Cypress Reports Second Quarter 2002 Results

7/19/2002 - Cypress Semiconductor Corporation (NYSE: CY) today announced that revenue for the 2002 second quarter, ended June 30, 2002, was $202.1 million, up 5% from 2002 first quarter revenue of $193.2 million and up 9% from year-ago quarter revenue of $185.5 million. Pro forma net loss for the 2002 second quarter was $6.3 million, resulting in a pro forma loss per share of $0.05, compared with a first quarter 2002 pro forma loss per share of $0.10 and year-ago second quarter pro forma earnings of $0.01 per diluted share. Including acquisition-related costs, restructuring or non-recurring charges, and credits, Cypress posted a net loss of $28.1 million for the second quarter, resulting in a loss per share of $0.23, compared with a first quarter 2002 loss per share of $0.33.

Cypress CEO T.J. Rodgers said, “We are pleased to have achieved our third sequential quarterly growth in revenue and continued improvement in earnings to a five-cent loss, closing in on our goal to break even in the third quarter. Bookings grew 9% to $219.9 million, resulting in a book-to-bill of 1.09, providing a modest increase in backlog, also for the third consecutive quarter. However, we still need bookings in the September quarter to reach our break even target.”

Rodgers continued, “Our gross margin improved nicely from 39% last quarter to 45% in the second quarter, due to a better product mix, slower price erosion, and the initial cost reduction benefit from our 0.15-micron conversion. The company also successfully sold some fully reserved inventory, which contributed approximately 3 percentage points to our gross margin. Operating expenses were relatively flat as a percentage of sales with incremental spending driven largely by technology and product-design-related depreciation.”

MARKET SEGMENTS

Wide Area Network and Storage Area Network (WAN/SAN)
Revenue from the WAN/SAN segments, which accounted for 33% of second quarter revenue, increased 6% quarter-to-quarter. The WAN/SAN segment posted a gross margin of 57% in the second quarter. We expect continued modest recovery in the WAN/SAN segment in the third quarter, aided by incremental new product revenue and market share gain. Segment highlights for the quarter include:

  • Cypress shipped first revenue on its POSIC2GVC™ Packet-Over-SONET (POSIC) device, the industry’s most advanced 2.5-Gbps SONET/SDH framer. The device provides virtual concatenation to dynamically allocate up to 16 channels of voice and data, providing right-sized, secure, and dedicated bandwidth for high-speed data networks. Its support for generic framing procedure (GFP) makes it possible to transport any protocol over SONET/SDH, including Gigabit Ethernet, Fibre Channel, Enterprise System Connection (ESCON®), and Digital Video Broadcast (DVB). The POSIC2GVC framer is ideal for metropolitan area network (MAN) and wide area network (WAN) carrier-class routers, switches, add/drop multiplexers (ADMs), and dense wave-division multiplexing (DWDM) communication systems.
  • Cypress sampled its first OC-192, 10-Gbps framer: the POSIC10GTM device, a single-chip framer that makes it possible to extend 10 Gigabit Ethernet (10 GbE) local area networks (LANs) over standard SONET/SDH networks. The POSIC10G framer reduces network and linecard complexity while enabling networking and telecommunications carriers to offer cost competitive 10 GbE services over MAN/WAN networks. The framer is a product of Cypress’s recent acquisition of Silicon Packets Inc.
  • Cypress announced production samples of an OC-48, 2.5-Gbps SONET/SDH serializer-deserializer (SERDES) device fabricated using Cypress’s internally developed Silicon Germanium (SiGe) process. The CYS25G0102DX is Cypress’s first SiGe device, integrating a serializer, deserializer, clock and data recovery, clock synthesis, and a limiting amplifier into a single chip, allowing one device to take the place of two or more devices in many existing designs. This device consumes less than half the power (0.6W) and occupies less than half the board space (11 mm x 11 mm) of competing solutions.
  • Cypress introduced the Ayama™ family of network search engines (NSEs), including a pair of devices capable of searching 512K, 36-bit IP entries with the industry’s lowest power and highest performance specifications. NSEs offload some of the packet classification and forwarding functions of network processors, optimizing performance in voice and data transmission. Both the Ayama 10000 and Ayama 20000 versions are capable of performing 233 million lookups per second (MLPS). The Ayama 10000 line targets customers who use ASIC-based network processors—the largest segment of the network processor market. The Ayama 20000 line meets the needs of the growing number of customers who use commercial network processors from companies such as Intel, AMCC, Motorola, IBM, and Vitesse. Cypress provides the industry’s broadest NSE portfolio.
  • Cypress sampled a 256K NSE device, the latest entry of its existing NSE 70000 family. The low-power CYNSE70256 features a 1.5V core voltage and performance as fast as 83 MLPS. This device is ideal for applications requiring large routing tables and wirespeed processing at OC-48 (2.5 Gbps), OC-192 (10 Gbps), and beyond. Internet traffic growth, as well as the increasing number of services offered over the web, has created a demand for very large entry devices such as the CYNSE70256, which can perform layer 3-7 searches at line rates of up to 10 Gbps.
  • Cypress sampled a Zero Delay Buffer (ZDB) with a Total Timing Budget™ (TTB™) window of just 200 picoseconds, an industry first. ZDBs replicate a system clock to multiple devices in the same time domain with very low delay.
  • Cypress announced production volumes of the Quantum38K™ family of complex programmable logic devices (CPLDs). Quantum38K devices target set-top boxes and digital modems, along with enterprise network equipment such as switches, routers and storage systems. The Quantum38K family provides the industry’s most cost-effective CPLD solution but also provides a multidimensional upgrade path to Cypress’s Delta39K™ CPLDs, an even more robust family with the industry’s broadest feature set. Quantum38K devices seamlessly integrate with the design environments of major third-party providers, including Synplicity and Mentor Graphics, via Cypress’s Warp® Release 6.3 design software.

Wireless Terminals and Wireless Infrastructure (WIT/WIN)
Revenue from the WIT/WIN segments, which accounted for 34% of second quarter revenue, increased by 14% from the prior quarter, driven by an increase in cellular handset business and the continued shift toward higher-density memories in cell phones. The WIT/WIN segment posted a gross margin of 38% in the second quarter. We expect WIT/WIN sales to be slightly up in the third quarter of 2002. Segment highlights for the quarter include:

  • Cypress introduced three new 3.3V asynchronous SRAMs on its 0.15-micron, RAM7™ platform: the 16-Mbit CY7C1061, the 4-Mbit CY7C1041, and the 1-Mbit CY7C1021. These parts offer an industry best 8-10 nanosecond access time at significantly lower active power then the competition. The 16-Mbit device is sampling now.
  • Cypress announced full production of the first four members of the HOTLink II™ (High-speed Optical Transceiver Link) family of products, including single-channel, quad-channel, and Gigabit Ethernet/Fibre Channel devices and a Programmable Serial Interface™ (PSI™) version with up to 200K gates of logic. These devices, along with dual-channel and frequency-independent versions, make Cypress’s HOTLink II family the broadest 1.5-Gbps transceiver family on the market. The “frequency agility” of HOTLink II devices—their ability to operate at transmission speeds from 200 Mbps to 1.5 Gbps—makes them ideal for a variety of port and backplane applications in wireless basestations, workstations, servers, mass storage, and video transmission equipment.

Computation and Other
Revenue from the computation and other segment, which accounted for 33% of second quarter revenue, decreased 5% from the prior quarter with cyclically down PC-related clock sales offset by some strength in the consumer market. Gross margins were 41% in the second quarter. We expect this market segment to have slightly higher revenue in the third quarter of 2002. Segment highlights for the quarter include:

  • Cypress MicroSystems (CMS), a subsidiary of Cypress Semiconductor Corp., achieved $1 million in backlog for its first product, the Programmable System-on-Chip™ (PSoC™) microcontroller. Since its release, the PSoC device has achieved 50 design wins amid broad acceptance in the marketplace. The software-configurable PSoC device enables designers to select from a library of digital and analog IP blocks to instantly create an application-specific microcontroller that can take the place of thousands of custom microcontrollers, speeding time-to-market, reducing the number of chips used in a design, and decreasing overall system cost.
  • Cypress announced the availability of the EZ-USB AT2™ controller, its fourth-generation mass storage bridge solution. The device offers USB 2.0-to-ATA/ATAPI support to connect PCs and other information appliances to external storage units such as hard disk, CD, and DVD drives. The EZ-USB AT2 device expands Cypress’s No. 1 existing position in the USB 2.0 mass storage market.
  • Cypress reinforced its leadership position in the USB-to-storage arena with a flash memory reference design. Cypress shipped its Flash Drive reference design for the portable flash memory market. The design is a small mobile storage device that can be used to replace a floppy disk drive, and provide true “plug-and-play” capability and data portability for PCs.
  • Cypress released the VxWorks® USB host driver for its SL811HS embedded host/peripheral controller. This driver enables developers using the VxWorks real-time operating system (RTOS) and embedded development platform from WindRiver Systems to add USB host functionality to embedded applications such as cellular phones, MP3 players, network appliances, and PDAs. Cypress also announced that its customers would have access to Jungo Software Technologies’ WinDriver™ automatic code generator for the EZ-USB® family through the Cypress Lab CD-ROM. The WinDriver code generator includes libraries customized for the EZ-USB® family, further accelerating driver development.
  • Cypress received its first production order on a new clock chip created for Apple Computer’s iMac® desktop computers. All new iMac computers use this Cypress clock chip exclusively to perform all critical timing requirements. The custom chip is the most recent product of an ongoing, five-year relationship between Cypress and Apple.

Other Developments

  • Silicon Light Machines, a subsidiary of Cypress, announced that its Grating Light Valve™ (GLV™) device—an optical micro-electromechanical system (MEMS) component with a variety of applications in the telecommunications and imaging industries—attained a pair of design wins in the emerging computer-to-plate printing market. Print market leaders, Japan’s Dainippon Screen Mfg. and Germany’s Agfa are using SLM’s patented GLV technology in their next-generation computer-to-plate (CTP) platesetting solutions. CTP products enable commercial printers to produce high-quality print plates by directly “burning” a plastic printing plate with a computer/GLV-controlled laser.
  • Cypress received preferred supplier awards from three of its contract electronics manufacturing (CEM) partners: Celestica Inc., Solectron Corp., and Jabil Circuit Inc. The awards are handed out periodically by these CEMs to their top-rated suppliers based on criteria such as price competitiveness, delivery, quality, supply-chain integration, and technology. “These top-supplier awards validate Cypress’s best-in-class CEM program, which has taken market share in recent months under challenging conditions,” said Ralph Schmitt, Cypress VP of sales and marketing. “The awards underscore the success of our commitment to building long-term partnerships with the critical CEM channel, the importance of which has increased dramatically as end-market equipment companies continue to outsource a broad array of design and manufacturing services.”
  • Cypress successfully implemented world-class manufacturing planning software to drive customer satisfaction and additional efficiency in demand forecasting, supply chain planning, and order-scheduling systems. Cypress’s implementation of i2 Technologies, Inc.’s Demand Planning, Master Planning, and Demand Fulfillment systems was deployed during the quarter; Cypress announced plans to implement i2’s Factory Planner and Order Management systems. The new systems manage demand and production planning with high cost-efficiency, optimizing supply and factory utilization to meet customer demand, and reducing design cycle time and inventory.
  • Cypress and DuPont Photomasks Inc. signed an agreement to jointly develop advanced photomask technologies supporting the production of high-performance integrated circuits (ICs). The technology agreement calls for the companies to collaborate on the development and qualification of binary and phase-shift photomasks for 0.09- and 0.065-micron technology.
  • Cypress announced a technology exchange agreement with NVE Corporation under which the companies will gain rights to each other’s magnetic random-access memory (MRAM) intellectual property. Dr. Jim Daughton, the Chief Technology Officer of NVE, has joined the Technical Advisory Board of Cypress MRAM subsidiary Silicon Magnetic Systems.
  • The company repurchased $12.8 million of its 3.75% convertible debentures due July 2005 through open-market purchases. The purchase netted a pre-tax gain of $1.2 million, which was reported as a one-time event, excluded from pro forma earnings.

Conclusion
Rodgers concluded, “We have grown in each of the last three quarters. We expect to grow again in the September quarter with continuing increased activity in the wireless and consumer-related markets and a seasonal uptick in the computation market. Our goal is to break even in the September quarter.”

About Cypress
Cypress Semiconductor Corporation (NYSE: CY) is Connecting from Last Mile to First Mile™ with high-performance solutions for personal, network access, enterprise, metro switch, and core communications-system applications. Cypress Connects™ using wireless, wireline, digital, and optical transmission standards, including Bluetooth, USB, Fibre Channel, SONET/SDH, Gigabit Ethernet, and DWDM. Leveraging its process and system-level expertise, Cypress makes industry-leading physical layer devices, framers, and network search engines, along with a broad portfolio of high-bandwidth memories, timing technology solutions, and programmable microcontrollers. More information about Cypress is accessible online at www.cypress.com

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements herein that are not historical facts are “forward-looking statements” involving risks and uncertainties, including but not limited to: the effect of global economic conditions, shifts in supply and demand, market acceptance, the impact of competitive products and pricing, product development, commercialization and technological difficulties, and capacity and supply constraints. Please refer to Cypress's Securities and Exchange Commission filings for a discussion of such risks.

Cypress, the Cypress logo, Warp, and EZ-USB are registered trademarks of Cypress Semiconductor Corporation.

POSIC2GVC, POSIC10G, Ayama, Total Timing Budget, TTB, Quantum38K, Delta39K, RAM7, HOTLink II, Programmable Serial Interface, PSI, Programmable System-on-Chip, PsoC, EZ-USB AT2, Grating Light Valve, GLV, Connecting from Last Mile to First Mile, and Cypress Connects are trademarks of Cypress Semiconductor Corporation.

All other registered trademarks or trademarks are the property of their respective owners.

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