Cypress Sales Down, SunPower IPO Considered
By Jeff Chappell and Ann Mutschler -- 4/21/2005
Cypress Semi's memory products business may have been hurting in Q1, but not its solar power cell division – that's going so well, the company is considering an IPO for the business in order to continue funding its growth.
San Jose, Calif.-based Cypress Semiconductor Corp. reported its Q1 earnings today, and in a conference call with analysts, CEO T.J. Rodgers said the IPO for its SunPower division was a possibility.
"It was a decision we made in our board meeting … yesterday afternoon," Rodgers said. "We've decided we're going to begin investigate doing an initial public offering for SunPower." Cypress has the cash to fund the division's planned manufacturing expansion, but the board decided taking the company public may be a more efficient means of raising the capital involved, he said.
Cypress has some $250 million on hand, Rodgers said. The company could write a check today for the $100 million needed to build SunPower's next manufacturing line, but Cypress board has mandated that its cash position not dip below $200 million, according to the CEO.
SunPower was the one bright spot in an otherwise lackluster quarter. Cypress' Q1 revenue dropped 21.3 percent year over year to $200.3 million, which was also down 4.7 percent sequentially. The company posted a GAAP net loss of $65.1 million in Q1, which includes restructuring charges of $19.0 million.
"Our revenue for the 2005 first quarter came in at the bottom of the range we provided in guidance at the beginning of the quarter," Rodgers, Cypress president and CEO, said in a statement. "However, we believe that the first quarter was the bottom of this current slowdown.
"We have started the second quarter with a better backlog position than last quarter's, and bookings to date are strong," he noted.
"Most of our revenue shortfall in the first quarter was the result of a decrease in sales of memory products to the wireless handset market, which experienced softness towards the end of the quarter," Rodgers added.
Cypress' silicon solar cell subsidiary, SunPower Corp., on the other hand, exceeded its revenue target slightly, posting sales of $11 million in Q1.That was up 142 percent from Q4 2004 and comprised 6 percent of Cypress' Q1 revenue, as SunPower continued to ramp its initial 25 megawtt manufacturing line in the Philippines. Cypress expects continued growth for SunPower in Q2, based on sustained demand for its products and continued progress in the Philippines. The SunPower plan is to break even in Q3.
In fact, Rodgers said that the company was already planning its second 25 megawatt solar cell production line, which is what is prompting the IPO consideration. The first manufacturing line is debugged, and is seeing consistent yields around 85 percent, he said.
The second 25 megawatt solar cell manufacturing facility will cost approximately $100 million, Rodgers said. An IPO might not only help fund that, it could prove to make sense from an operations standpoint; SunPower operates as an individual entity within Cypress, with much of its own marketing and sales, Rodgers said.
However, it will require its own CFO, and if SunPower does go public, Cypress CFO Manny Hernandez will go with it to function as CFO, Rodgers said. Hernandez, a native of the Phillipines, worked at National Semiconductor from 1976 to 1993 prior to Cypress. He joined Cypress as corporate controller before advancing to CFO in 1994.
Rodgers said that the SunPower plans are so new he has no idea just yet who would be Cypress new CFO, should Hernandez leave with SunPower. In typical Rodgers fashion, he offered bottles of wine as headhunter's and finder's fees to any analyst on the conference call this morning that could lead him to the company's next CFO.
"Give me the name of someone you like dealing with as much as Manny, and I'll go after that guy," Rodgers said. Rodgers is a wine enthusiast and owns several vineyards in the Bay Area of Northern California.
As for Cypress proper, the company said it maintained its commitment to achieve profitability in Q2, the first quarter in which the restructuring and cost-reduction measures announced previously take effect.
Q1 gross margin was 37 percent, flat compared to the previous quarter. The company said it managed its net inventory down again, amounting to $3 million in Q1, despite missed sales and an increase in SunPower's inventory to support its ramp.
The cost reductions included a reduction from four divisions organized around product lines to three divisions organized around market segments: the computation and consumer Division (CCD), the data communications division (DCD), and the memory and imaging division (MID).
Beginning with today's results, Cypress will report along these lines, including a separate report on SunPower.
Revenue from CCD was $66 million, up 12 percent from Q4 2004, and accounted for 33 percent of Cypress' Q1 revenue. Strong USB sales helped to drive growth for the division, with more strong results expected for Q2 based on broad, accelerated customer acceptance of Cypress' programmable-system-on-chip mixed-signal arrays, increased sales of PC clocks, and the continued adoption of WirelessUSB, Cypress' 2.4 gigahertz radio SOC technology.
Revenue from DCD was $41.4 million, down 8 percent from Q4 2004, and accounted for 21 percent of Cypress' Q1 revenue. Improved demand for NSEs in IP-based systems and for specialty memories in wireless base-stations was offset by a decline in sales of legacy VME, physical-layer and programmable logic products into wireline systems. The company does not expect a significant improvement in the data communications market during Q2.
Revenue from MID was $74 million, down 16 percent from Q4 2004, accounting for 37 percent of the company's Q1 revenue. Increased sales of CMOS image sensors and synchronous SRAMs were offset by a decline in handset revenue, the result of continued average selling price pressure on Cypress' MicroPower and psuedo-SRAM products, the company said. Margins and revenue for the division are expected to improve in Q2, based on an increase in factory utilization and a mix shift among customers to 90nm SRAM products, according to Cypress.
"With the continued ramp of SunPower and all of our cost reduction initiatives in place at the end of the first quarter, we plan to return to profitability and growth in Q2, or -- worst case -- come very close to breakeven," Rodgers concluded.
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