaller and sleeker and cooler. That's very important and more is [indiscernible] on the silicon, but it really hasn't existed in the packaging end of it. So basically, we're bringing silicon-based solutions using some of the solar packaging and process technology that we had to go drive into this market. He's doing very well. If you can see, the customers up there, and I apologize if the font looks a little weird, but it's kind of a who's who of big semiconductor guys out there and he has an extremely high hit ratio of interest across these companies. We've actually even had companies that have asked to buy in to the company from an equity perspective as well as via customer. So we have very high hopes for him and they're continuing to execute very well. We are actually shipping product into the touchscreen market using that technology and it's had very good reviews from our customer base. And he's adding new customers literally every quarter. It's a very long qualification cycle. But if you think about it, he's almost like another TSMC type of person that needs to get qualified by the company and then by the company's end customers. But we're very optimistic in where that's going to go and I think from a -- as we call our Emerging Tech business it's really like an embedded call option. Most of you don't value it, and it actually drags down our results if you look at our consolidated results. So for instance, my gross margins in the core business, where 99% of my questions were actually 1.5% point higher in Q1, because of this Emerging Tech division, that's because it's small and it's growing, dragged it down, so I really encourage you to look at this piece of the business. Because I think, Deca hits its stride, there's no reason it's not a $0.5 billion, $1 billion valuation company on its own, and I think there's a high probability that they'd potentially get sold their IPOs out over the next couple of years. That would be our goal at least at this point in time. I think it could be $0.5 billion to $1 billion, again, over the next couple of years as we expand, bringing us revenue out and people start to understand the reality of it. Well, it's not really -- because it's one of those where -- it's still embryonic. I mean, we're very excited on it. Obviously, we wouldn’t have made the commitment -- we've spent a good year doing due diligence with this company. It's pretty exciting I'm very involved. T.J. is extremely involved. And it's really more focused on portable electronics. Again, a very similar theme to our mobility, right? One of the other biggest issues, much like this packaging is battery life and everything. And those of you that have gone to 4G, right? Good luck, making a day, right? And if you want to stay sleek and thin and cool and have utility out of it, there needs to be innovation there. So we're looking to bring a lot of our process technology, R&D and manufacturing capabilities and -- with this company, and bringing their product to fruition, getting through a private line and then ramping it to manufacturing but that's really a kind of 2013 event. We'll use this year to get through some pretty big technical milestones and manufacturing and then we'll probably start talking more on that. But again, to your point, if you've got to focus more than a quarter, that's something that I think again over the next 2 to 3 years, we'll start adding some option value into the company as well. Hence, the reason we have no problems buying stock back at this range because we're looking a little more further out than a quarter or 2.

Blayne Curtis - Barclays Capital, Research Division

We're actually out of time, Brad. Closure, as always?

Brad W. Buss

Thank you. Thanks for having us. Good Luck. [Greek] That's for all my Greek friends.

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