CY - Cypress Reports Third Quarter 2018 Results

Cypress Semiconductor Corporation (NASDAQ: CY), a leader in embedded solutions, today announced its third quarter 2018 results with the following highlights:

• Record revenue of $673.0 million, a 7.8% increase sequentially and 11.3% year-over-year
• GAAP and non-GAAP gross margins were 38.6% and 47.0%, respectively, and represent a 390 bps and 400 bps increase year-over-year
• GAAP diluted EPS increased 10 cents to $0.14 and Non-GAAP diluted EPS increased 13 cents to $0.40 year-over-year
• Automotive revenue increased 8.3% sequentially and 12.8% year-over-year

“Cypress delivered another record quarter for revenue while continuing to expand gross margins, operating margins and cash flow due to our uncompromising focus on execution,” said Hassane El-Khoury, Cypress’ president and chief executive officer. “Our strategy and investments to advance our portfolio of highly-differentiated connect, compute and store solutions are paying off. We are seeing a strong design pipeline leading into the fourth quarter with design activity increasing 23% year-over-year. Our continued commitment to sharpen our focus, with moves such as today’s announcement of entering into a joint venture for our NAND Flash business, are positioning us well in our target high-growth markets of Automotive, Industrial and IoT.”

Revenue and earnings for the quarter are shown below with comparable periods:

(In thousands, except per-share data)

Revenue and earnings for the year-to-date are shown below with comparable periods:

(In thousands, except per-share data)

BUSINESS REVIEW

During the third quarter, Cypress expanded its connect, compute and store portfolio for the Internet of Things and strengthened its positioning with key developments in its partner ecosystem, and the Company’s focus on delivering automotive-grade quality and reliability resulted in a key customer win. Highlights included:

+ Cypress expanded its collaboration with Arm^® to enable secure, easy-to-use management of IoT edge nodes based on Cypress’ leading compute and connectivity hardware. The solution integrates the Arm Pelionâ„¢ IoT Platform with Cypress’ ultra-low power, dual-core PSoC^® 6 microcontrollers (MCUs) and CYW4343W Wi-Fi^® and Bluetooth^® combo radios for robust wireless connectivity. PSoC 6 provides hardware-based security that adheres to the highest level of device protection defined by the Arm Platform Security Architecture (PSA). Cypress and Arm demonstrated hardware-secured onboarding and communication through the integration of the PSoC 6 MCU and Pelion IoT Platform in the Arm booth at the Arm TechCon event this month.

+ Cypress expanded the cloud connectivity offerings for its IoT solutions with AliOS Things, Alibaba’s embedded IoT operating system. Developers can now streamline connections to Alibaba Cloud, the cloud computing arm of Alibaba Group, and design differentiated products with the flexible computing and security features of Cypress’ programmable PSoC microcontrollers and the robust wireless connectivity of its industry-leading Wi-Fi and Bluetooth portfolio for the IoT. Cypress also collaborated with the Alibaba Group to strengthen its sales presence in China by opening up an online store in Alibaba Group’s TMALL market.

+ Cypress introduced a Bluetooth audio offering that brings leading-edge performance to wireless earbuds and hearables. Based on the new Wireless Audio Stereo Synchronization (WASSâ„¢) application and the CYW20721 Bluetooth and Bluetooth Low Energy (BLE) Audio MCU, the solution provides robust connections for differentiated performance in wireless earbuds. The MCU delivers up to twice the range of competing chips and combines with the WASS application to enable superior cross-body performance, giving users uninterrupted audio on their earbuds with their smart device in their back pocket or on their wrist. The MCU also operates at nearly 50% lower power consumption than competing chips, enabling twice the playback time or the use of smaller batteries in sleeker form-factors.

+ Automotive supplier Yazaki North America implemented Cypress’ instrument cluster solution to drive the advanced graphics in its instrument cluster for a leading American car manufacturer. Yazaki selected Cypress based on its unique offering of five chips that combine to drive dual displays and provide instant-on memory performance with automotive-grade safety compliance. The Cypress solution is based on a Traveoâ„¢ MCU, along with two high-bandwidth HyperBusâ„¢ memories in a multi-chip package (MCP), an analog power management IC (PMIC) for safe electrical operation, and a PSoC MCU for system management support.

+ Cypress’ manufacturing and support operations attained the latest IATF16949:2016 and ISO9001:2015 certifications for automotive quality. Developed by the International Automotive Task Force in conjunction with the international standards community, IATF 16949 is the industry's highest standard for quality management systems in the automotive sector. The certifications help ensure the reliable performance of components, which is critical for enabling fail-safe operation of automotive systems.

+ On October 18, 2018, Cypress paid a cash dividend of $39.8 million, or $0.11 per share, to holders of record of the Company’s common stock as of the close of business on September 27, 2018. The dividend was equivalent to a 3.0% annualized yield as of September 28, 2018.

FOURTH QUARTER 2018 FINANCIAL OUTLOOK

For the fourth quarter of 2018, Cypress estimates financial results as follows:

A reconciliation of GAAP forward-looking estimates to non-GAAP forward-looking estimates may be found in the Non-GAAP Reconciliation Tables at the end of this earnings report.

The timing and amount of certain material items, including restructuring charges, asset impairments, changes in value of deferred compensation assets and liabilities, impact of stock-based compensation from modification of equity awards, and the tax impact of non-GAAP adjustments, which are needed to estimate forward-looking GAAP financial measures, are either inherently unpredictable or outside the control of the Company, and may have a significant impact on the Company’s financial results.

CONFERENCE CALL AND WEBCAST INFORMATION

Cypress will host its quarterly conference call on October 25, 2018 at 1:30 p.m. Pacific Daylight Time to discuss its third quarter 2018 results and outlook for the fourth quarter of 2018.

All interested parties may dial 517-308-9119 and provide the passcode “Cypress” to listen to the call. The event will be broadcast over the Internet and may be accessed through Cypress’ website at www.cypress.com/investors. The archived presentation will be available for at least two weeks immediately following the event.

FOLLOW CYPRESS ONLINE

Join the Cypress Developer Community 3.0, read our blog, follow us on Twitter, Facebook and LinkedIn, and watch Cypress videos on our Video Library or YouTube.

ABOUT CYPRESS

Cypress is a leader in advanced embedded solutions for the world’s most innovative automotive, industrial, smart home appliances, consumer electronics and medical products. Cypress’ microcontrollers, analog ICs, wireless and USB-based connectivity solutions and reliable, high-performance memories help engineers design differentiated products and get them to market first. Cypress is committed to providing customers with the best support and development resources on the planet enabling them to disrupt markets by creating new product categories. To learn more, go to www.cypress.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated unaudited financial results presented in accordance with GAAP, Cypress uses the non-GAAP financial measures listed below, which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in more detail below.

• Non-GAAP gross profit;
• Non-GAAP gross margin;
• Non-GAAP cost of revenues;
• Non-GAAP interest and other expense, net;
• Non-GAAP research and development expenses;
• Non-GAAP selling, general and administrative expenses;
• Adjusted EBITDA;
• Non-GAAP income tax provision (benefit);
• Non-GAAP pre-tax profit;
• Non-GAAP pre-tax profit margin;
• Non-GAAP operating income (loss);
• Non-GAAP operating margin;
• Non-GAAP net income (loss);
• Non-GAAP diluted earnings (loss) per share; and
• Free cash flow.

Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of the Company's operations which, when viewed in conjunction with Cypress' GAAP results, provide a more comprehensive understanding of the various factors and trends affecting the Company's business and operations.

The Company presents non-GAAP financial measures because management uses these measures to analyze and assess the Company's financial results and to manage the business.

There are limitations in using non-GAAP financial measures including those discussed below. Moreover, the Company’s non-GAAP measures may be calculated differently than the non-GAAP financial measures used by other companies. 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.

As presented in the Non-GAAP Reconciliation Tables in this press release, each of the non-GAAP financial measures (other than free cash flow) excludes one or more of the following items:

Acquisition-related charges: Acquisition-related charges are not factored into management's evaluation of Cypress' long-term performance after the completion of acquisitions. However, a limitation of non-GAAP measures that exclude acquisition-related charges is that these charges may represent payments that reduce the cash available to the Company for other purposes. Acquisition-related expenses primarily include:

• Amortization of purchased intangibles, including purchased technology, patents, customer relationships, trademarks, backlog and non-compete agreements;
• Amortization of step-up in value of inventory recorded as part of purchase price accounting; and
• One-time charges associated with the completion of an acquisition including items such as contract termination costs, severance and other acquisition-related restructuring costs; costs incurred in connection with integration activities; and legal and accounting costs.

Stock-based compensation expense: Stock-based compensation expense relates primarily to employee stock options, restricted stock units, performance stock units and the employee stock purchase plan. Stock-based compensation expense is a non-cash expense that is affected by changes in market factors including the price of Cypress’ common shares, which are not within the control of management. In addition, the valuation of stock-based compensation is subjective, and the expense recognized by Cypress may be significantly different than the expense recognized by other companies for similar equity awards, which makes it difficult to assess Cypress’ results compared to its competitors. Accordingly, management excludes this item from its internal operating forecasts and models. However, a limitation of non-GAAP measures that exclude stock-based compensation expense is that they do not reflect the full costs of compensating employees.

Other adjustments: Additional items are excluded from non-GAAP financial measures because management does not consider them to be related to the core operating activities and ongoing operating performance of Cypress. Excluding these items, which can vary significantly from quarter to quarter, allows management to better compare Cypress’ period-over-period performance. However, limitations of non-GAAP measures that exclude these items include that these adjustments are often subjective and such non-GAAP measures may not be comparable to similarly titled non-GAAP financial measures used by other companies. These adjustments primarily include:

• Revenue from an intellectual property license;
• Changes in value of deferred compensation plan assets and liabilities;
• Investment-related gains or losses, including equity method investments;
• Restructuring and related costs;
• Debt issuance costs, including imputed interest related to the equity component of convertible debt;
• Asset impairments;
• Tax effects of non-GAAP adjustments;
• Income tax adjustment related to the use of the net operating loss, non-cash impact of not asserting indefinite reinvestment on earnings of our foreign subsidiaries, deferred tax expense not affecting taxes payable, and non-cash expense (benefit) related to uncertain tax positions;
• Certain other expenses and benefits; and
• Diluted weighted average shares non-GAAP adjustment - for purposes of calculating non-GAAP diluted earnings per share, the GAAP diluted weighted average shares outstanding is adjusted to include the impact of non-GAAP adjustments on the number of diluted shares underlying stock-based compensation awards and the impact of the capped call options related to the outstanding convertible notes.

Adjusted EBITDA: Adjusted EBITDA is calculated by adjusting net income (loss) attributable to Cypress to exclude (without duplication): interest expense, income tax provision, depreciation, amortization, equity in net loss of equity method investees, and the non-GAAP adjustments described above (acquisition related charges, stock-based compensation expense, and other adjustments). Commencing in the second quarter of 2018, Cypress reconciles adjusted EBITDA to GAAP net income rather than operating income; prior period reconciliation tables have been revised to conform to the current presentation. Adjusted EBITDA may be useful to management, investors and other users of our financial information because the exclusion of certain gains, losses, and expenses facilitates comparisons of Cypress' operating performance on a period to period basis. Adjusted EBITDA should not be considered as a measure of discretionary cash available to invest in the growth of the business. In addition, adjusted EBITDA should not be considered as a substitute for, or superior to net income attributable to Cypress, operating income, or diluted earnings per share, or other financial measures prepared in accordance with GAAP.

Free Cash Flow: Free cash flow is calculated as net cash provided by (used in) operating activities, less acquisition of property, plant and equipment, net (i.e., acquisition of property, plant and equipment less proceeds received from disposition of property, plant and equipment). We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by business operations, after deducting our net payments for acquisitions and dispositions of property and equipment, which cash can then be used for strategic opportunities or other business purposes including, among others, investing in the Company's business, repurchasing stock, making strategic acquisitions, repayment of debt, and strengthening the balance sheet. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for this limitation by also relying on the net increase in cash and cash equivalents and restricted cash as presented in the Company’s condensed consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period.

FORWARD-LOOKING STATEMENTS

Statements in this press release that are not historical facts and that refer to Cypress or its subsidiaries’ plans and expectations for the future are forward-looking statements as such term is used in the Private Securities Litigation Reform Act of 1995. We may use words such as “may,” "will," “should,” “plan,” “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “predict,” “potential,” “continue” or similar expressions identify forward-looking statements. This press release includes, among others, forward-looking statements regarding our fourth quarter financial outlook (as well as the related GAAP to non-GAAP reconciling items). Our forward-looking statements are based on the expectations, beliefs, and intentions of, and the information available to, our executive management on the date of this press release. Forward-looking statements involve risks and uncertainties, and readers are cautioned not to place undue reliance on forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: potential tariffs and other disruptions in the international trade and investment environment; global economic and market conditions; our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; risks related to paying down our indebtedness and meeting the covenants in our debt agreements; our efforts to retain and expand our customer base; business conditions and growth trends in the semiconductor market; competition; volatility in supply and demand for our products, including but not limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities; reliance on distributers, resellers, third-party manufacturers, and others; risks related to our “take or pay” agreements with certain vendors; the risk of defects, errors, or security vulnerabilities in our products; the impact of acquisitions; our ability to attract and retain key personnel; the unpredictability and expense of legal proceedings; and other risks and uncertainties described in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and “Quantitative and Qualitative Disclosures about Market Risk” sections in our most recent Annual Report on Form 10-K and in our subsequent quarterly filings with the Securities and Exchange Commission which are available on our investor relations website at http://investors.cypress.com/financial-information/sec-filings. We assume no responsibility to update our forward-looking statements.

Cypress, the Cypress logo and PSoC are registered trademarks and WASS, Traveo and HyperBus are trademarks of Cypress Semiconductor Corporation. All other trademarks are property of their owners.

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