Cypress Semiconductor Corporation (CY) CEO Hassane El-Khoury on 2019 Analyst Day Conference (Transcript)

About: Cypress Semiconductor Corporation (CY)
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Cypress Semiconductor Corporation (NASDAQ:CY) 2019 Analyst Day Conference Call March 13, 2019 12:00 PM ET

Company Participants

Colin Born - Vice President of Corporate Development and Investor Relations

Hassane El-Khoury - President and Chief Executive Officer

Sudhir Gopalswamy - Executive Vice President of the Microcontroller and Connectivity Division

Mike Hogan - Senior Vice President of IoT Compute and Wireless

Thad Trent - Chief Financial Officer

Conference Call Participants

Karl Ackerman - Cowen

Tony Stoss - Craig Hallum

Suji Desilva - ROTH Capital

Charlie Anderson - Dougherty & Company

Craig Hettenbach - Morgan Stanley

John Pitzer - Credit Suisse

Harlan Sur - JP Morgan

Harsh Kumar - Piper Jaffray

Colin Born

Good morning. My name is Colin Born, Vice President of Corporate Development and Investor Relations. Thank you for joining us for Cypress Semiconductor’s 2019 Analyst Day. Our leadership team is here today along with an immersive demo area highlighting many of the technologies we enable with our Connect & Compute Solution for life at work, life on the go, and life at home.

Before we get started, I’ve got a few things our legal folks asked me to cover. During this presentation management will make statements about our strategic and operational plans, our long-term financial target model, and other future matters that should be considered forward-looking. Actual results might differ materially from the results anticipated in our forward-looking statements.

Please refer to the risk factors in our most recent Form 10-K filed with the SEC and our other SEC filings for a more detailed discussion of risks and uncertainties that could cause these differences. All forward-looking statements are based on the information available to us as of today, March 13, 2019 and individuals are cautioned not to place undue reliance on our forward-looking statements.

We undertake no obligation to update these statements. Please note, that the financial measures to be discussed by management today are non-GAAP measures, unless they are specifically identified as GAAP. Reconciliations of non-GAAP measures to their most comparable GAAP measures and certain limitations of non-GAAP financial measures are all included and described in the appendix of today’s slide deck which will be posted on the events and presentations page of our Investor Relations website at

Our agenda today will start with Hassane El-Khoury, President and CEO who will provide an overview and update of Cypress 3.0; followed by Sudhir Gopalswamy, our EVP of the Microcontroller and Connectivity Division who will take a deep dive into our automotive business; and then Mike Hogan, our SVP of IoT Compute and Wireless who will share some of the exciting things happening in our IoT business. Finally, Thad Trent our CFO will provide a financial overview.

Following the presentations, we will then take your questions. Today’s presentations as well as some supplemental materials will be posted on our investor relations website by the end of today’s event. Upon completion of the QA, the webcast will end and our onsite participants are free to explore our interactive Connect & Compute demos until noon. Let’s go.

[Video Presentation]

Hassane El-Khoury

There is a go of the same event, talking about the foundation of what turned out to Cypress 3.0 the results we have delivered over the last two years, but more importantly the momentum we have built. We’re talking about long-term. We focus on auto. We’re not in it for quarter-after-quarter, you will see the momentum building up with the foundation we have built and what the next five years are going to look like.

We’ve done our earnings call just a few years ago. Nothing has changed in our outlook. Nothing has changed in, you know we all talk about what the environment is, each one of us will describe it with different words. It is what it is, however what today is, all about what is the foundation? What is the structural changes that we have made and we have delivered over the last two years going to do for us and propel us moving forward with the word momentum? Which is we’re getting started.

Two years ago, again, we talked about what would the future hold and we made a – I’d say a picture, a pictorial of a ‘why not’ scenario. Fast forward to where we are today, and the future is here. Two years ago, we predicted it, two years ago we started making products and here I am today holding the future in our hand. So, when I say this is a start, this is what Cypress is enabling.

We enable technologies today that will drive the future. You will see it all around here and you will see it in our customer testimonials as well. But what causes all of that? Of course, you have to have competitive products, my team will talk about those. Of course, we have to have execution, we will talk about that, but there’s a very important aspect that I want to make sure does not get diluted in a lot of the data and a lot of the technology we have today and that aspect is very important in Cypress 3.0 and who we are, what I stand for, and what the management team stands for, which is the people and the diverse work force that we do have.

So, when I talk about the foundation, it’s starting with the foundation of what did we have to do, what have we done, who are we, because that confidence and that execution is going to give confidence and credibility in what we are going to do next. We are a diverse team. We are a global team. I want to talk about the things that maybe are not in the headlines, but are very necessary and foundational to any company in today’s world to thrive and to be honest with you, you will see a lot of competitive views on the technology side.

What I want to describe is the competitive view I see from the inside looking up. We talk about employee engagement, we have an engaged workforce, we are 2x where the benchmark would be for employee engagement, but I’m not only talking about engagement within the company, I’m talking engagement with the environment we are in, the engagement with the society we are in. Starting from San Jose here with the second harvest food bank and it is contagious.

Many of our world-wide sites have adopted similar causes that they care for with their identity and have pushed it, causing our brand awareness to go 2x since 2017. I’m not looking for who’s got the highest thumps up and how many likes we have. Brand awareness why it’s important it drives future purchasing consideration, which has also increased over the last few years since we started embarking on Cypress 3.0.

The awareness drives customers, customers drive purchasing, purchasing [drives growth]. That’s a foundation that is a competitive advantage, and of course, I love our customers, I spent over 50%, 60% of my time with customers. We haven’t filled a customer focused culture, customer experience, I’ll give you a little bit of the extent of it. We have nine listening posts across the world at every point of our customer journey.

We understand how customers buy, we understand how customer dislike an experience and we work on them. We listen in over 150 countries, we have over 30,000 customers, then the question is how do you get 20,000 pieces of feedback and can act on it? That drives where the innovation goes in. Innovation beyond R&D, innovation beyond just the product, innovation about how we work, innovation is how we manufacture and innovation about how we do our customer experience.

We have implemented artificial intelligence, machine learning, synthesizing data. We are in a generation of data. However, data is meaningless if not synthesized and not acted upon. We do collect data from sales to manufacturing to customer experience. We have AI engines that do the analytics and guide our teams worldwide to meet our corporate objectives.

And very important with all of this is the effort on diversity and inclusion from the affinity groups to all the way back to new college grads hiring. How do we instill that in our management training all the way up? Big focus from the management team, and more importantly, big support from the Board for us to achieve that mission moving forward.

Those are what you see is the foundation of all the results we have done, and more importantly, that’s what’s going to keep those results for us moving forward. A lot of people might say, they are soft, but they are important, and they are critical for a competitive environment we are in and for us to maintain our competitiveness.

With that foundation, how do we tackle the markets? We talked about two years ago 7% to 9%. This same day, in 2017, my commitment was 7% to 9% growth; we did 13%. Gross margin, we talked about exiting the year 47.9%, and I do remember a lot of people in the room, a lot of people on the road did not think this was achievable. We've achieved it, and we’ve achieved it and we're maintaining it.

I talked about three markets we're focusing on; automotive, consumer and industrial. 8% to 12% in auto, we achieved 14%; 10% to 15% in consumer, we achieved 13%. And I will remind you, in the consumer, we included all that conversion from the commodity plays in consumer into the differentiated consumer to smart home that you see here today, and we still grew 13%.

From the industrial side, 3% to 5%; slow-moving; we achieved 1%, but I talk about momentum, the exit velocity where we exited 2018 for 11%. That's what matters when you're focusing on a long-term trajectory is what is the velocity, what is the momentum, what is the design and funnel going to contribute for you in the future. That’s our scorecard. This is what I committed, this is what my team agreed we will be judged on, and we have executed.

With that execution and the momentum that’s what we will be moving forward with. You hear me talk a lot about focus. We’re focusing in market that matter, and we are focusing on winning. We focus on Connect, we focus on Compute. You’ll get more color in Sudhir and Mike’s pitch of how these apply to our market, but we play to win. We play to get a leadership position, we don't dabble.

We will achieve Number 1, and we have achieved Number 1 in those fast-growing markets that matter. And matter means a lot of things for a lot of people. When I talk about matter, it has to fit our objective of growth, but more importantly, it has to fit our objective of margin expansion, and you’ve seen us do that as well.

We’ve improved our quality of earnings. If you look historically and where Cypress 3.0 started, we have quality of earnings, but I would want to highlight a very important thing. They are structural. Yes, we came off of great times, but the changes we have made are structural. The changes we have made are not a one-year or one-quarter change, they are changes that will keep the company, keep the foundation solid in order to move forward.

We’ve restructured the company to focus on the markets that matter for us. We’ve doubled down on Connect & Compute. You’ll get a preview of that. We exited a lot of the memory business that we talked about being commoditized and focused that business on automotive, and the proof, the last few quarters when the market turned, we grew. That’s what I mean by momentum.

Is this connecting from the cyclicality of one or two or three technologies or markets, go broad, go focus, and go deep, and go to win, and we’ve done that with the auto and high density. We’ve focused; we’ve killed a lot of projects that are not core; we refocused our investments; we’ve divested a fab; we’ve expanded and diversified our Board, which helps us achieve that mission and maintain that momentum moving forward; and we focused on our brand because as I sit here today, two years after we launched Cypress 3.0, we are a different company whether you look at it from the culture, from the people, from the technology or from the execution and the results that we have delivered.

We’re focusing investments in two areas, two areas that you hear us talk about. Automotive with all of the megatrends that are driving the automotive starting from ADAS to the human machine interfaces, and we’re working on connecting everything and everywhere, and you see that today here in the room, you see it in the demos, in fact you can see it at home.

There is a very high probability i.e. Cypress market share that anything connected in your house is Cypress powered. That’s a very probability based on what you will see in the demos today and what you’ll hear from the team. Those are our focus and our push where the movement is. We spend a lot of time clearing out the weeds to the focus that we are moving forward with, and the focus is automotive and IoT.

We’re driving the high-growth markets with the right technology. So, what does that mean now for us as a company, for me, and the team, and the global workforce? How we look at it moving forward? We’re still reporting two segments; nothing is going to change for that. But for the clarity of the strategy, the clarity of capital allocation, and the focus on IoT and auto, you’ve seen over the last [three] years tremendous growth, tremendous execution, tremendous restructuring, and a solid foundation.

We have the legacy business that has declined with all of that during that period by about 3%. That’s the legacy that we will take it for what it is. It will fund growth, it does fund the growth. Layer on top of that the automotive business from microcontroller to wired and wireless to storage and touch. That grew 14%.

The next segment, the IoT segment, which includes the microcontrollers, wireless, wired and layer on top of that the software, which Thad will talk about as far as differentiation and where we are heading as far as investment and software, specifically in Mike’s section of the IoT. With these, based on the last [three] years at where we are, how does the outlook look like?

We will maintain the growth and the IoT and the automotive business off of a solid foundation we have established. We still expect the legacy to decline 2% to 4%, and more importantly, we will maintain the momentum that drove us over the last three years into the 7% to 9% growth, which is exceeding our industry growth, and that’s by taking share, but more importantly, participating in new content created in the new trends or the megatrends that we are doing.

So, we will be growing faster, focus on IoT with the high-growth segments with the Compute & Connect, maintain our market, and maintain our leadership with automotive with more and more content gain. And forward-looking, 85% of our revenue will be generated and coming from these double-digit, high-growth markets that everybody is dying to get into. The difference for us is, we have a very wide food print already and we will expand that footprint as we do.

[Video Presentation]

Sudhir Gopalswamy

Good morning. My name is Sudhir Gopalswamy, and I’m responsible for Microcontroller & Connectivity Division at Cypress, and I’m super excited to be here because I have the privilege of explaining how we're going to with Cypress' automotive solutions drive that stable, predictable, and profitable revenue growth over the next several years.

Now, the videos from Matt Cole and Mike Winkler provides you some insight as to why we’re successful in the marketplace. And Hassane talked about the fact that we have grown by 14% average over the past couple of years and I’ll show that that’s 2x the semiconductor industry and automotive. When we look at why we're driving that kind of growth and why we're winning, I want to start by establishing relevance to looking at the industry context. And specifically, I want to explain how the solutions that we provide in Connect & Compute underpin the megatrends that are transforming the automotive industry.

Now these megatrends are universally accepted, so I won't go through them in detail, but I will explain them briefly. The first one is electrification. We all understand that the internal combustion engines are transitioning to electric, be that in hybrid vehicles, plug-in hybrids or battery-operated electric vehicles. So that’s obviously one of the key megatrends going on in the automotive industry.

The next one is connectivity, and this too is universally accepted, but maybe not as well understood. When we think about connectivity, we think about it at multiple levels and each of those levels create in connection the totally connected car. So, at the very basic level, we’re talking here about subsystems in cars, electronic control units or ECU's getting increasingly interconnected.

So, just this subsystems’ cars connecting to one another, and the more obvious example that you’re all familiar with is users connecting to services using wireless technologies like Bluetooth or Wi-Fi. So, that is the second dimension of it. The third one is something that if you saw the Manticore video at the beginning you will appreciate, which is the consumers are connecting to the vehicles in new ways enabled by new user interface technologies.

And then finally, the one that’s going to emerge over time is cars connecting to one another and to the infrastructure using wireless technologies, but it’s really all of these layers of connectivity that are captured within that megatrend. And the final one is well understood also, and that is the drive towards autonomy progressing through the various levels from level 1 through level 5.

Now, each of these megatrends are individually impactful for the automotive industry, but collectively, the confluence of those megatrends is really transformative both in terms of the architecture inside the vehicle and in terms of the in-car experience. So, if we look at those implications one by one, the first and fairly obvious one is that the systems that as I said, are now getting increasingly interconnected are also going to grow in intelligence.

So, we know this empirically from all other segments. The more connected the subsystems get, the more intelligent they become. So, consider here an example where your ADAS system might detect the presence of a pedestrian on the road. Well, what you need to do is to relate that information to the driver and in one mechanism you might actually render the image of the pedestrian and that – pedestrian's location in a heads-up display.

So, think about the connectivity of that had to happen and the latent fee that has to be achieved for that to happen. So, just one example. Now, also evident in the Manticore solution and in the video that you saw earlier is the evolution of the human interface. So, here we’re seeing the transition from mechanical type of interfaces to electronic ones in a distributed way throughout the vehicle through not just the infotainment and your touch screen, but the mechanism through which you gain access to the car, through which you access all of the functions of that vehicle is transitioning from mechanical to electronic.

And third one, and this was driven mostly by autonomous vehicles is that there is a proliferation of sensors in the car. We see that empirically and of course each of these sensors is generating data and collectively that data requires a substantial amount of bandwidth, both in the car and then ultimately to get that data back into the cloud. So, all of these drive-in need for more bandwidth. And, with all of this interconnectivity and all of this complexity, the safety and security requirements actually go up and so the bar for vendors providing solutions with respect to safety and security also is higher.

And then from the experience perspective bandwidth obvious, especially as you advance through the levels of autonomous vehicles is the in-car experience looks very similar to the experience that we have either in the home from an entertainment perspective or in the office from the productivity perspective.

So, this is an evolution that’s happening and that’s an important point to realize that these megatrends, a lot of energy is spent in the industry focusing on the end state, on fully autonomous vehicles, on the completely connected car. And that’s a bit of a state mistake because the reality is that opportunities exist in the journey in the progression.

So, let’s talk a little bit about what that progression looks like starting with autonomous vehicles. And here what we’re going to show you is the OEMs plans for deploying tournament vehicles over the next several years. So, if you look at the starting point today, actually as early as 2017, most of the leading OEMs had already achieved level 2 autonomy in the subset of their vehicles.

So, that’s really the starting point as of 2017. And if you project what happened last year, you look at Audi with their traffic jam pilot in Europe reaching level III automation. So, upping the bar with respect to automation, getting to level III, and Waymo giving them credit for their program at the end of the year, so they launched in December 2018, essentially a taxi service in Arizona to a limited set of riders, but demonstrating that Level 4 is actually possible within a small environment.

Now, if you look at the announcements from GM, the GM as publicly as recently as January reaffirmed their commitment to get to level IV, rider type of service this year at the end of this year, and Tesla is a little bit difficult to predict. So, you have to do some divining of tweets and so forth, but our protection here is that at a minimum they get to level III in 2018. And from here, you see each of the OEMs and their plans kind of getting to level III in over the next several years. And the reality is the opportunity for silicon vendors like us is huge and through this progression even up to level 3.

So, to a first order, it sort of doesn't matter when you get to level 5 because the opportunity for growth this now. Now, as with the autonomy, connectivity is going through its similar evolution and here we talk about the used cases starting with wireless used cases. So, everyone is familiar with being able to use their hands-free calling in cars today, that’s well established. And what we’ve talked about now is that Wi-Fi is increasingly getting established as a means of streaming video through cars.

So, we anticipate that 25% of vehicles will have Wi-Fi capability and that number will grow to about 50% in the 2 to 3-year period. So, Wi-Fi is now getting established in cars for not just video streaming, but also the mirroring of your phone devices wirelessly using services like Apple CarPlay. And that are emerging used cases that we are working on with our customers and with the OEMs for wireless technology.

For example, using your phone as a means of gaining access to the car leveraging Bluetooth [with] energy technology, and using the Wi-Fi capability for telematics. So, you already see this with Tesla today. There exists the ability to remotely update the software over Wi-Fi that can be user initiated today that exists today in the Tesla and will grow in adoption over the next several years. And then finally, at the end of this, cellular technologies or wireless Wi-Fi technology is being used for car to car communications or car to infrastructure communications.

So, here to, the opportunity grows as we progress through the levels and through this revolution of connectivity. And as leaders of USB and USB-C, we see a similar kind of progression with respect to the technology adopted in cars. So, today, we already are beginning to work with our customers on solutions that allow you to implement USB-C type phone mirroring and to charge devices delivering up to even 100 watts over that USB-C connections.

So, if you think about that, you have the ability to charge even sort of the gaming PCs, your very, very high-end PCs with the power delivery that’s possible in your vehicles today. And over time, we see the same kind of progression with rear seat entertainment being delivered either wirelessly or over a wired USB connection. And here-to, there are opportunities for us along the way.

So, if you think about this revolution and think again about the mega trends and the implications that we’ve talked about, it becomes very, very clear what Cypress’ roll is. The Connect & Compute solutions that we provide are really underpinning the growth in this segment. So, our connectivity solutions come in the form of both Wi-Fi for Bluetooth combinations or in the form of USB and USB-C solutions, and on the computer side, we provide the MCU’s that for example are the brains of the instrument cluster or distributed body electronics platforms, and we provide as well the mechanism for delivering those new innovative human machine interfaces.

And finally, our storage options are really the basis for all of the ADAS systems that are out there today and will be over the next several years. It is reasonable to say that you don't do ADAS without Cypress. So, each of these connect and compute solutions really provides the foundation for each of these megatrends and for the evolution, that’s the relevance, that’s our role with respect to the industry.

So, now what I’d like to do is to talk about how these solutions provide us sustainable competitive advantage, now and over the next several years. And at the highest level, you can think about the sources of competitive advantage being first incumbent leadership. We’re not only incumbent, we have a 30-year track record in the automotive industry, but we’re leaders in the segments that we address. More than that, we’re investing. We’re investing in market leading platform solutions that will pave the way for additional growth for extended leadership over the next five years.

And, I’d like to spend some time talking about this notion of platform solutions because what you heard from that call is that the industry requires are scalable platform solutions. Scalability is tremendously important. So, I’d like to motivate why that’s the case. So, if you look at it, really every segment of the value chain is moving towards scalable platform solutions. So, here is an example from Toyota. This is a well-established and successful implementation of a scalable platform solution at the car OEM level.

They introduced a solution called Toyota New Global Architecture, TNGA and really this is a common architecture that expands a broad range of Toyota vehicles. Now, why are they doing this? Because commonality enables them to reuse R&D and actually makes them much more nimble and much more agile. Meaning that if a change is required, they can propagate that change instantaneously throughout all of their product lines. Now, if you think about it from just the R&D advantage and the R&D benefit, think about the following. So, high-end luxury cars, the number of commonly used is that those cars have about 100 million lines of code, that’s an amazing figure. 100 million lines of code. So, it’s reasonable to think of a car with its distributed electronic control units is kind of being a distributed Compute environment and that level of complexity with 100 million lines of code.

So, imagine then if you had to take 100 million lines of code and make modifications for each unit, absolute not scalable, you need to have a common platform with common software across that array of platform, and the other thing you need to do is to leverage that R&D across generations. So, you need to bring to the next generation as much of that software as you possibly can and focus only on those innovative changes that provide value in the next generation. And it’s not just Toyota, we can show you every OEM out there doing this. GM is another example.

They have a platform called Global B, which expands all of the electronic control units in cars and Cypress is figuring heavily and prominently in the Global B platform as well. So, the OEMs are moving to the scalable platform solutions and obviously the tier 1 suppliers. The suppliers like Visteon and like DENSO and Continental and others have to respond by creating scalable platforms of their own. And that’s precisely what they’re doing. Matt Cole talked about scalability in terms of delivering a full range of solutions that vary in terms of screen sizes and resolutions.

If you look at Body Electronic platforms, there is also a need for scalability, but here it’s different. Unlike cluster, which is sales content, you have a range of cluster solutions. With Body, you have a number of – Body Electronics you have a number of different platforms throughout the car, and what you need to have is scalability and continuation of software across those platforms, ranging from electronics modules that’s inside the door to control the doors to – climate control or HVAC systems, body control modules, and over time evolving to gateways that exist in the cars, and you can think about these as being little network, routers and switches inside the cars.

So, this is the way that the tier 1 suppliers are responding to that need for scalability and ultimately Cypress as well is responding and this is the source of competitive advantage for us. Now, our scalable platform solution starts with silicon. We have a range of silicon, it’s not sufficient to have a single silicon solution on a per platform or per electronic control unit ECU basis. You have to have a range of silicon, and we have that in every solution that we offer, a range of silicon.

Now, that silicon solution has to be – auto quality has to be robust, and has to be a best-in-class. These guys, the OEMs are the tier 1 suppliers, if they are investing in a solution that expands their platform and has their last multiple years, only the best suffices for them, and it has to meet auto quality standards. In the software that we provide, as we said, has to enable them to reuse the investment not just across the platform, but over generations as well.

They have to be able to reuse that software investment across generations. And the other point that I would make is, their level of investment that goes into each of these platforms that we make into each of these platforms’ ranges depending on the complexity of the solution from $60 million, all the way up to $100 million. So that’s the price of entry, if you want to get into an automotive solution.

And then finally, you have to have a proven track record. OEMs are not going to bet the entirety of the product line on a provider that is [indiscernible] lately. You have to have an established track record of delivering high-quality robust solutions. That’s essential to win. And because we have all of those things. We do have a defensible competitive advantage going forward.

So, we’d leverage our leadership position, we invest in these platforms solutions and in doing that extend the leadership position and this translates into growth drivers for our business. And so, I’d like to talk about five growth drivers that we have in our business that are fueling the growth that’s stable, predictable, profitable growth. And I’ll start by talking about MCUs. And I’ll actually – let me just calibrate first on describing the array of solutions.

So, those five solutions stand connect both in the form of wireless connectivity and USB connectivity, and contribute Compute here in the form of MCUs and human machine interface solutions and in storage solutions as we’ve talked about before. So, let me actually start by talking about the Compute Solutions. And I’ll start with a strong points for Cypress, which is instrument clusters.

So, instrument clusters is a market in which we have 37% share, a Number 1 position today, very, very hard earned through investment over many, many years as I talked about, 30 years of microcontroller solutions that we’ve delivered. And what we're doing now is introducing a next generation platform and that next generation platform is called Traveo II, and Traveo II has all of the attributes that I just described as being required in a scalable platform solution to meet the next generation requirements that represents an evolution of those megatrends.

Specifically, we have scalability in the form of software, in the form of compute, in the form of memory, peripherals, and I/O, scalability throughout the platform. You can think about the blue boxes as being the best examples of where that scalability is delivered, a range of solutions in each of the blue boxes.

Secondly, we have the security and functional safety that we described is so essential to next generation solutions, be they cluster or Body Electronics. And then finally, some specific things to cluster. So, we have to have graphics. Matt Cole talked about the need to get up to high definition display and up to 3D graphics. You need to have high performance graphics.

We have a very, very innovative graphics solution in Traveo II that delivers high quality graphics, while substantially reducing the bond cost of those instrument clusters and that’s a material advantage. And you don't have to just take my word for it, you can just look at the design traction that we’re having in the customer base. So, these numbers here, the 395 opportunities and $1 billion, isn’t exclusively Traveo II, that’s really all of our cluster opportunities, but it’s increasingly weighted towards Traveo II.

And if you think about this in terms of the revenue growth, you can see how Traveo II will grow over the next several years to become a material part of our automotive business here, and this is important not just from a growth perspective, but it's also important from a margin perspective because Traveo II, in delivering these next generation capabilities that address the next generation requirements, is substantially higher margin than our legacy devices, substantially so. So, while we ramp this Traveo II product line in cluster, we will also increase our margins in the automotive business.

The other thing that we can do with this major investment is extend this Traveo II to establish a leadership position in connected next-generation body electronics. Here, we have a relatively more modest market share and position today, but what we’re able to do is to take that same Traveo II solution that you saw, so the block diagram that you see here is the same, except for the removal of graphics, and with incremental investment provide a leading body electronics platform that needs that full range of requirements that we talked about earlier.

Two years ago, we announced that we’re working with Continental. The Continental had selected Traveo II for their next generation body electronics platform, and that's particularly important because Continental is the Number 1 provider of body electronics solutions in the automotive industry today. And it doesn’t stop Continental. The traction here grows, and we have now in our final 347 opportunities that collectively are size of $1.7 billion of lifetime value.

Again, not all of this is Traveo II, but Traveo II is representing an increasing proportion of this business. And here you can see that Traveo II body over the next five years will become a much more substantial percentage of our overall revenue within the body electronics segment. And here too, it represents not just revenue growth, but also a margin improvement and expansion.

So, let's move from MCUs, clusters and body electronics into HMI. So, this is the Manticore video that you started – that you saw at the beginning of the session today and this Manticore video illustrated [Audio Gap] has become part of the human interface experience. Remember, we’re not talking about your traditional cluster where you’re looking at a mechanical steam gauge. In fact, in electrical vehicles you don't even look at RPM, right?

So, now what we’re talking about is the cluster that’s configurable and personalized to the user and optimized based on the user and the specific conditions that the user is experiencing, completely different class of cluster and we’re leading in this regard. But it’s not just that we’re establishing the vision for the industry, we’re actually working with the Tier 1 suppliers and the OEMs on delivering a range of solutions that actually realize this future.

So, all of the examples that we show here are active projects that we’re working on with our Tier 1 suppliers that essentially allow you to distribute HMI Solutions throughout the vehicle that are much more intuitive, much more adaptive, and improve the driver experience substantially. And in doing these things we're going to defend and grow our leadership position, which is currently measured at 46% market share. And here is the semiconductor opportunity that we see in terms of growth ranges from about $12 a vehicle in 2018 to $31 a vehicle in 2023, substantial growth in terms of our addressable opportunity.

Now, as with HMI, and in fact even with the MCUs, we see tremendous growth opportunities in storage. Here we have an overwhelming advantage. We provide fail-safe, high-performance storage solutions and – in a way that has earned us a 68% market share for these type of solutions in cars today.

Now that market share number is even higher when you look specifically at ADAS. You can see here that we’re qualified in 100% of ADAS platform and work with every one of the ADAS processors. So, again, you don't do ADAS without Cypress. And what's happening over time is, this proliferation of systems that you see in cars, all need to be instantaneously booted. I mean think about the most obvious example of when you start your car, you need that rearview camera to be running right away so that you get access that as you’re reversing out of your garage or out of your parking spot.

These things need to be instantaneously turned on, and they have to meet the safety requirements, they have to meet the reliability requirements that are so important within the automotive sector and we do that. We do that today and we do that even better with our next generation solution, which is called Semper. And where we’re going in the next generation is very, very interesting.

We’re leveraging the security capability that we deployed initially and on the MCU side and making the storage solutions more secure over time. This is a real interesting dynamic where we can share technologies between our memory division and our microcontroller and connectivity division to build better solutions in both areas. Here too, the opportunity is going to grow for us. We see that growing from $21 in 2018 to $45 per vehicle in 2023, so another important growth driver.

The final growth driver is connectivity both in wireless and wired form. So, let me just start with wireless. We have our industry leading position today; we’re in eight out of the Top 8 car OEMs with wireless solution with 34% market share and our solutions address all of the applications that those wireless technologies address in vehicles today.

So, we talked about Wi-Fi, for example, for streaming of media, for sharing an Internet connection, and we talked about Bluetooth and Bluetooth low energy being a mechanism through which you actually can communicate with your phone, and these exist and are being adopted today. But the next generation of solutions include body electronic solutions like the example that we talked about using your phone to gain access to the car as if it were a key.

And then emerging uses over the next several years that are to do with car-to-car communications and car-to-infrastructure communications. And our approach in terms of solution delivery is consistent with what we talked about in all of the solutions that we do. We provide a range of solutions here based on solid technology. Here the technology that we have is best-in-class in Wi-Fi and Bluetooth 5.0 IP. This is the same technology that is used in all the mobile phones. And so, auto OEMs and Tier 1 manufactures can be assured of compatibility.

It is best-in-class IP, and here too, we provide a range of solutions starting from 1x1 Wi-Fi 5 technology, and Wi-Fi 5 by the way is the new cooler term for 802.11ac. Wi-Fi 6 then is 802.11ax, the next generation to support the even as more evolved and higher performance in a lot of those functionality. Mike will talk a little bit more about that going forward. But the point here is, a range of solutions that allow you to deliver Wi-Fi and Bluetooth and in many instances through a single chip address the requirement of a car.

And then on top of it, we have a very consistent software layer that allows you to progress through the various levels of wireless connectivity functionality without modifying yourself to it. And here to, with the adaption of those new usage models, we see growth potentially, specifically tripling of the opportunity over the next five years. We talked about USB-C, the fact that here we can leverage our industry leadership where the clear industry leader in both USB and USB-C and we talked about the used cases that are emerging for USB-C, not just distributing video or distributing high bandwidth data, but also implementing charging up to 100 watts.

The solution is exactly the same. A range of silicon products, based on best-in-class IP and a common software development kit that allows you to leverage your R&D across standard products and in this case, we see the opportunity starting from nothing growing to a very conservative $6 per vehicle in 2023. So, each of these connectivity and compute capabilities are translated into growth drivers and collectively what they mean is that the total opportunity that we have in vehicles over the next five years will double.

So, to put specific numbers on it. In 2018, these are vehicles that are shipping in the market in 2018. We have an addressable opportunity of $93 per unit. So, we're thinking here of more high-end vehicles that have $93 of opportunity for Cypress in vehicles to ship in 2018. Now, we’ve talked about the fact that among vehicles that are in design right now, we have an opportunity as high as 125.

While when looking at all of the opportunities that we're working on with customers, we actually see an opportunity for cars that will be shipping in 2023 as high as $184, and we’re super confident based on our track record, based on our leadership position, and based on our compelling solutions that we're going to get the lion's share of this opportunity as well.

All of which translates into a very confident 8% to 12% growth projection over the next several years. And that’s possible again because we’re providing leading solutions that enable those megatrends were absolutely critical in the evolution of all of those megatrends. We’re investing in these scalable platform solutions that extend our competitive advantage, and frankly we’ve been executing, fundamental, but essential to success, we’ve been delivering on our commitments and will continue to do so over the next several years and that is how we're going to drive this durable predictable, profitable growth within auto.

[Video Presentation]

Mike Hogan

Okay. So, my name is Mike Hogan. I look at after the IoT Compute and Wireless Business at Cypress and that’s essentially the combination of our commercial MCU business and our wireless asset. So, I’m going to try to extend the scene of Connect & Compute to the generalized case of the IOT. By background, I have been talking about IoT almost exactly 8 years to the day. I started this in 2011, and if you’ve ever been subjected to IoT presentation in the last seven or eight years it literally starts with charts that look like this. Where you claim an ever-larger future opportunity in order to draw attention to what you are doing today.

Okay. So, I’m going to liberate myself from trying to make a chart that shows you that we can get from 10 to 20 to 50 to 100 billion units because the IoT is actually happening now and we don't need to go to this level. The market opportunity is enormous, but I am more interested in talking about why, how it sort of builds up and where Cypress fits. So, Compute & Connect, and may be subsets of Compute & Connect, the software angle and the human machine interface.

So, over decades we’ve looked at the way these four forces create semiconductor market opportunity, and the way companies at different points in the process extract value and emerge as either a dominant player or sort of an afterthought. So, by example, once upon a time, the PC was born. So, on the compute side Intel, a formerly failing memory company happened to have a 32-bit architecture and they transformed this, a start-up company called Microsoft, MS-DOS, so very thin connectivity to the outside world in the form of Ethernet and Voice-Band Modem, and very rudimentary interface to people, keyboard initially, ultimately a mouse into a really big business.

So, kudos to Intel, they win sort of round one of Compute & Connect coming together. So, now you have a bunch of computers and you say, I want to connect them to each other. I have to have broadband and infrastructure. So, again, not the Broadcom you know today, but the Broadcom that existed in 1995 through their IPO, you know, they took advantage of the fact that some of the compute technology became simply IP you could license, but their real advantage was on the connect site. So, we’re only a few mediums that you could connect these computers to each other with.

There was ethernet, there were cable modems, there were DSL, and there was a start of wireless. So, Broadcom put in place essentially an infrastructure that you will see we’re still building on today, but kudos to them, they win sort of round 2. And the volumes that are involved and the opportunity that’s involved sort of jumps up one more level as you start to connect everything. So, this is sort of their port count, 500 to billion units. The markets move on. The same four forces come together. Qualcomm, a struggling phone company actually, if people remember that, turned their IT advantage and their wireless modem advantage into the ability to be a massive integrator of what happened in the smart phone world.

So, they weren’t a graphics company, they weren’t an image signal processing company, they weren’t processor company, but they became on because they had the 100% of attach piece, the cellular modem. So, price for them, billions of units right. And up until recently they performed very well and maybe they have lost their way a little. Now, you sit there and go what’s next?

Well what’s next is, the IOT. And this is where those same four dimensions come together in a very different way, and I'm going to try to make the case that Cypress sits right at the heart of the biggest opportunity that’s likely to have ever existed in semiconductor land and somebody will emerge and capture a significant part of that value and I’m – I get up every morning before 4 o'clock shot out of a gun because I think that’s going to be us.

And remember, we’re playing a 100% offense on IoT. Those last three eras, PC, broadband, wireless phone we’re not defending a bunch of turf there. We’re free to go execute on what’s coming. So, I feel very good about where we’re headed in IoT. But to kind of bring it to reality, we’ve got to sell problems. We’ve got to have solutions. We’ve got to actually connect the opportunity to our products. So, if there is a sampling of what I think our customers face.

Again, in the same context with Compute & Connect. Software we use ultralow power, secure processors that are connected, secure processors means they have to be upgradable, the software dynamic has changed, we’re talking all about cloud connectivity, the complexity of developing these solutions has gone up, how do I use development tools. If I want to be IoT, I have to be connected.

If I'm going to be connected it’s got to be wireless right, because it would already be connected otherwise. But what wireless standard do I choose? What range and rate do I have to achieve? What power do I have to deal with? I have a very different product. I am interfacing with people in a very different way. I don't have a mouse or keyboard. I don't have 10,000-megapixel phone to talk to, right. So, change is a dynamic in many different ways and we have the opportunity to solve that. So, as in most of these generations, what emerges is an SOC, an SOC play, and what I’m here to sort of talk about is, this same play happens for IoT.

So, the IoT SOC is a real thing. So, I'm going to sort of drop it down through layers. So, for every IoT used case, every IoT customer, you sort of start with the customer software. The customer software is a proxy for what the unique value add is of a particular customer. That unique industry or market or experience they understand, that they somehow have to connect to users in business opportunities, but in order to do that they have get through many different levels.

So, I want to talk about where Cypress fits in. First of all, enabling software. So, for every single IoT application there are just a number of fundamental building blocks that you have to have. You have to have certain wireless connectivity capability, you have middleware capability to connect you to Amazon web services to Microsoft to whatever cloud you are using. You have development frameworks.

At Cypress, we basically take all of that enabling software and we create what’s called ModusToolbox. ModusToolbox abstracts on the complexity of all the software work that you have to do just to have the privilege of connecting to a network of having a product to allowing your software to go do what it wanted to do. On top of that and if you look at our website today, you will see an announcement, we offer value-added services on top of just the fundamentals.

So, Cirrent, a company we acquired a few months ago, you will see an announcement assigned General Electric their appliance division to offer things like provisioning services. So, how you make it easy for somebody to bring the product home and get it on their network. If you can't do that everything else was wasted. If you can't have a good user experience it’s all been for none. So, we enable that.

On the Compute side, PSoC6 our MCU architecture was not built 10 years ago when all of the appliances and the speakers and the things that you have in your house were not connected. This was built specifically for the IoT. So, it has features that make a ton of sense for IOT. The programmability, the dual core nature of the products makes it inherently securable and ultimately the big one is power. So, in these IoT systems, something has to be on all the time waiting to do something. If you don't have inherently low power you sort of can't make it work.

So, what people use today are a mix of things that were designed for a completely different purpose. To try to kind of create the first generation of IoT solutions going forward, you need to do things specifically for the IoT. So, we have the compute background and it’s no mistake or is no accident that that’s why even now we’re growing our 32-bit PSoC6 business at twice the rate of the market. Connect or HMI, like I said, it’s not going to be a keyboard it’s not going to be a display, it’s going to have to be a different way that you connect to users.

So, we break it up into three pieces, tough, see, talk. So, touch, we have a long history in CapSense. Okay, it's a critical advantage for our solutions over other folks. See, is the kind of display that you might actually have on an IoT device, or how you sort of highjack a user’s device like a phone to use that screen. And then talk, talk is voice recognition.

All of a sudden, people are actually speaking to their IoT devices and that audio technology, that ability to listen, that ability to process voice are all new keys to this next generation of semiconductor growth. So, secure PSoC, touch see, talk. But now we're at the very base, and fundamentally I believe most important, none of this means anything if your connectivity isn't good.

So, there’s no world in which there is just okay connectivity and everything comes out okay. Your user experience, your satisfaction, your ability to see if your unique value add has sort of made it all the way through to the customer, is all predicated on the fact that you connect well, you connect robustly, you connect everywhere.

So, I'm going to spend just a little bit of time talking about that. So, if you sort of sit there and look at the world, and you say, hey if it is going to be IoT, it's going to be connected, if it's going to be connected, it's going to be connected wirelessly. The very most likely thing that it's going to connect to the internet with is Wi-Fi.

There is almost literally no other relevant technology that fits that description. That actually connects directly to an IP network and its Wi-Fi. And to do Wi-Fi that's table sticks. And remember Wi-Fi goes back more than 20 years. So, 20 years of innovation to get to where some people are just getting to today, and it doesn't stop.

We introduced GEN 6. Sure, did a CES, that's not going to end, there is more beyond that. So, for Cypress, and this is something I think people don't understand. In many cases you look at an industry standard and you say, hey that sets a bar above which everybody is the same. In wireless technology it is quite different.

In wireless technology, the bar is set quite low, but there is no sealing. Okay. So, people are familiar with things like Moore’s Law, right, you know, the ever decreasing cost and power of making silicon, but in communication and wireless, you are really much more operating on Shannon's theory right, which is that the amount of bandwidth that you can get out of a channel is really dictated by your ability to transmit a clean signal, and receive.

So, the ability to receive in the presence of noise, in the presence of interference, actually gives you head room to make the wireless better and better and better. And that makes it an open-ended proposition. This is why in former era’s you know, nobody ever built a better modem for cellular than Qualcomm because they are building on generations of innovation, which is why in Wi-Fi it matters to have a pedigree that goes back this far.

So, if I kind of extend that out, complex co-existence algorithms an enormous installed base of other wireless things that you naturally connect to, the maturity of our software, these are all of sustainable differentiable advantages for our total solution. So, we're absolutely committed to relentless innovation in wireless, in compute, in connecting the HMI.

So, what's different? About the IoT is in every one of those future eras, essentially everyone was competing to sell you the exact same thing. So, they wanted to sell you the PC you bought, they were going to sell you the thing that connects you to the network, whether that was a cable modem or DSL. Every one of you was going to purchase a phone, but it was a same item, right.

So, the difference in IoT is its actually thousands of items and thousands of customers. Not just one thing, it’s many, many things. So, what – how do we fit into that? Well, for decades, Cypress has been building a very broad market footprint. A very deep investment in micro controller, thousands of customers, growing real fast in 32-bit, you know, all good.

Broadcom where a bunch of our IP comes from, spend enormous time and treasure to create sort of this wireless advantage, but it was trapped in a very tier one focused stock. So, even though there was a nation capability for doing IoT that was developed there it was trapped it was $188 million worth of exception to the rule at Broadcom. So, July comes along July 16 and we do the acquisition and that $188 million grows to 475 over those 2.5 years.

It’s hard to get your head around, but the number of ports shipped is actually 1 billion, 1 billion wireless connections in 2.5 years. If you remember back to the smart phone era, I mean people were waiting for 1-billion-unit market to emerge, it was a big deal because it was tracked sort of relentlessly. Sneaking up on you is an IOT market that’s already in that ballpark. And that’s just in the first 2.5 years.

Going forward, it’s a multibillion-dollar business, it’s about providing a platform. It is the software, it’s the services. There’s a lot of headroom and things like the intelligent edge where the intelligent edge where machine learning and AI come into play, and without adding a single salesperson that 475 million happened, and that’s just hundreds of customers. As Hassane said, we have 30,000. So, we’re talking about thousands of customers getting access to this basic capability.

Finally, why did it matter that there was Bluetooth and Wi-Fi and then I talked a little bit about Wi-Fi, I didn’t talk as much about Bluetooth, but really what you have to look at it is the installed base. So, the installed base matters. So, the biggest installed base out there is their Wi-Fi network and walking around in your pocket in everybody's hands is essentially a Bluetooth network. So, every smart phone has a Bluetooth connection. Every place, every home, every business, every public place has a Wi-Fi connection.

We’re accessing essentially the installed base of wireless. So, that’s why we say hey, Wi-Fi Bluetooth combos are really the killer. Their table stakes to being successful in the IoT. Breaking it down into the numbers, we think the IoT can and people counted differently. For connectivity, is about 2.6 billion. Wi-Fi and Bluetooth, they will cover almost 75% of that. When you look at our – so that is $2 billion in the wireless peace, when you look at the compute piece, our compute cover is 100% of that opportunity.

So, we can connect our microcontrollers to any of the wireless standards. So, we get 100% access to another almost $2 billion of market. So, for Cypress that’s about 2.0 plus $1.9 billion opportunity, almost $4 billion in 2019. 3.9 billion growing real fast of which we have a significant share. So, I like our position, I like the vector of growth. I like the ultimate size of the market. So, where did that put us competitively. So, we said hey, wireless connectivity is no such thing as IoT without wireless connectivity.

Many competitors have some form of wireless connectivity, but honestly if you’ve been in and out by Wi-Fi Bluetooth combo, the number dropped substantially. Okay. So, what’s left, they are sort of some big guys from the handset world, but if you look further there, most of those guys really aren't experts in microcontroller. Cypress has expertise in microcontroller with the fastest growing 32-bit franchise on the planet and then when you add in the HMI component, very few of these guys have any history in HMI.

And then finally, because IoT is broad, because there is many products, you have to have that in your DNA and that’s just not the case for guys like MediaTek and Qualcomm, they operate on more of a Broadcom game plan. So, when you really net it out, you look across these attributes, Cypress is actually unique. We actually have all the technologies required to not only participate in this market, but to extend what is already our lead in this market. So, we’re tremendously excited about that.

So, couple of examples just to sort of ground people in the fact that this is happening now. So, if I look at wearables, on the left is the FitBit tracker, on the right is the Oura Ring. Incredibly small form factors, what do we provide? Well PSoC6 is essentially an IoT SOC. It’s the MCU, it’s the touch and it’s the BLE [RO1 package]. Okay. Ultra-low-power, a seven-day battery life, incredibly aggressive form factors.

In the smart speaker, Amazon Echo, what do we provide, we provide a wireless combo. It is the 802.11ac 2x2 combo. Why, because the wireless performance really matters. It really matters how far away the speaker can be from the access point. It really matters that the sound comes across well. It really matters that the voice recognition works well. But all comes because of good Wi-Fi. So single chip, small form factor, very robust performance.

Other may be more obscure applications. There is a product from Philips they call Lifeline. This is part of monitoring what’s going on, where you are with your elderly parents or nursing homes. We provide a wireless MCU. This is a single chip Wi-Fi connection with an MCU, providing essentially everything you need to know about where you are and what’s going on. So, you can deliver a service. So, somebody can monetize the IoT.

So, the IoT SOC is happening now, you have to have all the pieces. You have to have the ability to do that broad base and Cypress I believe is the only one that can actually link claim to that. So, we represent in our group toward the top half of this chart and the growth opportunities that drive this 12% to 14% coming off of where we’ve already been. And in summary, we really are about connecting everything everywhere.

Literally everything that you have can be connected and will be connected. The idea of a big IoT number where all of the nodes are infinitely small and dumb, doesn't follow the track of every network ever built. Every network ever built, the notes start out and they only want more bandwidth. They want more compute, they want more software. So, there is no share of an intelligent edge as where the world is heading. There is massive upside on what’s going to go into the edge and the node.

We leverage Wi-Fi and Bluetooth because that’s what’s there. The ability that [co-put] network and fresh, explains why things like as Zigbee, like UWB, like some of the some of the LoRa and Sigfox stuff don't seem to get off the ground is because another really cool law on IoT, it's called Metcalf's Law and as the value of the network increases with every node that’s in the network.

So, the first fax machine that rolls of the factory floor is infinitely useless. Until the second one is made. Because you have nothing to talk to. And that’s what the other technologies struggle with whereas for Cypress, Wi-Fi, and Bluetooth are the installed base. Massive head room in IoT. So, people talk about Amazon and Lexus being everywhere, smart speakers, IT cameras, the actual penetration of those if you sort of use the cell phone subscription model the percent of people who have those in their home is infinitely small relative to metrics that you sort of become used to in terms of subscribers and developed world.

So, there is enormous headroom on the things that we’re already doing. And then ultimately it will take a little longer, the monetization of commercial IoT. The ability to change the business model to make more money by making it an IoT application are just sort of coming on. So, this whole monitoring, this child monitoring, tracking, all of these things have enormous upside potential for us. So, the IoT SOC era has started its starts now, we’re already in the front, and we have all the pieces to continue to lead.

So, appreciate your [Audio Gap].

[Video Presentation]

Thad Trent

Hi, so for those of you who may not know me, I am Thad Trent, I get to take all this excitement we’ve been talking about the last couple of hours and turn it in to the financial results. So, what I’m going to cover here is just the focus on execution, Hassane has touched on it quite a bit. I’m going to talk about the changes we’ve made to position ourselves for growth, and then the structural changes that we’ve made in the company on how that is improving the quality of earnings and then talk about our shareholders returns.

So, Cypress 3.0. When I talk about Cypress 3.0, I talk about execution and focus. I think you’ve heard all of us say it many times today, but that’s really, I think the core of what’s made us successful. So, we’ve got to look back and how we’ve done. If you take a look at revenue since we embarked on our Cypress 3.0 story, we’ve been growing at 15% per year on a CAGR basis. Even with headwinds we saw in late 2018, we were 7% in 2018. All-time record high revenue of $2.5 billion. The net growth over this time frame has come from automotive IoT and the industrial market, and you’re seeing that come together.

On the gross margin story, we’ve executed great, I’m going to do a deeper dive on the gross margin, but we – for the year we’re 46.8%, we exited the year at 47.8%. This has come through a lot of hard work from thousands of people around the globe, relentlessly focused on execution on the gross margin side of things driving cost out. The gross margin coupled with our strong focus on OpEx management has delivered operating income, which is six times higher that has grown 6x in this time frame, growing 9.5 times faster than revenue.

So, we’re very proud of the accomplishments that we’ve had through this time frame and as we look forward, we continue to execute. So, now coming back to at this onset, we’ve got a score card of how we did from 2017. We made a lot of commitments at that time. He talked about the revenue growing 7% and 9%. We actually delivered 13%. Hassane also broke down the revenue by end market. And that time, we broke it down also by product. So, we set our connectivity, which is both wired and wireless would grow 16% to 18% and said our micro-controllers would grow 5% to 7%, and our memory we thought of that time would be down 3% to 5%.

So, how did we do? On the connectivity we grew 36%. Now, this is actually trued up for 2016 and it includes this performance, includes the full-year of the wireless IoT, prior to the acquisitions so we could get an apples-to-apples comparison. So, 36% CAGR over this time frame. The microcontrollers grew 11% over this time frame, driven primarily by 32-bit microcontroller growth.

In the memory, it was actually up 4%. So, when we embarked on this. We knew, we were going to restructure our memory business. We’re going to walk away from a lot of commoditized business. We weren’t sure exactly how that was going to play out. What we’ve done now is, we have walked away from that commoditized business, we’ve focused our NOR into automotive. 50% of our NOR business is now automotive.

We shifted our focus into high-density versus the low-density commoditized competitive area. The high density is characterized by stable markets, not a lot of pricing pressure, and we actual ship 4x the average density in the industry now. So, we are four times higher with density in the average – in the industry. So, that business now is very predictable and manageable and I will show you more on that as a result of those structural changes we’ve made there.

On the financial side, we said our free cash flow would grow 3x revenue during this time frame and that our operating income would grow 2.5 times during that time frame. So, how do we do there. So, on the cash flow, we’re 5.6 times. On the operating income, 5.4 times. So, you take it, you put it all together, we’re focused on execution and we take pride in actually delivering our commitments.

So, we think we’ve done great there. So, now what do we do to position ourselves for growth. In 2016, we restructured the company, we talked about a new go to market strategy and Hassane talked a lot about it in 2017. What does that translate it into, as we think about what we’ve done in that timeframe? We’ve got a broad customer base. We’ve got over 30,000 customers. We have no 10% customer. Our larger customer is an automotive customer and represents about 5% of revenue.

So, lots of customers, lots of touch points. Our automotive channel, we’re engaged with the top 25 OEMs on the globe and then obviously when you're touching them, you're also touching all the tier 1 guys as well. That channel is very robust for us. When we acquired the wireless IOT asset, our automotive business at that time was roughly about $20 million on an annualized basis, last year we had $90 million. So, it shows our ability of taking asset and deploying it through our channel very quickly.

On the distribution channel, again very robust. 72% of our 2018 revenue. Went through the distribution channel. We have over 30 distributors around the globe that are focused on selling our products and designing our products in with their customer base. We’re engaged with a view of their large global guys, as well as the regional guys that focus on their markets.

And then the other thing is cross-selling. So, 80% of our revenue now today comes from customers buying more than one technology. When you have a broad customer base and you have the portfolio, we do, this sets us up to be able to cross-sell. So, now we will continue to execute on this. We will be taking it from two technologies to 3 to 4 to 5 as we continue to focus on solutions for those markets. So, how did we do? If you think the 32-bit MCU market, which is we focus, almost 60% of our microcontrollers are 32-bit when growing, covering the fastest for us.

If you go back to 2013, now this is pro forma for the combination of expansion in Cyprus coming together. We’re Number 9. We did a $112 million of revenue that year. If you fast forward to 2017, which is the most recent data that is available right now, we actually moved to number 7, but more importantly we're doing $443 million of 32-bit microcontrollers. That’s a 41% CAGR. And this is because the connect microcontrollers are the fastest growing submarket of that 32-bit market.

So, in summary, we’re growing five times faster than the overall market in 32-bit and it’s continuing in 2018, we grew this 32-bit another 10% that we’re still executing on that side of things. Mike talked a lot about IoT. If you just take the Wi-Fi and the Bluetooth, and you look at that market for IoT and auto, IoT you can think about it as being industrial consumer and auto is obviously the wireless connectivity here. In 2016, our market share was 17%. For 2018, we increased it to 23%. So, a 43% CAGR there as well as we continue to execute on that side of things. And I think Mike did a job of walking through the pieces.

So, we grew 2.5 times faster and hopefully you can see that we think there is a lot more room to grow here on that side as well. And we will continue to execute. So, growth drivers, we look forward now. We got multiple product cycles. We are ramping a lot of new products. We are in the early stages of ramping these new products to drive profitable growth that’s favorable gross margins. On this slide are just a few of the examples. On the IoT side, we have the Wi-Fi 6, the next generation of connectivity. We’ve got PSoC6, which is the purpose built IoT microcontroller.

On the automotive side, Traveo II that’s a big ramping product for both body and cluster that Sudhir talked about and also is favorable margins for us. So, it’s a big push. And then for ADAS systems, we focus on the specialty storage of the central Flash. And then bringing it all together sitting across both of those is USB-C. USB-C is an early stage of adoption. Today there is 592 devices shipping with Cypress USB-C on it, and this USB-C is growing four times faster than any other generation of USB, whether it is USB-1, USB-2, or USB-3. So, it’s being adopted in its early stages of that time.

So, as we think about those cycles kicking in, we’ve got the right portfolio, we’ve got the broad customer base, and we’ve got the design wins that give us comfort and we're going to maintain that 7% to 9% growth rate as we move forward. If you look at 2018, I broke out the components of the revenue. So, roughly two-thirds of our revenue in 2018 were IOT and automotive.

Looking out over five years we expect that to move to about 85% of our revenue. The legacy, which is roughly a third today will step down to about 15% of our total business by 2023. Now, you see a step off in 2019, that is a result of the spin out of the NAND joint venture that we’re doing. So, you see kind of a step down in the 2019 number as a result of that. You won't see the benefit of that joint venture coming through on our non-GAAP numbers. You will see the cash flow coming through our GAAP results.

So, if you think about each of these markets, I think the guys did a great job of explaining it, IoT, high-growth, lots of customers, broad customer set, we’ve got the products to win in that market. Automotive, steady, more predictable, long design cycles once you win you ship for many years, engaged with the right customers, all the right OEMs, the tier 1 guys and it’s a content story for us. We show that our content over the next five years will double.

On the legacy, although it’s going to decline 2% to 4%, we’ll manage that for cash flow, steady cash flow. We think it’s very predictable, we think it’s very manageable, and I’ll show you more on that as well. So, Hassane talked about the structural changes, he gave a list. Now, I'm going to turn the structural changes and what does it mean to us financially. So, gross margin expansion. We’ve done a great job since launching with Cypress 3.0 our gross margins have improved 1,080 basis points until we are 2.5 years.

So, how did we get there. The first thing is pricing discipline. We’ve got a religion over pricing. We sell the value of our products as we become more important to our customers and as we develop complete solutions for our customers it allows us to extract the value of our product and drive higher pricing across the portfolio. So, that gave us 240 basis points. The next thing was Fab25 learning. In 2016, we had two fabs. We had a Minnesota fab and we had the fab in Austin Texas, Fab25, both of them were running at about 50% utilized.

Today we have one fab, Austin Texas, it’s 85% utilized and that’s fully loaded for us. We have the ability to move products inside now. Today, we manufacture about 35% of our products in-house in Fab25 and 65% outside. So, it gives us the flexibility to move products inside and outside to capture the best cost structure, as well as we can keep that fab fully loaded through any type of market softness like we're seeing today. So that gave us 170 basis points in the Fab utilization, just improvement there.

Then on the cost side, there is 370 basis points of cost. This is literally thousands of line items that work and talked about this over and over and over, lots of detail behind it. We’ve got teams focused on it, but manufacturing efficiencies, we devastated the Minnesota Fab, so we took a lot of fixed cost out by divesting that fab. We’ve worked on our input cost as well. We have yield improvements, there is literally thousands of items that work to get to this cost reduction over that time. And then the last piece, which is 300 basis points is the mix shift.

So, this is ramping into the new products as well as taking our legacy MCUs. These are the old Fujitsu MCUs that we acquired through the merger expansion, the expansion acquired from Fujitsu, and transitioning those PSoC. The benefit there is those were old legacy products, the cost structure on them is very high, so it actually is a low margin. As we can move those products to PSoC we get a more favorable cost structure, which allows us to drive a higher margin of that product. So, it’s been an initiative that we’ve been driving across the company. We’ve also shifted our storage business into the higher density as I talked about earlier, and then of course we’ve been exiting a low margin business as we go forward.

So, where do we go from here. We’ve always set our gross margin targets or 50%. So, we're not stopping at 47.8. If you actually take the automotive legacy MCU products and you strip that out, these are products that have the high cost structure. If you actually strip it out and you look at the remainder of the company, our gross margins are actually at 50.6% today. So, we’re achieving the margin today. As Sudhir talked about, our opportunity here now is to take those old legacy products, which are legacy cluster and body and move them to Traveo II, which were substantially higher margins because of their higher features.

It is going to take time to transition. It’s a multi-year transition. It takes time with those automotive customers, but once we can transition that out, we’re instantly at a 50% gross margin company, but we’re not stopping there. So, our target is greater than 50% on gross margin. So clearly, we’re going to continue the transition on the legacy products. We're going to continue to drive a differentiated product, which drive a higher gross margin and then as always, we’ll continue to focus on cost on a manufacturing footprint optimizing that getting the right structure there to improve gross margins.

So, our projections here are to be greater than 50% gross margin company. So, the other thing is, Hassane talked a little bit about we're still reporting those two new reporting segments. MPD, the Memory Products Division, and MCD, Microcontroller and Connectivity Division. We’ve been making big investments in the MCD division and they’re now paying off. If you look back to 2015, roughly 54% of our business was in memory of that time. As we think about 2019, and we strip out the NAND as we divest that, two thirds of our business will be MCD, Microcontroller and connectivity. About a third of our business will be automotive, I’m sorry in memory. And half of that NOR business is automotive.

So, you can think about, roughly 35% to 40% of that 34% just being automotive. Stable business, predictable, and allows us to manage that for cash flow. You think forward into operating income, I think it’s been pretty well known that a lot of our operating income more than time has come from memory. We now have that business very stable. You can see the light blue line there as the historical and then the projection, you can see a little bit of a hedge there in 2019 that’s the exit of the NAND joint venture. You may have seen earlier this week, we actually announced that we’ve cleared all regulatory approvals for that NAND joint venture, and we’re planning on closing it by the end of the quarter.

So, now we’re in operational phase, working on integration of moving that company of into the joint venture. So, we have cleared everything there. So that's a little bit of the reset there, but if you look forward on that light blue line, we will manage that for operating income and cash flow. As I said before. So very predictive because of the structure that we put into that business. The incremental operating income all comes from the microcontroller and connectivity division.

As we continue to drive that growth there that’s where the income will come from, and if you think about it from the total company all incremental profits actually come out of that division as we monetize it. We’ve made huge investments historically in our USB-C platform and our connectivity platform, and our PSoC platform and now these, it’s time to monetize those and you can see we're doing that. You can see the trajectory going in 2018 and what we think is going to happen. So, at some point in the future we’ll have a crossover where MCD actually drives higher operating income then the memory products division.

So, that gives us more predictability in our overall model. And then on a cash flow basis, so this graph shows, it’s a graph of our EBITDA and free cash flow, and free cash flow is in purple there. Our free cash flow over the last two years have increased 155% as we’ve focused on working capital, CapEx, low CapEx we were about 2.5% of CapEx, that’s about what we will do going forward, very CapEx like. We’ve obviously managed expenses as you have seen our OpEx come down, and that’s resulting in higher cash flow.

As we look forward, we think that over the next five years we’ll generate $3 billion of free cash flow. And that’s growing 2.5 times faster than revenue. Again, strong execution on that side. We’re also setting the target for free cash flow to be greater than 20% of revenue. First time, we’ve done that as well. We executed in 2019 at 16.5%. And then if you look at the volume, this is our net leverage on an LTM basis. We acquired the wireless IoT, we levered up on a net basis almost 4 times.

We exited 2018 at one time for ever as we have focused on paying down debt, as well as driving EBITDA, and what this does is it gives us a lot of flexibility. So, in terms of debt capacity and firepower we’ve got, somewhere between 1.2 billion and 1.9 billion of firepower, and then we can either reinvest in our own business or choose to move in M&A if there is an offset that we feel is strategic that fits our Cypress 3.0 strategy. And then obviously with our NAND joint ventures we’ve talked about that joint venture will generate about $150 million over the next five years of cash flow, which doesn’t get reflected in free cash flow, it actually comes through on a different line, but obviously helps with the cash flow.

So, the next question is, if you generate all this cash, what you do with it? So, we have a long history of being shareholder friendly, and returning capital to our shareholders. You can see our dividend yield on the right side where dividend yield is 2.8%, it’s one of the highest of our pier groups, and on the left side you can see the history of us returning capital to shareholders between the dividend and the buyback. In 2017, we suspended all of our buybacks as a result of the acquisition. We focused on debt paydown.

In Q2 of 2018, we started repurchasing shares again. We turned on the buyback again. We bought back $35 million of shares in the last three quarters of the year. And for the year, we return 47% of our free cash to shareholders between the dividend and the buyback. And there is about $176 left in the buyback. So, we will continue to be opportunistic on that side of things. So, as we look forward, our target remains, returning 50% of free cash flow to shareholders and we have a history of doing this.

So, wrapping up the year for 2018, I mentioned $2.5 billion of revenue all-time record, operating margins of 22.8%, and if you map that to our model, our model is 50% gross margin, 30% OpEx and greater than 20% operating margin, but if you look at the operating margin, we’re already exceeding that model. We’re at 22.8% in 2018 for Q4, we delivered 24.5% operating income. So, we are already achieving that model and because of our execution focus we’re comfortable raising that model.

So, our new model is to be greater than 50% gross margin. I told you the company was already at 50.6 if you exclude the low margin auto legacy MCU. Our OpEx would be 25%, we’ve already been running in that range for the last two years, so it’s natural that we can run there. We’re investing in everything we need to invest in. You heard the guys talk about all the investments. 85% of our R&D investment is going into auto and IOT. We’re investing in the right areas. We're doubling down in those areas. And then that will result in operating margins of greater than 25%.

It’s my expectation as we continue to improve our gross margins and that will follow through to the bottom line and drive those operating margins up from where we are today. And then as I mentioned earlier, for the first time we’re actually giving a free cash flow target of being greater than 20% on a revenue basis.

So, to wrap things up here, Cypress 3.0, we have got Connect & Compute for auto and IoT, I think that should hopefully be cleared today after sitting here and listening to everybody talk. Those markets are growing faster than the overall semi market. As I said, we're doubling down on those markets. We will win in those markets. We’ve got new products cycles driving favorable margins, and this is early stages. Operating margin and cash flow expansion both are growing faster than revenue.

Our focus on auto and IoT are providing higher quality, more predictable earnings then we’ve ever had. If you think about, we – for Q4 we actually reported a down quarter, but gross margin is up. That would have never happened in legacy Cypress. That’s because of the structural changes that we’ve made in the company. That’s the improvement in the quality of their earnings. We have a strong track record of execution and we’re aligned shareholders. Our expanded target model actually gives us more operating leverage to come and we believe we can still, there is more leverage there. And then we’re driving shareholder value through capital returns.

So, with that I will ask Hassane to come up and wrap it up.

Hassane El-Khoury

Thank you. I listen to this, obviously daily or on a quarterly basis while we are doing. But I keep getting excited every time I hear it. People ask, you know how we do this and with the ups and downs? I think what you've got today is a more important answer to a much more important question, which is why we do this? And why we do this is exactly what every person at Cypress, my team, myself go up to work to do. We do have – we bring value to our customers, but we also bring value to our shareholders.

We have positioned the company and delivered and will continue to deliver on our growth for an IoT and automotive. We will always provide differentiated solutions in these markets for Connect & Compute, which will drive the growth, drive the differentiation, the stability and predictability of that growth, but more importantly the margin expansion that we have talked about, again that we’ve delivered and with the products that we’re just getting introduced will keep delivering.

The cash flow that Thad talked about at length, which is growing faster than the top line and that’s again the average we have and maintain, and the returning capital to our shareholders. That’s why we are here. That’s what we do every day. Every one of us has a different path to creating shareholders whether you are in the product or you are in sales or in marketing or you are in my team. We all work in different deliverables in order to achieve one goal. And that’s that goal putting everything we talked about today, summarizes Cyprus 3.0 and summarizes how we for food technology through our worldwide team are creating the shareholder value that you all should expect from us. Thank you.

[Video Presentation]

Question-and-Answer Session

A - Colin Born

We’ve got mikes on both sides of the room, just raise your hands if you want to ask a question. We appreciate it if you could state your name and your company affiliation now before the questions please. Thank you.

Karl Ackerman

Hi, Karl Ackerman from Cowen. Thad or Hassane, I first want to talk about the automotive business. I know that tier 1 automotive design wins are more of a counter 2020 growth towards in perhaps 2019, but how much were your 8% to 12% growth target in automotive assumed by existing design funnels today? And you highlighted two significant tier 1 automotive providers earlier in today’s presentation, but how should we think about the diversification of your tier 1 automotive customer base in 2019?

Hassane El-Khoury

I’ll take that and then Sudhir you can add more color if needed. So, if you look at the automotive design cycle, you have 3 years to 4 years to see revenue. So, when you talk about products, we’re introducing in 2018 and 2019, those will start contributing that revenue to the 2023, 2022. So, that’s the long-term view, that’s the predictability we have. Over the next couple of years, the comfort we have and the confidence we have and the growth rate for automotive is from an established install base already.

Whether it’s the memory or whether it’s our current Traveo, all of those are contributing to the growth over the next couple of years from a design cycle that started 2017 or 2018. That gives us what I call the layering effect of growth as new things come on. Now, even if you abstract and say it’s a four-year design cycle, the lifetime of that is about 10, 15 years. So, you are literally layering in as things start to ramp, and that’s the confidence we have in the growth rate, it’s the same confidence I had two years ago when I stood here and aggressively talked about how we’re going to outgrow within that same range and we actually beat it.

That’s that visibility, that’s the confidence. From the OEMs and tier 1, we have the top 25 of the OEMs, and if you think about their logistics and their supply chain, that touches pretty much everybody today, and in the next five years. So, there is no, if you think about do, we have gaps in certain areas? The answer is no. We don't have gaps, if I look at revenue generated today or funnel that is in our company today that we're working on future revenue. That we have full coverage of where we need.

Obviously, there are maybe a start-up that comes up in three years or four years, which we will tackle then, but that would be a revenue outside of the five-year plan, but we are always monitoring, there is always new technology and we'll keep aggressively going after like we have done.

Thad Trent

Yes, I think you covered it. The only point, I would maybe add is that, you don't get the number of design wins that we do unless you are winning beyond just the top couple of people. So, the number of design wins that we talked about are not just in the top couple of providers that are spread across. Now, within each electronic control unit segment of automotive there is some degree of concentration, but really across the base we’re winning.

Tony Stoss

Tony Stoss from Craig Hallum. I hope you can hear me. Of your 7% and 9% growth target what are you assuming for the auto SAAR and then a follow-up on the USB Type-C side, can you give us an update on where you are design-wise or the values of that pipeline? Thanks.

Hassane El-Khoury


Sudhir Gopalswamy

So, with respect to the SAAR, we are over an extended period. We're just assuming 1% to 2%. The story as you know is just about content. So, if you were to look at last year as an example, the growth rate that we had year-over-year for our business in automotive was 13% relative to a SAAR that is an order of magnitude lower. So, a SAAR is, a SAAR assumption is fairly modest, it is called a 2% [clip] and so the growth is really all about the content. So that was the first question. Second, with respect to USB, USB-C, could you restate the question?

Tony Stoss

The number of design wins and the value of the pipeline?

Hassane El-Khoury

The value design, the last number I gave, I think last call was 420 or 490.

Sudhir Gopalswamy

Actually, we get up to 5, 590.

Hassane El-Khoury

It keeps going up, which is good. So, we have over 500 call it sockets and it’s the breadth of sockets you will see it on our demo where we don't have the concentration that you typically would have. We’re going after the broad market. The growth, the opportunity that we’re talking about what I have mentioned before is a $900 million opportunity over the next five years, as far as growth.

We have the leadership position. So as that grows, we will keep expanding our footprint and monetizing it, and we’ve started doing that. The next layer obviously is what Sudhir showed, which is the automotive frontier, but we have a lot of already established base in the consumer and industrial segment.

Suji Desilva

Hi, Suji Desilva, ROTH Capital. Keeping on automotive here, can you talk about a Traveo in whole [indiscernible] products and how they fit in the competitive landscape, it seems like you are growing in the product roadmap, seems more ambitious, are you starting to encroach on when you saw some [indiscernible] already established or where you really kind of have your place versus – I could see you smiling Hassane, [indiscernible]?

Hassane El-Khoury

Because we are not starting, that’s why I was laughing. Right. So, the starting point is, market share leadership position in clusters for example. So, that’s a stronghold of Cypress and has been for several years, and what we're doing right now is extending that leadership position. Now, one of the things that you may be referring to in the dynamic in clusters that you have some consolidation of ECU’s at the super high-end, where you have for example high-end infotainment processes and Clusters being combined. That’s not an area where we are focused on.

There is still robust growth in Clusters as they evolve from mechanical to purely digital and graphics driven Cluster. That’s our focus with the sector Cluster. Also, in body electronics, we have a well-established position today. It’s not as big in share, but the overall segment in body electronics is much larger, but we're one of the recognized suppliers. We'd say we're number four today. So, we're going to continue to grow in body electronics. That will be in percentage terms, a bigger growth driver for us because our solutions are super competitive.

The reality is that, we co-defined our products with the lead customers. The guys that are leaders in their field, both on the body and cluster side. So, we have confidence that we’re meeting their requirements of next-generation systems and now what’s paying off is that we’re seeing those design wins replicate across the customer base. We feel really good about our design.

Charlie Anderson

Yes. Charlie Anderson from Dougherty & Company. First of all, thanks for all the group presentations today. I had a question on the gross margin target of 50% plus. I wonder, if you may define some of the end point of that, I see a lot of references to 2023, is that sort of the endpoint of 50% plus, and then, you did talk about Traveo II’s influence on it, but I think some of the presentations I saw wasn’t a 100% of your mix out in 2023. So, are there other things that help you get to that 50% beyond the Traveo II to [indiscernible] mix? Thanks.

Sudhir Gopalswamy

Absolutely. So, the key driver there is the auto and IoT growth. So, if you think about those products cycles that I talked about, those are all at gross margins that are at or above the corporate target of 50% or higher. The transition of Traveo II is a component of it, but it’s not the only component. It takes a long time to actually transition those products in an automotive application into a new product. So, we think over the next three years, we’re probably going to transition from the old legacy MCUs to the Traveo II probably somewhere in the 40% of 50% range that would be transitioning in about three years. But we expect to hit that 50% gross margin target within the five-year horizon.

Charlie Anderson

So, I was wondering if you could size the Fujitsu microcontroller business at this point in time, and then also what is the hurdle rate for gross margins for your, I mean Traveo or PSoC6 business, what are you shooting for in terms of new products and wins you are getting?

Sudhir Gopalswamy

I think clearly our target for anything coming out of R&D has got to be greater than 50%. Obviously, that varies by product, right. So, if it is a microcontroller or connectivity, we’re going to expect well north of that. So, the – to kind of scope the size of the legacy MCUs side, the auto MCU, today it’s in the kind of mid-teens in total company revenue and that’s why it’s going to take some time to wind that out, and obviously it’s something we’ve already been working on, but like I said, over three years we can wind that down, but the hurdle rate for anything coming out of R&D today is a minimum of 50% gross margin in a lot of cases much higher.

Hassane El-Khoury

If you think about the corporation with the target where we are, and the mix that we have between MCD and MPD, you can also think about the deliverable of margin from the MCD division is much higher hurdle than anything else. So that’s where the company is about 50% plus.

Craig Hettenbach

Hi. Craig Hettenbach with Morgan Stanley. Just question from Mike on connectivity. If you look at the competitive landscape, you have broad-based suppliers and pieces of technology as some of the modem suppliers like the MediaTek or Qualcomm, as you’re engaging on designs where are you seeing kind of the most competition where do you see that going forward?

Hassane El-Khoury

Yes. I think we see dabbling from all the above. Most of the MediaTek and Qualcomm activity is focused at places that are somewhat adjacent to what they already do, but we really don't seem very much in the broad market because they really don't just have frankly the tools or the – in the case of Qualcomm sort of a, I would call a very friendly IP regime to work with. So, we’ve seen that even with other partners on the processor side that find it problematic to work with somebody who is [indiscernible] and try to sell across a wide range of customers and a multitude of different volume points.

So, MediaTek, Qualcomm all sort of stay in their lane in terms of focused on handset guys and we're really not really there. And where we play, we probably see a different arrangement of competitors that in one way or another are missing a piece. And so that’s why I think we’ve got a lot of success.

Sudhir Gopalswamy

And I think, just to add some color, when you refer to, you are right, there are broad-based that even as we put a check mark on connectivity or Wi-Fi, but if you look at the table stakes and that what Mike showed in his power point and if you look at the one layer down, a lot of them just introduced 11n. What year was 11n?

Hassane El-Khoury

In 2007.

Sudhir Gopalswamy

In 2007. So, I would love to compete. That’s all I would say.

John Pitzer

John Pitzer from Credit Suisse. Maybe a question for Mike and Thad, and a couple of questions for Mike. One, just kind of curious on how the move towards 5G, you see that influencing the growth in your business. But I guess more importantly, when you look at the auto vertical, albeit there's some new entrance as the world moves towards autonomous. The customer base there is fairly well-defined and finite. You look at sort of the IoT vertical, especially from the investment community, the way we look at it, it seems like an infinite potential number of customers. I’d be really curious about your go-to- market strategy. Is it all going to be handled through distribution? Are there particular end-markets and verticals that you particularly focus on? And Thad, what’s the implication for operating margins in that business, just given that there seems to be a much larger sort of set of potential opportunities and not to say the auto market?

Mike Hogan

So, just clarifying, by 5G do you mean 3GPP cellular 5G or do you mean Wi-Fi 5G?

John Pitzer

No, cellular 5G. Obviously, it is not a direct impact. There could be a lot of indirect drivers for your business.

Mike Hogan

Yes. I mean I think – I think all kind of connectivity build on the infrastructure allows things to connect. That doesn't compete with us. I think it sort of upgrades the infrastructure in a different part that we don't play in, so it’s all good.

You know, as far as the breadth of customers, yes, you know, our – everything we do in terms of – the way we think about tools, the way we think about customers is to treat every customer, every customer engineer equal. So, we don't differentiate by which logo is in the corner of their paycheck is to whether they should get a good set of tools or now. So, that’s what we mean democratizing access to wireless technology.

And if you look at what’s really different about Cypress versus some of these other guys is – and I was – you know, I was at Broadcom for a long time as well, and if a customer engagement requires the person on the other side to have 100 or 200 qualified wireless engineers, and they commence our equipment to do a wireless design, it limits the number of people you can deal with. But what we’re trying to do is remove that complexity, make it sort of fit in a box, allow you to get products to market quickly and to iterate very fast.

You know, if you think about the broad-base – I don’t want to answer for Thad, but in general, you know, we’re very happy that every incremental customer we add, even smaller, is actually is an uplift to gross margin.

Thad Trent

Yes, I think Mike hit on it. Right. I mean giving our customers, a lot of these small customers the tools to be successful with our products gives us scale, right? So, as we think about going from thousands of customers to tens of thousands of customers to hundreds of thousands of customers in this market, it's really leveraging the R&D investments and leveraging the investments that we’re making in these tools that make it very easy for our customers to do business with us to define in our product. You know, at that point, I expect, you know, operating margins to be accretive and as we add every customer, it just becomes accretive.



Harlan Sur

Harlan Sur, JP Morgan. Thanks for hosting this event. You know, if I look at your leadership automotive, IoT end-markets, and then I scale it up to these sort of embedded systems market and I think about the building blocks of what it takes to be successful software, MCU, connectivity, storage you guys have leadership in all of those areas. But there is one other area, which is analog and power management, which sort of is a he key part of the overall inclusion. Wanted to know what are your thoughts about adding analog power management capabilities to the portfolio over time.

Sudhir Gopalswamy

Sure. So, I'll – let me take a system view, which is how we go to market as a system view and where does analog fit in. To me, analog fits in just like, for example, our storage will fit in. And the reason I say this is, the customer will first pick from a supplier base. They will first pick microcontroller or conductivity, and I say this or that because if it is, for example, like an Amazon-like where a connectivity is the do-or-die of the product, they will the conductivity first and then compute.

Once you have those, then it’s what else you have. So, we don’t have to go to all the suppliers. That's what the systems are. That's – if you look at IoT, if you look at automotive, if you look at any of the markets that matter and the markets that we plan, that’s the first decision that happen. Then for us, we have PMIC and if we PMIC, for example, the Global-B, they’ll take the PMIC, within its storage for over the [Indiscernible] we have storage and that’s how we start [Indiscernible] and we get what I call the bomb coverage, which is a theme in Cyprus 3.0. Analog is a piece of that.

The reason I gave you that overview first is, from a strategic intent, meaning strategic intent for us to achieve the growth rates that we have and the customer intimacy that we have. We have those center building blocks. For us, analog – obviously if there is an opportunity, you know, Thad talked about our financial positioning and firepower, but it has to be coherent with the rest of our strategy.

It has been planned on the automotive, it should be planned with, you know, the IoT, and the way I describe it, exactly the playbook from the wireless asset. I won’t be able to bring it in and take it brought without adding a single salesperson. So, you got the sales efficiency. Those are kind of what we look at it on top of the technology. But form a fitting, we’re not missing it. It would be accretive or additive to what we could do from what you saw today.

So that the differentiation I would play. I know there are a lot of – some analog focused companies that say, well, we have the analogs, so we’re capturing everything else. That's not how it works. If you have the customer journey, the analog is not the first thing customers choose. It’s the brain and the connect and that's where we are.

Harlan Sur

And as you think about…

Sudhir Gopalswamy

Let me just get you mic, just for the broadcast.

Harlan Sur

So, I totally agree with you. And so, as you think about leading with MCU, leading with connectivity, and you think about the potential for analog attach, do you think about it sort of – is it something that Cypress can do organically or there’s probably something that's probably more inorganic?

Sudhir Gopalswamy

[Either or]. We have today – if you think about where we’re today, what I call analog, we have automotive PMIC, what I call the companion PMIC. You don’t see us in the broad talking about analog, but again, I’ll give the Global-B, next to the Traveo microcontroller there was a PMIC sitting there. So that’s the synergy we look for. So, the question is organically, we’re doing it today. We have the capability to do it and will keep doing it as long as it’s very synergistic with ours.

To go beyond that, you know, more analog front-end or different things like, there will more, in my view, inorganic because you got to look at it from a capital allocation. Today, I allocate the capital, what I call we’re doubling down and computing connect. The last thing we need is a distraction of something that is additive versus core to our strategy. So, I remain true to the core, which is the organic capital allocation will go into the Compute & Connect.

Harlan Sur

I have one question for Hassane along with the [Net]. With regard to your future M&A opportunities, would you describe some [Indiscernible] and potential areas of interest, which you focus on your core areas, auto and IoT or would you consider going beyond those?

Hassane El-Khoury

Obviously, I’ll give you a description of the net. The net is wide because it's not a matter of – it's also actionability, it’s also available and really, it's a matter of timing. So, what you see us talking on or where you see us focusing on is the path that you looked at today, which is high growth, which is high profit, which is a margin expansion. So, what do we look for is, things that go with that.

You know, now, could it be potentially, you know, slightly dilutive on our growth? If it's person – a specific target that is in three years from now, will be accretive to growth from automotive? Could be, but the net is wide. It's really more on strategic financial fit. It has to our financial model, you know, within a certain period of time based on the strategic intent. But it also, more importantly, has to fit with our focus markets.

You’re not going to see us grow after something that’s so, you know, foreign to our [DNA], so foreign to our sales force that it looks like another company that’s not really coherent with our go-to-market strategy. That to me is a very tight outlook, but we’re always looking – you know, standing still is not an option in today's environment.

Harlan Sur

One more follow-up, I forgot to say [Indiscernible] one question for Thad. So, Thad, with regard to the capital allocation strategy, let’s say in absence of M&A, how should we think about potential dividend increase versus more allocation for share buyback?

Thad Trent

So, you know, you saw the dividend yield, right, 2.8%, one of the highest. So, you know, we don't manage dividend yield, but we will augment that – that dividend with share buybacks. So, you’ll see when we got excess cash that’s what we will do. We’ll be more opportunistic on the buyback rather than increasing the dividend.

We’re happy where the dividend is $0.11 per quarter per share. You’re going to see us – what you’re seeing us doing right now is build flexibility on the balance sheet while returning cash, right. So, you’ll see us do that through the share buyback versus the dividend.

Colin Born

Any more questions?

Hassane El-Khoury


Colin Born

Oh! Sorry go ahead guys. Harsh Kumar from Piper Jaffray.

Harsh Kumar

Harsh Kumar from Piper. Thanks for hosting today. I had two questions. One was you guys standout on ADAS side in your storage solutions. I mean clearly some impressive numbers. What is it that you do so much better than your – perhaps your Chinese, Taiwanese competitors that keeps you further apart? And then, you know, somebody is going to have to ask that what keeps you up at night question. In IoT, you’re doing very well clearly, but there must be something that bothers you, worries you, you feel you’re missing or you got to watch out for, what is that?

Mike Hogan

Okay. So, I’ll do the – I’ll give you the memory, and Sudhir touched on it. If you think about what we have in the memory, number one is the high density at a very compelling technology baseline, meaning translate that to [Indiscernible]. We have that; we do it very well; and we do it at much higher densities, which is how we took the market.

You know, Thad gave a data point of our – our actual end-market density is four times the average of everybody else. So that’s by itself and that’s backwards looking data. It’s not the forecast meaning, this is what we are doing today per strategy. That’s the first differentiation. On top of that, now, you can say, okay, somebody can do advancement in technology. They catch up. On top of that, we have moved years ahead by adding Compute into our memory.

Currently, our – you know, unfortunately we still call it NOR, we should come up with a cooler name. But our flash today – our NOR flash has an M0 sitting and they are doing system level computation that is value-added to these ADAS system. You can’t just do a memory and if it fails, if it’s not reliable, the whole system is done. In fact, you might not even have a steering wheel to recover.

Failure is not an option in these things. So, we put intelligence, we put compute into the platform. If you look at all the other players, nobody has compute under the same roof. I don’t think they are neighbors with somebody who makes a compute. We have those under the same roof and that’s what Sudhir talked about. We’re able to cross pollinate between the two, which creates a sustainable and a much wider entry – barrier to entry from everybody else who comes at it from the, you know, the storage side.

What’s keeping me up at night, you know, I don’t stay up a lot. I sleep – sleep very well. I will tell you what I spend a lot of time looking at, which is a lot of that what we all look at, which is today, you know, the geopolitics, a lot of these things, but they don’t keep me up at night because this is not something, I’m going to do anything about or – nor control.

The only thing I can tell you comfortably is, I don't – nothing keeps me up at night that is related to our team’s execution and that – I have two years of proof why I sleep very well. I don't let anything else distract us because if I start losing sleep on things we don't control, I will tell you, nobody wins.

So, I let these things go; we focus on what we want. You heard me talk in the Q3 earnings call, while all this is happening, we’re going to double down on our R&D. You saw what that means because we’re winning and we’ll keep the momentum and we’re going to double down on go-to-market, on demand creation because where everybody else is puckered up and losing sleep, we’re going to be taking share because I have the confidence in, one the technology, and two the people that we are able to do. So, for that, I’m very comfortable with the plans we’re well planning today and we’ll keep executing.

Hassane El-Khoury

How do you sleep Mike?

Mike Hogan


Hassane El-Khoury

Do you want to add anything to that?

John Pitzer

Yes, thanks for letting me the follow-up. It’s John Pitzer from Credit Suisse here. On the auto side, you clearly have a lot of opportunities to grow content before VDX, but that was part of your presentation. I just want a better understanding of kind of what core IP you think you bring to the VDX, V2X market that is a differentiator, and kind of how you see that market developing over time? And then, maybe a follow-up just on the capital allocation question that you are quick to point out that your dividend yield compares favorably with your peers. That 50% free cash flow back to investors, especially given your low capital intensity is kind of at the lower end of what some of your peers are giving back to investors. Why 50%? Why not more? What’s the implication for M&A?

Sudhir Gopalswamy

I’ll take that one first. So, as I mentioned before, you know, its flexibility right now, right. And the market that continues to consolidate, we want to make sure we’ve got flexibility to be able to move on an asset that becomes available and that’s a strategic fit and it fits our financial profile, so that’s why we’re at 50%. We’re not increasing it right now just in a market that we want to make sure we maintain flexibility, cash on the balance sheet and firepower on the debt capacity as well.

Hassane El-Khoury

Now, with respect to V2X, the one thing I’d point out is over the five-year horizon from a growth perspective, V2X represents zero. So, we are not counting at all on V2X on that five-year time horizon, it was more presented as a one dimension of connectivity that is out there in the future. In terms of the core technology though, one of the implementations of V2X is DSRs, dedicated short range communications. That is based on, we have the core technology in our Wi-Fi products today.

Silicon products today to be able to support 802.11P and deliver those signals in the 5.9 gigahertz range. So, we have it from a Silicon perspective. We actually are in fact working in conjunction with customers on early stage thinking about how that would be deployed, but there is a multiple kind of complexities associated with the deployment, so we don’t count on it at all.

Suji Desilva

Just two follow-ups if you won’t mind, Suji Desilva from ROTH. First of all, on Bluetooth mesh and interplay with versus Zigbee and Z-Wav is Bluetooth on the embedded base in Wi-Fi is that something that [indiscernible] those markets or they co-exist? And the second one, if you could touch one, the trend at [indiscernible] footprint, is that something that will be in your roadmap, is that something that is up? If you can touch on that.

Sudhir Gopalswamy

Sure. Just a few thoughts on mesh, right. So, the [indiscernible] associates with Zigbees and Z-Wave and mesh as if they were one in the same thing. The first thing I am going to see is, mesh was at [indiscernible] somewhat agnostic as to what the connectivity is. Second part of your question is, how do you see Bluetooth BLE mesh co-existing or subsuming Zigbee. I think it actually built some [mountain around] Zigbee and [indiscernible]. I think, we see a lots of customers, if once mesh has been sort of kind of [indiscernible] deployable they would rather deploy it on something that has got a very high penetration rate.

So, I think it’s sort of going to be one of these deals where maybe in some ways the Zigbee crowd gets meshed to a certain level of relevance, but what we’ve seen time and time in Wi-Fi and Bluetooth is once those technologies adopt it, they sort of crush you. So, I see a lot of customers even today saying, hey we want to go all BLE and it doesn’t mean Zigbee goes away overnight, it just builds a [mode] around it and says this will age out over time. So, we are bullish on BLE mesh being the end answer for people who figure out how to use a mesh to [indiscernible] and a used case to get purpose.

AI and machine learning, I mean I think what we see is, we try to think in terms of the abstract compute and the compute that you see today, as I mentioned in the PSoC6 slide it is very much imported from other markets and other applications and the Compute that will exist in the IoT is likely to not look anything like what it looks like today and AI and ML are sort of just examples of that. Because you will have to do inference in learning and things that just didn’t exist when you were making a micro controller and runner [indiscernible] of it, right. So, it is just apples and oranges in terms of complexity. So, we are not announcing any roadmap of product, but clearly owning compute architecture of the IoT is high up on the list.

Colin Born

Any question? All answered? Okay, well thank you for coming. Great to be able to have the opportunity in person to talk to you about what we have done and more importantly what we plan on doing, what we are putting on works on for next years. I invite you to mingle, go through the hands on, the physical aspect of everything we talked about, how it exists today and talk to the team about how we see that stuff existing in the future. So, thank you and enjoy the rest of the day.