Cypress Reports Fourth Quarter 2004 Results

Cypress Reports Fourth Quarter 2004 Results

    Business Editors

    SAN JOSE, Calif.--(BUSINESS WIRE)--Jan. 27, 2005--Cypress Semiconductor Corp. (NYSE:CY) today announced that revenue for the 2004 fourth quarter was $210.2 million, down 4.3% from prior quarter revenue of $219.6 million and down 11% from year-ago fourth quarter revenue of $236.0 million.
    On a non-GAAP basis -- excluding the amortization of intangibles and other acquisition-related, restructuring and special charges and credits -- the 2004 fourth quarter resulted in a net loss of $18.0 million, or a diluted loss per share of $0.14. This compares with the prior quarter's diluted earnings per share of $0.22, which included a favorable adjustment to income tax liabilities of $29.9 million, without which earnings per share were $0.04. Diluted earnings per share in the year-ago fourth quarter were $0.16.
    Cypress posted a GAAP net loss of $28.1 million in the 2004 fourth quarter, or a diluted loss per share of $0.22. This compares with last quarter's GAAP earnings of $0.02, which includes the tax benefit noted above, without which the GAAP loss per share was $0.16. Diluted earnings per share in the year-ago fourth quarter were $0.15 per share.
    For the fiscal year 2004, Cypress posted total revenue of $948.4 million, a growth of 13.3% from fiscal year 2003 revenue of $836.8 million. On a non-GAAP basis, Cypress's total year net income was $83.3 million, or diluted earnings per share of $0.54. On a GAAP basis, Cypress's total year net income was $24.7 million, or diluted earnings per share of $0.17.
    Cypress President and CEO T.J. Rodgers said, "Although our results were in line with revenue guidance issued at the beginning of the quarter, we missed our earnings guidance. This was primarily due to the underutilization of our fabs, which in turn was based on our decision to drain inventory in the current low-demand environment. As a result, internally fabricated inventory dropped by $3.6 million, compared with last quarter's inventory growth of $16.7 million. Combined with lower sales and a decrease in average selling price, these factors contributed to a 37% gross margin for the quarter."
    Rodgers continued, "To hasten our return to profitability, we have taken action to reduce our cost structure and improve our end-market orientation, including an organizational restructuring and a reduction in force of approximately 200 employees worldwide. We are merging our Timing Technology Division and Personal Communications Division into a new, market-oriented Consumer and Computation Division. We will close our Austin, Texas CAD center, lower our headcount in Minnesota Fab 4 in line with demand, and systematically reduce the number of management layers in the company to no more than six in most of our functional organizations. The full impact of these actions won't be realized until the second quarter of 2005. Our current estimate of charges related to these actions is approximately $15 million, of which $6 million is expected to be an actual cash expense."

    MARKET SEGMENTS

    Wide Area Networks and Storage Area Networks (WAN/SAN)

    Revenue from the WAN/SAN segment, which accounted for 31% of fourth-quarter revenue, decreased 11% from the prior quarter, compared with our expectation of flat revenue. The gross margin for the segment was 44%. There was a more aggressive inventory-reduction push at our customers in Q4 than we had anticipated at the beginning of the quarter. We are not expecting this to change in the first quarter; as a result, we are forecasting another reduction in revenue. Segment highlights for the fourth quarter include:

--	Cypress announced the release of its Cynapse(TM) SP software platform, providing networking vendors with a common-control-plane application programming interface (API) that supports Cypress's portfolio of TCAM- and algorithmic-based network search engines (NSEs). Cynapse SP enables software developers to build and simulate applications prior to their integration into hardware, accelerating time-to-market.
--	Cypress shipped fully qualified 4-Mbit, 9-Mbit, 36-Mbit and 72-Mbit synchronous SRAMs. These memories, built on Cypress's 90-nm RAM9(TM) technology, are many times faster than competing high-speed DRAMs and feature high data throughput and low latency. They target a broad array of applications, including switches, routers, basestations and data storage devices.
--	Cypress also introduced 90-nanometer versions of its 18-Mbit QDR(TM)-II (Quad Data Rate(TM)) SRAM family, including 250 MHz devices optimized for router applications. Earlier in 2004, Cypress became the first company to sample 72-Mbit QDR-II devices at 90 nm.

    Wireless Terminals and Wireless Infrastructure (WIT/WIN)

    Revenue from the WIT/WIN segment, which accounted for 31% of fourth-quarter revenue, declined 16% from the prior quarter, compared with our expectation of flat revenue. The WIT/WIN gross margin was 30%. Cypress's handset revenue was flat with a significant reduction of average selling prices. The segment continued to experience a slowdown in the wireless infrastructure business as customers deferred 3G basestation deployment projects. We expect segment revenue to be flat quarter on quarter. Among the highlights:

    -- Cypress added five new products to its FLEx18(TM) family of
    synchronous, pipelined, dual-port RAMs, all of them in the
    world's smallest package: a 144-pin fine-pitch ball-grid array
    (FBGA). The devices, ranging in density from 512 Kbit to 9
    Mbit, with up to 24 gigabits per second (Gbps) of bandwidth,
    enable designers to shrink board sizes and increase
    reliability by reducing pin count. Cypress's FLEx18 dual ports
    target applications including wireless microbasestations and
    voice-over-Internet-protocol (VoIP).

    -- Cypress announced that its HOTLink II(TM) physical layer
    family now meets the 768-Mbaud and 1536-Mbaud Reference Point
    3 (RP3) specifications of the Open Basestation Architecture
    Initiative (OBSAI). The RP3 specification addresses the
    interface between baseband processing cards and RF modules
    using OBSAI-defined packets and high-speed serial links.

    -- Cypress also announced that its HOTLink II family is compliant
    with version 1.2 of the Common Public Radio Interface (CPRI)
    specification. The CPRI spec defines a standardized serial
    interface between the digital and RF components of a
    basestation, reducing system costs and accelerating time to
    market.

    Computation and Consumer

    Revenue from the computation and consumer segment, which accounted for 31% of fourth-quarter revenue, increased 13% from the prior quarter, outpacing the company's expectation of flat revenue. The gross margin for the segment was 37%, primarily due to the negative impact of memory pricing in cell phones. Strong demand for USB and clock products--particularly those for mobile computing and gaming platforms--helped to drive segment growth. We expect flat revenues in Q1, which is normally a seasonally down quarter due to low inventory levels in the channel. Fourth-quarter highlights include:

    -- In the wired Universal Serial Bus (USB) business, Cypress and
    Agilent Technologies announced a joint reference design kit
    for high-performance optical mice. The combination USB-PS/2
    reference design kit gives manufacturers the technical
    instructions and firmware to quickly implement an optical
    mouse design and create innovative products for PC OEM and
    retail markets.

    -- Cypress also announced general availability of the CY4640 USB
    Host Mass-Storage Reference Design Kit, which has helped it to
    secure lead customers for USB hard drives, MP3 players and
    set-top boxes with host functionality.

    -- Cypress launched production shipments of its WirelessUSB(TM)
    Sensor Network Development Kit for low-cost, low-power,
    wireless sensor networks. The solution targets low-data-rate,
    high-node-density systems, providing a scalable development
    environment for a wide variety of consumer, industrial,
    medical, building and home-automation systems. WirelessUSB is
    a low-cost, high-performance 2.4 GHz radio system-on-a-chip
    technology that enables developers to "cut-the-cord" in
    low-data-rate applications such as PC keyboards and mice,
    video game controllers and sensors.

    -- Cypress announced that its WirelessUSB radio system-on-a-chip
    received a best-in-class design innovation award from the
    publisher of Electronic Product Design magazine, a major
    electronics trade publication. The award marked the fifth time
    Cypress's WirelessUSB has received such industry recognition.

    -- Cypress entered the $1.52 billion market for crystal
    oscillators with the launch of its CY25701 programmable timing
    generator, which integrates a spread-spectrum crystal
    oscillator (SSXO) and a high-frequency reference crystal in a
    single package. The addition of an onboard crystal to
    Cypress's SSXO products eliminates the need for designers to
    characterize oscillators with the broad array of crystals
    available on the market to determine the optimal pairing for
    their system. The new family of "oscillator-inside" devices --
    now available in production quantities -- paves the way for
    Cypress to expand outside the $1.69 billion market for
    conventional clock chips.

    Cypress Subsidiaries

    Revenue from Cypress's subsidiaries, which accounted for 7% of fourth-quarter revenue, increased 31% from the prior quarter, in line with expectations. The gross margin for the segment was 47%. Increased revenues were driven by the continued ramp of SunPower Corp. solar cells and Cypress MicroSystems' Programmable System-on-Chip(TM) (PSoC(TM)) mixed-signal arrays. Segment highlights include:

    -- SunPower announced plans to double the capacity of its
    Philippines manufacturing plant to 50 megawatts -- about $150
    million per year in revenue potential -- based on strong
    demand for its solar cells and modules. The global demand for
    solar-electric systems has increased by more than 40 percent
    annually over the past five years, according to Strategies
    Unlimited, a leading independent market research firm. But
    even with this rapid growth, the entire solar-cell industry
    produced only 1,000 megawatts of capacity in 2004 --
    equivalent to one large power plant. In other words, the solar
    industry is just beginning to show up on the energy production
    charts and has a long future ahead of it.

    -- SunPower launched its line of high-efficiency photovoltaic
    modules in the North American market at the Solar Power 2004
    conference in San Francisco. Previously, SunPower's
    breakthrough products had been available only in Europe due to
    very high demand and a limited but ramping supply.

    -- SunPower also announced the installation of its first
    building-integrated photovoltaic system. The company's solar
    cells were laminated into custom glass panels and designed
    into the rounded facade of a building in Paderborn, Germany.
    SunPower's A-300 cells were selected for their high efficiency
    and unique all-black appearance. The National Renewable Energy
    Laboratory has rated A-300 solar cells at 21.5% efficiency,
    the best in the industry, compared with typical production
    cells in the 12%-15% range.

    -- Cypress MicroSystems (CMS) announced production shipments of
    its smallest, most integrated PSoC mixed-signal arrays,
    featuring four configurable analog and digital blocks. The new
    device rounds out the PSoC portfolio, which now targets
    embedded-control applications ranging from the most complex to
    the most cost-effective.

    -- CMS also announced the qualification of its PSoC device by the
    Automotive Electronics Council. The ability of a PSoC array to
    integrate analog and digital functionality with an eight-bit
    microcontroller in applications operating up to 125 degrees
    Celsius has enabled it to secure design wins in power train
    and automotive body electronics, as well as in car-based
    safety, security and entertainment systems.

    -- Silicon Magnetic Systems provided alpha samples of its
    256-Kbit magnetic random access memory (MRAM) device to seven
    key customers, two of which have indicated that the MRAMs are
    fully functional in initial system tests and five that are
    currently developing evaluation systems. MRAM is a fast-write,
    easy-to-use technology combining the best characteristics of
    volatile and non-volatile memories.

    Other Developments

    -- Cypress's founder and CEO, T.J. Rodgers, was inducted into the
    Silicon Valley Engineering Hall of Fame. Rodgers and four
    other industry pioneers -- including Douglas Engelbart, the
    inventor of the computer mouse -- will be honored in February
    at an event hosted by the Silicon Valley Engineering Council
    (SVEC), a regional organization representing 60,000 engineers,
    scientists and technology professionals. The Hall of Fame's
    membership comprises a virtual "Who's-Who" of industry
    pioneers, including Hewlett-Packard founders William Hewlett
    and David Packard, Intel Corp. founders Robert N. Noyce and
    Gordon E. Moore, and Apple Computer founder Steve Wozniak.
    Rodgers remains active in a few key technology programs at
    Cypress; he recently received his 10th patent.

    -- In December, Cypress completed the redemption of all
    outstanding 3.75% convertible subordinated notes, due July 1,
    2005 for approximately $69 million.

    Conclusion

    Rodgers concluded, "In light of our fourth-quarter results, we are taking decisive action to return the company to profitability quickly. We remain excited about the growth prospects of our subsidiaries, particularly SunPower and Cypress MicroSystems. We still expect these new businesses to ramp and offset the market softness that may impact our industry in the first half of 2005."

    About Cypress

    Cypress Semiconductor Corp. (NYSE:CY) provides high-performance solutions for personal, network access, enterprise, metro switch and core communications system applications. 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, USB devices, timing technology solutions and reconfigurable mixed-signal arrays. More information about Cypress is accessible online at www.cypress.com.

    This press release contains statements that are not historical facts, but are forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We use words such as "anticipates," "believes," "expects," "future," "estimates," "plans," "intends" and similar expressions to identify forward-looking statements. Such forward-looking statements regarding the future prospects of Cypress and the semiconductor industry more generally, Cypress's anticipated revenue and operating results, and customer demand for Cypress products are based on management's current expectations as of the date of this release. Our actual results may differ materially due to a variety of uncertainties and risks, including those described in our filings with the Securities and Exchange Commission, as well as our ability to fully realize the anticipated benefits of the cost-cutting and restructuring measures identified this release, the actual cost of such measures, the ability of such measures to return the Company to profitability, the possible disruptive effects of merging certain divisions within the Company, the optimization of our manufacturing facilities, the movement in ASPs, our ability to manage inventory, the seasonality of the computation and consumer segment, and the demand for SunPower and PsoC products. Cypress cannot provide any assurance that its results will meet expectations, or that it has identified all of the risk factors that might materially affect such results. We assume no responsibility to update any forward-looking statement.

    Cypress and the Cypress logo are registered trademarks of Cypress Semiconductor Corporation.
    Cynapse, RAM9, WirelessUSB, FLEx18, and HOTLink II are trademarks of Cypress Semiconductor Corporation.
    Quad Data Rate(TM) and QDR(TM) comprise a family of SRAM products developed by Cypress, IDT, NEC and Samsung.
    Programmable System-on-Chip and PSoC are trademarks of Cypress MicroSystems, Inc.
    Intel is a registered trademark of Intel Corporation.
    All other trademarks or registered trademarks are the property of their respective owners.

CYPRESS SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)

(Unaudited)

Jan 02, Dec 28, 2005 2003 ----------- -----------

ASSETS

Cash, cash equivalents, and investments (a) $307,641 $379,868 Accounts receivable, net 107,288 121,756 Inventories 99,709 72,085 Property and equipment, net 444,651 442,887 Goodwill and other intangible assets 447,003 375,483 Other assets 166,702 183,606 ----------- -----------

Total assets $1,572,994 $1,575,685 =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities $179,282 $155,693 Deferred income 33,426 28,292 Convertible subordinated notes 599,998 668,652 Income tax liabilities 71,992 103,930 Other liabilities 27,938 49,930 ----------- -----------

Total liabilities 912,636 1,006,497

Stockholders' equity (b) 660,358 569,188 ----------- -----------

Total liabilities and stockholders' equity $1,572,994 $1,575,685 =========== ===========

(a) Cash, cash equivalents, and investments includes restricted amounts totaling $62.7 million and $62.8 million as of January 02, 2005 and December 28, 2003, respectively.

(b) Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 128,493 and 120,483 outstanding as of January 02, 2005 and December 28, 2003, respectively.

CYPRESS SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)

THREE MONTHS ENDED TWELVE MONTHS ENDED (Unaudited) (Unaudited) ------------------------------------------------- Jan 02 Dec 28 Sep 26 Jan 02 Dec 28 2005 2003 2004 2005 2003 --------- --------- --------- --------- ---------

Revenues $210,181 $236,031 $219,595 $948,438 $836,756

Costs of revenues 131,442 115,229 112,401 492,058 435,749 --------- --------- --------- --------- ---------

Gross margin 78,739 120,802 107,194 456,380 401,007

Operating expenses: Research and development 66,910 60,790 64,764 261,629 251,432 Selling, general and administrative 37,041 34,270 37,239 139,799 130,349 Acquisition and other costs 9,361 5,941 25,339 56,498 34,215 Restructuring costs 243 (4,337) (326) (164) (6,685) --------- --------- --------- --------- ---------

Total operating costs 113,555 96,664 127,016 457,762 409,311 --------- --------- --------- --------- ---------

Operating income (loss) (34,816) 24,138 (19,822) (1,382) (8,304)

Net interest income (expense) and other 3,402 (575) (2,470) (495) 5,795 --------- --------- --------- --------- ---------

Income (loss) before income tax (31,414) 23,563 (22,292) (1,877) (2,509)

Income tax (provision) benefit 3,316 (400) 26,628 26,575 (2,822) --------- --------- --------- --------- ---------

Net income (loss) $(28,098) $23,163 $4,336 $24,698 $(5,331) ========= ========= ========= ========= =========

Basic net income (loss) per share $(0.22) $0.19 $0.03 $0.20 $(0.04) Diluted net income (loss) per share $(0.22) $0.15 $0.02 $0.17 $(0.04)

Shares used in calculation: Basic 127,362 119,940 125,172 124,580 121,509 Diluted 127,362 168,988 130,961 134,592 121,509

Reconciliation of our GAAP Net Income (Loss) to our Non-GAAP Net Income:

GAAP Net Income (Loss) $(28,098) $23,163 $4,336 $24,698 $(5,331) Adjustments: Cost of revenues (acquisition and stock compensation expenses) 68 139 29 148 693 Restructuring costs 243 (4,337) (326) (164) (6,685) Amortization of intangibles 9,361 9,441 9,739 38,898 37,715 In-process research and development charge - - 15,600 15,600 - Acquisition and stock compensation 1,253 2,130 2,180 9,084 13,143 Non-recurring charges - (3,500) - 2,000 (3,500) Synthetic lease - guarantee accrual 1,825 - - 1,825 - Employee loan reserve - - - (7,752) 241 (Gain) loss on retirement of bonds 209 - - 209 7,524 Impairments, asset write-downs (1,129) (10) 1,344 (446) (16,873) Tax effects on non- GAAP adjustments (1,758) (2,130) 1,163 (768) (7) --------- --------- --------- --------- --------- Non-GAAP Net Income (Loss) $(18,026) $24,896 $34,065 $83,332 $26,920 ========= ========= ========= ========= =========

Basic net income (loss) per share $(0.14) $0.21 $0.27 $0.67 $0.22 Diluted net income (loss) per share $(0.14) $0.16 $0.22 $0.54 $0.19

To supplement the consolidated financial results prepared under generally accepted accounting principles ("GAAP"), Cypress uses a non-GAAP measure of net income (loss) that is GAAP net income (loss) adjusted to exclude charges related to acquisitions including amortization of intangibles, in-process research and development and stock compensation, employee loan reserves, off-balance sheet lease accruals, restructuring, impairments and asset write-downs, gains or losses on the retirement of bonds and other non-recurring costs. Management does not consider these cash and non-cash charges, as applicable, to be reflective of the core operational activities of the Company as they result from corporate transactions outside the ordinary course of business. As a result, management uses this non-GAAP measure internally for strategic decision making, forecasting future results and evaluating the Company's current performance. Given management's use of this measure, Cypress believes this measure is important to investor understanding of the Company's disclosures regarding current and future operating results. Management also believes this non-GAAP measure enables investors to better assess changes in Cypress' core business across different time periods. This measure is not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

--30--EL/sf*

CONTACT: Cypress Semiconductor Corp. Manny Hernandez, 408-943-2754 Joseph L. McCarthy, 408-943-2902

KEYWORD: CALIFORNIA MINNESOTA TEXAS INDUSTRY KEYWORD: HARDWARE COMPUTERS/ELECTRONICS TELECOMMUNICATIONS SOFTWARE NETWORKING EARNINGS SOURCE: Cypress Semiconductor Corp.

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