Cypress Beats, Ups Guidance

On July 16 2009, Cypress Semiconductor Corporation (CY - Analyst Report) reported results for the second quarter of fiscal year 2009 ending June 2009. Both the top and bottom lines beat consensus and our estimates. Revenue for the quarter was $155.8 million, up 11.8% sequentially and down 25.7% year over year.

The Consumer and Computation (CCD) and Data Communications (DCD) divisions were up double-digits, while the Memory and Imaging Division (MID) was flat sequentially. Revenue was over the top end of management’s guidance range of $145-153 million (up 4-10% sequentially).

The company shipped 112 million units in the last quarter (up 14.3%), and the average selling price (ASP) declined 2.8% to $1.39. The blended ASP declined 2.2% to $1.39.

The CCD segment generated 40% of revenue (up 20% sequentially), DCD 16% (up 25%) and MID 42% (flat). While all end markets registered growth, there was particular strength in consumer, PC and handset markets. Management stated that based upon its own calculations and discussions with supply chain partners, it was of the opinion that restocking activity had not yet impacted the company’s business.

Management appeared optimistic that such activity in the second half of the year would boost sales. If management’s calculations are correct and order rates do pick up in the second half, this would be a positive for other programmable logic companies such as Xilinx (XLNX - Analyst Report), Altera Corp (ALTR - Analyst Report) and Lattice Semiconductor Corporation (LSCC - Snapshot Report). The revenue distribution by geography was as follows—North America 24% (down 10.5% sequentially), Europe 12% (down 21.1%), Japan 10% (up 11.8%) and other Asia 54% (up 40.4%).

Total orders increased by 27.8% in the last quarter, the second straight quarter of double-digit increase. CCD orders were up 16.5%, DCD up 56.8% and MID up 2.1%. The average book-to-bill ratio was 1.28. The backlog was up high double-digits, although management omitted to mention the percentage booked for the current quarter.

Our calculations indicate significantly lower turns business. Management stated that customer lead times were starting to stretch out, which could be the reason for the lower turns.

The pro forma gross margin for the quarter was 43.8%, up 918 basis points (bps) from the previous quarter’s 34.7%. All the segments saw gross margin expansion in the last quarter. Wafer starts and utilization rates picked up sharply in the last quarter, leading to better cost absorption, and thus, higher margins. The average utilization rate was 59%, compared to the all-time low of 34% in the first quarter. Product mix also had a positive impact, since the highest margin DCD grew strongest, followed by CCD, while lowest margin MID stayed flat.

In the last quarter, CCD generated a GAAP gross margin of 40.8% (up 818 bps), DCD 57.3% (up 1,503 bps) and MID 28.9% (up 1,408 bps). Operating expenses of $74.2 million were lower than the previous quarter’s $76.8 million. The operating loss margin was -3.8%, up 1,670 bps sequentially from -20.5%. All the three main heads of expenses (COGS, R&D and SG&A) decreased as a percentage of sales. However, the biggest decrease was in COGS, followed by SG&A, and then R&D.

The pro forma net loss was -$5.0 million, or a -3.2% net loss margin compared to -$33.0 million, or -23.7% in the previous quarter and net income of $33.1 million, or a 15.8% net income margin in the prior-year quarter. Fully diluted pro forma loss per share was -$0.04 compared to -$0.24 in the previous quarter and net income of $0.20 in the June quarter of last year. The pro forma calculations exclude restructuring charges, acquisition-related costs, deferred stock compensation, amortization of intangibles, loss on sale of investments and the impact of accounting changes in the last quarter.

The fully diluted pro forma loss per share of -$0.04 was $0.06 better than the consensus estimate of -$0.10. On a fully diluted GAAP basis, the company recorded a net loss of -$45.3 million (-$0.32 per share) compared to -$88.3 million (-$0.66 per share) in the previous quarter and a net income of $16.7 million ($0.10 per share) in the prior-year quarter.