Cypress Reports Third-Quarter 2008 Results

Cypress Semiconductor Corp. (NYSE:CY) today announced that consolidated revenue for the 2008 third quarter was $600.2 million, up 1.3% from $592.3 million for the prior quarter, and up 33.5% from $449.5 million for the year-ago period.

Cypress recorded a GAAP net loss of $23.6 million in the 2008 third quarter, or a diluted loss per share of $0.16. The GAAP results for the third quarter were impacted by significant one-time items that were not used by management in its internal review of Cypress’s core business and operating performance. These items primarily consisted of a gain on the sale of SunPower shares, a loss on the convertible debenture tender offer made during the quarter, a gain on the divestiture of the product lines of Cypress subsidiary Silicon Light Machines, acquisition-related charges, restructuring charges and charges related to the distribution of SunPower — including a material stock-based compensation charge. Last quarter’s diluted earnings per share was $0.14. GAAP diluted earnings per share in the year-ago third quarter was $0.18.

Non-GAAP² net income for the 2008 third quarter, which excluded the one-time items mentioned above, totaled $52.0 million, or diluted earnings per share of $0.30. That compares with non-GAAP² diluted earnings per share of $0.28 for the prior quarter and $0.26 for the year-ago third quarter.

As the majority shareholder of SunPower prior to the spin-off on September 29, 2008, Cypress reported consolidated financial results which included SunPower. Following the spin-off, Cypress does not own any shares of SunPower and beginning in the fourth quarter of fiscal 2008, will no longer consolidate SunPower’s financial results. Cypress will present SunPower as a discontinued operation in its historical financial statements for periods prior to the spin-off.

Cypress’s President and CEO T.J. Rodgers said, "This year has been challenging for the semiconductor industry. We are pleased that Cypress was able to grow revenue sequentially during the third quarter on the strength of new proprietary and programmable products and the new customers and end markets related to them.

"The third quarter was also highlighted by the distribution to our shareholders of 42 million class B common shares of SunPower, an asset worth $2.6 billion. We are pleased with the success of the company that we have nurtured and believe that we have delivered on our promise to spin out SunPower for the benefit of our shareholders.

"Looking ahead, we are very cautious, like most companies, about the macroeconomic environment and consumer spending. While we expect revenue and earnings to decrease in the fourth quarter more than the standard seasonal decline, we remain confident in our long-term strategy to drive programmable and proprietary solutions. We are focused on our cost model and maintain a very solid balance sheet positioned to support continued growth and long-term shareholder value.”

BUSINESS REVIEW

+ On a GAAP basis, third-quarter consolidated gross margin was 34.2%. Semiconductor¹ gross margin for the third quarter was 44.3%, down 4.2 percentage points from the previous quarter.

+ Non-GAAP² consolidated gross margin for the third quarter was 37.3%, up 2.3 percentage points from the previous quarter.

+ Non-GAAP² semiconductor¹ gross margin for the third quarter was 50.5% — the third straight quarter above our current 50% target. Non-GAAP² semiconductor¹ gross margin for the previous quarter was 50.7%.

+ In anticipation of the SunPower spin off, Cypress paid down $531.3 million of its convertible debt in the third quarter, leaving a balance of $68.7 million.

+ Semiconductor¹ cash and investments totaled $370.8 million with net cash of $302.1 million, providing financial strength and flexibility.

Additional third-quarter data and comparisons relevant to Cypress’s business units are presented below:

THIRD-QUARTER 2008 HIGHLIGHTS

Programmable product update:

+ Cypress’s programmable solutions business continued to grow in the third quarter. Its PSoC customer base — customers who have generated PSoC revenue for Cypress in the last 12 months — increased to 8,256 customers, up 5.2% quarter-on-quarter and 57.6% year-on-year. Programmable products accounted for 50.2% of Cypress’s core semiconductor business in the third quarter.

+ Cypress introduced a new integrated design tool called PSoC Designer™ 5.0 that combines both code-free and high-level language tools resulting in a highly flexible design tool and accelerated time-to-market.

+ Cypress announced the PSoC^® NV family of devices combining Cypress’s flexible PSoC architecture with nonvolatile SRAM (nvSRAM) technologies to deliver failsafe data protection to industrial systems. This integrated electronic "black box” solution is useful in many applications. For example, it could be used in the shipping business to record changes in environmental conditions during transit, such as a package being dropped or exposed to extreme heat or moisture.

+ Cypress and Avnet released an upgraded Spartan-3A FPGA evaluation kit pairing Xilinx’s Spartan-3A field programmable gate array with Cypress’s PSoC device. The kit enables fast FPGA configuration and flash memory reprogramming through a built-in USB interface.

+ Cypress partnered with Europractice to ensure the availability of Cypress solutions to academic institutions in the European Union. The Europractice group provides schools in 38 countries with broad access to advanced technology.

Other business news:

+ Cypress completed a tax-free distribution of its SunPower Class B common stock to Cypress shareholders of record as of September 17. Cypress shareholders received 0.2743 shares of SunPower Class B common stock for every share of Cypress stock. The value of the distribution was $2.6 billion, measured by SunPower’s September 29, 2008 closing price of $60.75.

+ Cypress consolidated its leadership position in the nvSRAM market with the acquisition of Simtek Corp. in an all-cash transaction totaling $44 million. Nonvolatile SRAMs provide the high-speed access of a standard SRAM, but retain data in the event of a power loss.

+ Cypress named Ben Lee senior vice president of worldwide sales. Lee brings 20 years of sales and marketing experience to Cypress, including senior positions with Altera, Trident Microsystems and Apexone.

+ Cypress subsidiary Cypress Envirosystems introduced a family of automated control and monitoring solutions that save money and reduce energy consumption in industrial and medical applications. The new products, powered by Cypress’s PSoC and 2.4-GHz wireless radio technologies, include a wireless pneumatic thermostat that enables remote temperature sensing and control, a wireless gauge reader that clips onto the face of existing gauges to capture and transmit data, a wireless steam trap monitor that detects leaks and failures, and a wireless transducer reader that provides valuable energy-use characterization and baseline data for audits.

ABOUT CYPRESS

Cypress delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include the PSoC Programmable System-on-Chip, USB controllers, general-purpose programmable clocks, and memories. Cypress also offers wired and wireless connectivity solutions ranging from its WirelessUSB radio system-on-chip, to West Bridge and EZ-USB FX2LP controllers that enhance connectivity and performance in multimedia handsets. Cypress serves numerous markets, including consumer, computation, data communications, automotive and industrial. Cypress trades on the NYSE under the ticker symbol CY. Visit Cypress online at www.cypress.com.

FORWARD-LOOKING STATEMENTS

Statements herein that are not historical facts and that refer to Cypress or its subsidiaries’ plans and expectations for the fourth quarter of 2008 and the future, and the assumptions that underlie these statements, are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We use words such as "believe,” "expect,” "future,” "plan” and similar expressions to identify such forward-looking statements that include, but are not limited to, the preliminary results we are reporting for our third fiscal quarter, which remain subject to regular quarter-end review and later audit by our external auditors, statements related to the semiconductor market, the impact of the economy on our businesses and consumer spending, the seasonality and growth of the markets we serve, and our expected revenue growth or decline. Such statements reflect our current expectations, which are based on information and data available to our management as of the date of this release. Our actual results may differ materially due a variety of uncertainties and risk factors, including but not limited to the growth trends in the semiconductor industry, the instability of the global economy which could impact the markets we serve, consumer spending, our investments, liquidity and cash reserves, as well as our ability to predict revenue for the current and future periods, SunPower’s ability to successfully transition to its new ERP and accounting system and the potential impact of such on our reported results in this press release (which remain subject to regular quarter-end review by our external auditors) and our periodic reports, whether the demand for our programmable portfolio of products, including especially our PSoC and West Bridge products, is fully realized, our ability to achieve the business objectives of our Simtek acquisition, the actions of our competitors, our ability to convert our PSoC marketing and education initiatives into product sales, customer acceptance of Cypress and its subsidiaries’ products as evidenced by design wins, factory utilization, the seasonality in the markets we serve, our ability to maintain and improve our gross margins and realize our bookings, and other risks described in our filings with the Securities and Exchange Commission. We assume no responsibility to update any forward-looking statements in this press release.

Cypress, the Cypress logo, PSoC, EZ-USB and West Bridge are registered trademarks of Cypress Semiconductor Corporation. PSoC Designer and WirelessUSB are trademarks of Cypress Semiconductor Corporation. SunPower is a registered trademark of SunPower Corporation. All other trademarks or registered trademarks are the property of their respective owners.

Notes to Non-GAAP Financial Measures

To supplement its consolidated financial results presented in accordance with GAAP, Cypress uses non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in details below. Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of Cypress’s operations that, when viewed in conjunction with Cypress’s GAAP results, provide a more comprehensive understanding of the various factors and trends affecting Cypress’s business and operations. Non-GAAP financial measures used by Cypress include:

• Gross margin;
• Research and development expenses;
• Selling, general and administrative expenses;
• Operating income (loss);
• Net income (loss); and
• Diluted net income (loss) per share.

Cypress uses each of these non-GAAP financial measures for internal managerial purposes, when providing its financial results and business outlook to the public, and to facilitate period-to-period comparisons. Management believes that these non-GAAP measures provide meaningful supplemental information regarding Cypress’s operational and financial performance of current and historical results. Management uses these non-GAAP measures for strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to Cypress’s historical operating results and comparisons to competitors’ operating results.

Cypress believes that providing these non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see Cypress’s results "through the eyes” of management as these non-GAAP financial measures reflect Cypress’s internal measurement processes. Management believes that these non-GAAP financial measures enable investors to better assess changes in each key element of Cypress’s operating results across different reporting periods on a consistent basis. Thus, management believes that each of these non-GAAP financial measures provides investors with another method for assessing Cypress’s operating results in a manner that is focused on the performance of its ongoing operations.

Cypress presents each non-GAAP financial measure, including the diluted net income (loss) per share, for the following categories: "Semiconductor,” "SunPower,” and "Consolidated.” SunPower was a majority-owned subsidiary of Cypress prior to the spin-off in the fourth quarter of fiscal 2008 and for accounting purposes, Cypress was required to consolidate SunPower’s results. Cypress included two distinct businesses: Semiconductor and SunPower. Semiconductor is Cypress’s traditional core semiconductor business. On the other hand, SunPower is a stand-alone, publicly-traded company specializing in solar power products.

Cypress’s investment community often viewed Cypress as two separate entities prior to the spin-off: Cypress and SunPower. Based on feedback provided by Cypress’s investment community to management, these non-GAAP financial measures divided into "Semiconductor” and "SunPower” were beneficial as they allow Cypress’s investment community to better understand Cypress’s financial performance for the two businesses separately, assess the various methodologies and information used by management to evaluate and measure such performance, and construct their valuation models to better align Cypress’s and SunPower’s results and projections with their applicable competitors and industries.

There are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, non-GAAP financial measures may be limited in value because they exclude certain items that may have a material impact upon Cypress’s reported financial results. Management compensates for these limitations by providing investors with reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP financial measures. The non-GAAP financial measures supplement, and should be viewed in conjunction with, GAAP financial measures. Investors should review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the accompanying press release.

As presented in the "Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures” tables in the accompanying press release, each of the non-GAAP financial measures excludes one or more of the following items: