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Cypress Reports 12% Increase in Second Quarter Revenue

7/18/2003 - Cypress Semiconductor Corporation (NYSE: CY) announced that revenue for the 2003 second quarter was $203.1 million, up 12% from the prior quarter revenue of $181.0 million and up slightly from the year-ago second quarter revenue of $202.1 million. Pro forma net income for the 2003 second quarter was $3.4 million, resulting in a pro forma income per share of $0.03, compared with the prior quarter pro forma loss per share of $0.10 and the year-ago second quarter pro forma loss per share of $0.05.

Including amortization of intangibles and other acquisition-related, restructuring and other special charges and credits, Cypress posted a GAAP net loss of $12.4 million for the 2003 second quarter, resulting in a loss per share of $0.10, compared with the prior quarter loss per share of $0.27, and the year-ago second quarter loss per share of $0.23.

Cypress CEO T.J. Rodgers said, “We’re very pleased with our return to pro forma profitability and positive free cash flow (cash from operations less capital expenditures) this quarter. The sequential revenue growth of 12% in the second quarter included incremental sales from the Micron synchronous (networking) SRAM business we took over. Bookings and turns were strong all quarter, and we ended the quarter with book-to-bill greater than 1.0, even with the Micron billing considered. Backlog grew sequentially as well.”

Rodgers continued, “Gross margin for the 2003 second quarter was approximately 48%, aided by a 3% benefit from the sale of previously reserved inventory. Operating expenses (Research & Development; Sales, General and Administrative) as a percentage of sales, improved approximately four percentage points in the 2003 second quarter, aided by cost reductions and incremental sales. We ended the quarter with cash of $600 million, of which approximately $328 million was earmarked for the redemption of our convertible subordinated notes, which was completed shortly after the end of the second quarter.”

MARKET SEGMENTS
Wide Area Network and Storage Area Network (WAN/SAN)
Revenue from the WAN/SAN segment, which accounted for 32% of second-quarter revenue, increased 17% from the prior quarter, aided by the Micron SRAM transaction. The segment posted a gross margin of approximately 55%. The datacom market continues to suffer from demand weakness, which we expect to continue through 2003. We anticipate flat revenue in the third quarter. Segment highlights include:

• Cypress sampled the industry’s first full-function, 72-Mbit synchronous No Bus Latency^TM (NoBL^TM) SRAM, the highest-density SRAM currently available. Manufactured on Cypress’s proprietary RAM9^TM 90-nanometer process technology, the CY7C1480 targets next-generation, high-speed networking applications.
• Cypress sampled the AyamaTM 10000 family of network search engines (NSEs), optimized for multiprotocol packet classification and forwarding at 266 million searches per second (MSPS). In Internet routers, switches, and other network-infrastructure applications, NSEs accelerate packet processing by offloading search functions from the application-specific integrated circuit (ASIC) or network processor. The Ayama 10000 enables network equipment suppliers to quickly deploy packet processing solutions at 10 gigabits per second (Gbps) and beyond.
• Cypress passed the 1.5 million-unit mark in NSE shipments. This milestone demonstrates Cypress’s leadership in network search solutions, including TCAM-based NSEs and network coprocessors.
• Cypress launched its Cynapse^TM software platform, a unified application-simulation and development environment for Cypress NSEs. The software package provides a standard interface for hardware and software simulations, system performance evaluations, and reference applications and diagnostics. Software is fast becoming a key differentiator in the NSE business.
• Cypress announced that it will use the Intel® Control Plane Platform Development Kit (CP-PDK), a software toolkit based on standards developed by the Network Processor Forum (NPF) to stimulate the development of a broad range of applications for NSEs and coprocessors. Cypress’s use of the toolkit will ensure that its NSEs are compatible with both Intel NPUs and NPF standards.
• Cypress announced first revenue on its FastEdge^TMfamily of high-performance clock and data drivers. The new devices leverage Cypress’s proprietary silicon germanium (SiGe) technology and advanced design techniques to achieve jitter performance that is up to 90 percent better than alternative solutions. The FastEdge family customizes a single base die with metal masks to provide a variety of clock and data drivers for customers without sacrificing time-to-market.
• Cypress is ramping production of its field-programmable zero delay buffer (ZDB). The CY23FP12 device is a high-performance, 200-MHz clock-distribution solution with a flexible architecture to fit a wide range of applications. The programmable, single-chip ZDB can replace multiple, fixed-function clock-distribution devices. It uses Cypress’s proprietary, non-volatile, silicon oxide nitride oxide silicon (SONOS) technology.

Wireless Terminals and Wireless Infrastructure (WIT/WIN)
Revenue from the WIT/WIN segment, which accounted for 29% of second-quarter revenue, increased 2% from the prior quarter with a gross margin of approximately 36%. The increase in revenue is attributable to a slightly higher-density product mix and to the broadening of our customer base, which we believe resulted in some market-share gains. We expect WIT/WIN sales to be up in the third quarter of 2003, aided by seasonal trends. Segment highlights for the quarter include:

• Cypress realized first revenue on its 16-Mbit, one-transistor (1T) pseudo-SRAM (PSRAM) product. The 1.8-V, 70-nanosecond PSRAM device offers higher density than a conventional SRAM, at a lower cost. PSRAMs are an integral part of Cypress’s portfolio of MicroPower^TM SRAMs for cell phones.
• Cypress sampled a 16-Mbit, second-generation More Battery Life^TM (MoBL2^TM) MicroPower SRAM, manufactured using the company’s proprietary 0.13-micron R8^TM technology. The CY7C62167/8DV device is the world’s smallest low-power 16-Mbit SRAM, increasing battery life, talk time, and data storage capabilities in cell phones.
• Cypress introduced two FailSafe^TM buffers (CY23FS04 and CY23FS08) that provide an uninterruptible clock source for applications such as storage area networking or wireless basestations, where continuous operation of the system is required to maintain mission-critical data in the event of a primary reference clock failure.

Computation and Consumer
Revenue from the computation and consumer segment, which accounted for 35% of second-quarter revenue, was up 18% from the prior quarter and posted a gross margin of approximately 48%. While PC clock demand was flat with the prior quarter, as anticipated, the sales of other consumer-related clocks and USB controllers grew briskly in the quarter, aided by a continuing increase in the USB adoption rate. We expect the computation and consumer segment sales to be up in the third quarter, aided by cyclically stronger demand for consumer products. Segment highlights include:

• Cypress sampled its fifth-generation USB 2.0-to-ATA/ATAPI bridge device, the ISD-300LP, adding to its market-leading USB portfolio a low-power solution for external mass storage, such as hard drives, CD-R/Ws (read-write devices), and DVD players. The best-in-class power efficiency of the ISD-300LP enables enhanced portability for mass-storage products.
• Fueled by growing consumer demand for USB 2.0-enabled PCs and peripherals, Cypress shipped its 250 millionth USB controller during the quarter, solidifying its overall No. 1 USB market position. Cypress USB controllers are used in a variety of products from mice, keyboards, hubs, and mass-storage peripherals, to video and multimedia players, set-top boxes, and photo printers.
• Cypress and Envara Inc. announced joint development of a low-cost, high-performance USB 2.0-to-Wireless LAN (WLAN) solution, consisting of an external USB 2.0 adapter that enables users to connect to IEEE802.11g or “multimode” IEEE802.11a/b/g WLANs at the current top WLAN speed of 54 Mbps. The solution is designed to extend the benefits of the popular, high-speed USB interface to the growing number of wireless cafes and “hot spots” that are proliferating in airports, coffee houses, and other retail establishments, providing mobile PC users with fast, easy, wireless connectivity.
• Cypress’s WirelessUSB^TM solution, a revolutionary 2.4-GHz radio frequency interconnect protocol, received several best-in-class awards during the quarter. The new technology—a wireless solution for mice, keyboards, game controllers and other systems, which offers an optimal combination of latency, power, bandwidth and price—was selected by EDN magazine as the winner of its “Innovation of the Year” award in the Communications product category. EDN is one of the industry’s most widely read design publications. The WirelessUSB product family also received the “Electron d’Or 2003” award in the Network and Telecom Chipset category from Electronique, the leading French design publication.
• Cypress and NMB Technologies, the world’s No. 1 keyboard manufacturer, signed an agreement to co-develop WirelessUSB keyboard and mouse solutions. Also during the quarter, Saitek—one of the world’s leading manufacturers of video-game peripherals—selected Cypress’s WirelessUSB solution for its PC and consumer products.
• Cypress continued to ramp production of a family of clock chips targeting the digital still camera (DSC) market. Cypress added several million units per quarter in business with design wins to major customers, including Sony® and Fuji Photo Film, which accounted for 2.2 million units this quarter. The DSC clock business is expected to grow 30% in the current quarter.
• Cypress qualified its CY22313 frequency timing generator, which combines into a single device all the primary timing functions for the Sony PS2® gaming system. Shipments of the new clocking solution are planned for the current quarter.

Cypress Subsidiaries
Revenue from Cypress subsidiaries, which accounted for 4% of second-quarter revenue, was up 6% from the prior quarter. The subsidiaries posted a gross margin of approximately 74%. The excellent gross margin was offset by the high operating expenses of the new ventures. As a group, the subsidiaries had a pre-tax loss of $8.0 million in the quarter. We expect revenue contribution from the subsidiaries to be up at least 15% in the third quarter. Segment highlights include:

• Cypress MicroSystems Inc. (CMS) announced a new family of Programmable System-on-Chip^TM (PSoC^TM) devices. PSoC Energy Meter ICs harness the capabilities of the basic reconfigurable PSoC mixed-signal array, which includes an onboard microcontroller, in an application-specific solution for engineers building commercial and residential power meters. PSoC devices integrate analog and digital logic, memory, and processing circuitry in one small package. When used in a power-metering application, PSoC reduces the component count and enhances functionality, compared with standard microcontroller-based solutions that limit the ability of end manufacturers to provide feature-rich products.
• CMS also introduced a single-chip fluorescent ballast controller capable of supporting the fast, cost-efficient development of electronic lighting systems. The CY8C0100 controller solution, which includes a reference design kit, enables the difficult-to-achieve automatic dimming of fluorescent lighting in response to ambient lighting conditions, facilitating substantial energy savings.
• SunPower Corporation sampled the A-300 solar cell, the world’s most-efficient, low-cost silicon solar cell. Based on a unique rear-contact design—which maximizes the working cell area, hides unsightly wires, and makes automated production easier—the A-300 achieves over 20 percent efficiency, compared with currently available cells in the 12%-15% range. Cypress holds a 57% ownership stake in SunPower and is lending its manufacturing and business expertise to the company’s 1-megawatt pilot manufacturing line near Cypress’s Fab 2 manufacturing facility in Round Rock, Texas, as well as to its 25-megawatt production plant in Manila, the Philippines, which is currently under construction.
• Silicon Light Machines (SLM) increased its profits during the quarter, leveraging existing development contracts to create faster, more precise optical modulators to be used in computer-to-print and other lithography applications. The new products are based on SLM’s patented Grating Light Valve^TM (GLV^TM) technology—a light-switching optical micro-electromechanical system (MEMS) device. SLM will showcase its use of the GLV device for lithography applications in San Francisco at the Semicon West conference, the semiconductor manufacturing industry’s largest annual exhibition. In addition, SLM signed a licensing agreement to commercialize its PyroFree^TM technology, which dramatically improves the manufacturability of lithium tantalite surface acoustic wave (SAW) devices by eliminating the electrical arcing problems that have historically plagued the material.

Financing Developments
During the second quarter, Cypress issued $600 million of five-year convertible subordinated notes with a coupon of 1.25%. Each note is convertible into 55.172 shares of Cypress stock plus a cash payment of $300.00. The notes are callable at anytime on or after June 20, 2006. At anytime prior to maturity, Cypress may, at its option, elect to terminate the holders’ conversion rights if the closing price of Cypress’s common stock exceeds $21.75 (subject to certain adjustments) for 20 days out of a 30 consecutive trading day period. Cypress used approximately $400 million of proceeds to retire the company’s existing convertible debt as described below.

Simultaneous with the offering, the company purchased nine million shares of Cypress stock for approximately $95 million in order to reduce the potential dilutive impact of the offering.

The company also used approximately $49 million of the proceeds to put in place issuer call-spread options to potentially reduce the dilutive effect of the shares issuable upon conversion of the convertible notes. The call spread expires July 15, 2004. This transaction has the potential to reduce the number of shares outstanding by up to 12 million shares.

Cypress also called for the full redemption of its 4% convertible subordinated notes due February 2005. As of July 1, 2003, the entire $283 million principal amount of debt was retired.

Cypress called for the redemption of its 3.75% convertible subordinated notes due July 2005. As of July 8, 2003, all but approximately $70 million of the $186 million principal amount of debt was retired.

Between the redemptions and privately negotiated purchases, Cypress retired approximately $400 million of its existing convertible debt, consistent with its plans at the time of the recent $600 million offering. Cypress intends to retire the balance of the 3.75% convertibles at or before maturity, either from its cash balance or cash generated from operations through additional redemptions or other purchases.

On June 30, 2003, Cypress filed a resale Shelf Registration Statement on Form S-3 for the registration of the shares underlying the recently issued convertible debt. The registration statement will become effective upon approval by the Securities and Exchange Commission.

Other Developments
Cypress received the International Organization for Standardization (ISO) 9001:2000 certification, the newest and most demanding of the ISO 9001 standards. The certification covers all Cypress locations and underscores the company’s commitment to provide the highest-quality products and services to customers.

Conclusion
Rodgers concluded, “We expect to grow revenue sequentially in the third quarter of 2003, to continue to generate free cash and to improve our pro forma profitability. The economy is still struggling, but—after a false start in 2002—this feels like the beginning of a recovery.”

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^TM using wireless, wireline, digital, and optical transmission standards, including 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.

Cypress and the Cypress logo are registered trademarks of Cypress Semiconductor Corporation. No Bus Latency, NoBL, RAM9, Ayama, Cynapse, FastEdge, More Battery Life, MoBL2, R8, MicroPower, FailSafe, WirelessUSB, Connecting from Last Mile to First Mile, and Cypress Connects are trademarks of Cypress Semiconductor Corporation. Programmable System-on-Chip and PSoC are trademarks of Cypress MicroSystems. Silicon Light Machines, Grating Light Valve, GLV and PyroFree are trademarks of Silicon Light Machines. Intel is a registered trademark of Intel Corporation. Sony and PS2 are registered trademarks of Sony Corporation.

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