Cypress Semiconductor Corporation (NASDAQ:CY) Q2 2016 Earnings Conference Call - Final Transcript

Jul 28, 2016 • 04:30 pm ET

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Cypress Semiconductor Corporation (NASDAQ:CY) Q2 2016 Earnings Conference Call - Final Transcript

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Presentation
Operator
operator

Good afternoon and welcome to the Cypress Semiconductor Second Quarter 2016 Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Rahul Mathur, Senior Vice President of Finance at Cypress Semiconductor. Sir, you may begin.

Executive
Rahul Mathur

Thank you, Mark. Good afternoon, and thank you for attending our Q2 conference call. All information discussed in our press release and on this call is based on preliminary unaudited results, and we encourage you to review our 10-Q once filed. (Forward-Looking Cautionary Statements)

Joining me today are Hassane El-Khoury, Dana Nazarian, Joe Rauschmayer, and Thad Trent, who make up the Office of the CEO, as well as Mike Balow, EVP of Sales and Applications; and Badri Kothandaraman, EVP of our Data Communications Division. The order of our call today will be as follows. CFO, Thad Trent, will make some introductory remarks and provide a financial overview, and then we'll end with Q&A.

I'll now turn the call over to Thad Trent.

Executive
Thad Trent

Thanks, Rahul. So let me start by discussing the critical focus areas for the company, including the demand environment, our margin trajectory and additional details on our financials.

First, the demand environment. We believe the semi market remains soft but relatively stable. Our non-GAAP revenue for Q2 was $456.4 million, in line with our guidance for the quarter, as we continue to execute as expected. The revenue estimate we provided for Q3 of $510 million to $540 million reflects our base business growing seasonally at roughly 3% as well as $55 million to $60 million in revenue from the acquisition of Broadcom's wireless IoT business, reflecting the growth we anticipated from these products.

Next, I'd like to discuss the gross margin trajectory. Our gross margin improvement plan is unfolding as expected. The Q2 margin was 37.8%, roughly in line with our expectations. Excluding our Emerging Tech division, core margins were 38.1%, up from Q1, as we continue to maintain low factory utilization as a part of our lean inventory initiative. We'll continue to keep utilization in our internal fabs below natural demand due to excess inventory we had at the time of the merger with Spansion. While this has put pressure on our margins and EPS in the short term, it's an effective way of generating cash flow and improves our pricing and profitability going forward.

We expect gross margins to improve in Q3 to roughly 41% with higher utilization, a seasonal revenue increase and contribution from the wireless IoT business at roughly 50% gross margin.

So before I dive into the financials, let me give you an update on our CEO transition. Our board continues to diligently evaluate internal and external candidates. In the interim, our business is operating as expected. Our Q2 financials were in line with our expectations. And we continue to exceed the Spansion synergy plan. Additionally, we closed the acquisition of the wireless IoT assets on July 5,