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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DECEMBER 19, 1997
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Date of Report (Date of earliest event reported)
CYPRESS SEMICONDUCTOR CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 1-10079 94-2885898
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(State or other (Commission (I.R.S. Employer
jurisdiction of incorporation) File Number) Identification No.)
3901 NORTH FIRST STREET
SAN JOSE, CALIFORNIA 95134-1599
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(Address of principal executive offices)
(408) 943-2600
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS.
The information set forth in the Registrant's Press Release dated
December 15, 1997 is incorporated herein by reference. The Press Release
includes "safe harbor" language, pursuant to the Private Securities Litigation
Reform Act of 1995, indicating that certain statements about the Registrant's
business contained in the Press Release are "forward-looking" rather than
"historical." Such forward-looking statements identify certain risks and
uncertainties in the Registrant's business, including, but not limited to,
market-acceptance risks, the effect of economic conditions and shifts in supply
and demand, the impact of competitive products and pricing, product development,
commercialization and technological difficulties, and constraints in capacity
and supply. The Press Release also states that a more thorough discussion of
such risks is included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 30, 1996, and in its Quarterly
Report on Form 10-Q for the quarter ended September 29, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS
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Exhibit No. Description
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99.1 Text of Press Release dated December 15, 1997
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION
Date: December 19, 1997 By: /s/ Emmanuel Hernandez
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Emmanuel Hernandez
Chief Financial Officer, Vice President,
Finance and Administration, and Secretary
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INDEX TO EXHIBITS FILED WITH
THE CURRENT REPORT ON FORM 8-K DATED DECEMBER 19, 1997
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Exhibit Description
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<S> <C>
99.1 Text of Press Release dated December 15, 1997.
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EXHIBIT 99.1
N E W S R E L E A S E
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CYPRESS
Contact:
Manny Hernandez
VP, Finance & Administration
(408) 943-2754
FOR IMMEDIATE RELEASE
Press contact:
Joseph L. McCarthy
Director, Corporate Communications
(408) 943-2902
CYPRESS TO MISS Q4 ANALYST'S ESTIMATES
SAN JOSE, CALIFORNIA, December 15, 1997 . . . Cypress Semiconductor Corporation
announced today that it would fail to meet analysts' expectations for the fourth
quarter ending December 29. The analysts' estimates for Cypress revenues and
earnings, as of December 9, are $152-155 million in revenues and $0.09-$0.10
EPS. The company's current estimates are for revenues in the range of $140-143
million, and EPS in the range of $0.00-$0.01. The shortfall is approximately $12
million in revenue and $0.08-$0.10 in EPS.
Q4 1997 REVENUE SHORTFALL
There are two causes for the $12 million revenue shortfall: a $5 million
shortfall in wafer-foundry revenue due to lower orders from our foundry
customers, and a $10 million shortfall in static RAM (SRAM) revenue due to a
timing problem in shipping by the quarter-end cutoff. Cypress's three other
divisions--Programmable Products, Data Communications, and Computer
Products--which account for 56% of the company's sales, are each forecast to
beat their revenue figures for last quarter and the year-ago quarter, partially
offsetting the SRAM and foundry shortfalls.
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The SRAM revenue shortfall is due to a timing problem in ramping up the
production of SRAMs at Cypress's Round Rock, Texas, (Fab 2) wafer-fabrication
plant, which produces non-volatile memories, programmable logic, and data
communications products, but not SRAMs. Cypress's Bloomington, Minnesota, plants
(Fabs 3 and 4) produced all Cypress SRAMs prior to Q4.
Starting in the third quarter of 1997, Fabs 3 and 4 reached their maximum
capacity, as SRAM unit demand surged to 38.5 million units, compared with only
21.3 million SRAMs in the third quarter of 1996. The growth in SRAMs to record
unit volumes necessitated the installation and ramping of SRAM technology in
Texas Fab 2. The Texas fab is now producing SRAMs and Cypress is now producing
SRAM chips at a rate higher than our SRAM unit sales. However, the rapid ramp of
the new SRAM technology in the Texas facility was slightly delayed, spilling
shipments intended for December orders over into the first quarter of 1998.
Cypress expects to catch up on SRAM shipments during the first quarter of 1998
and to resume growth in Q1, with a current projection of $150-155 million in
revenue for that quarter. The company's current revenue projection for all of
1998 is still in the range of analysts' current estimates, which vary from $671-
725 million.
PROFIT IMPACT
The profit impact of the $5 million in lost foundry business is $3.3 million, or
2.4 cents per share, out of the 8-10 cents-per-share total EPS shortfall. The
impact of the rest of the net $7 million product revenue shortfall is 3.0
cents-per-share. The remaining 2.6-4.6 cents-per-share difference between the
analysts' EPS estimates for the quarter (which were in line with our internal
forecast) and this forecast is due to the yield losses and inefficiencies
attributable to the rapid ramp of the SRAM process technology in the Texas
facility.
SHIFT TO 0.35-MICRON TECHNOLOGY
Prior to Q4, Cypress produced 0.25-micron technology in its San Jose wafer fab,
and 0.35- and 0.47- micron technologies in its Fab 4 Minnesota SRAM facility,
but only 0.65- and 0.8-micron technologies in its Texas facility. Consequently,
to meet our immediate SRAM unit needs, we ramped an older 0.57- micron SRAM
process in Texas Fab 2 this quarter. In 1998, in order to continue to increase
our SRAM
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capacity rapidly and profitably, both the Texas Fab 2 and the Minnesota Fab 3
facilities will be converted to 0.35-micron technology.
1998 EARNINGS
The slowdown in foundry business is likely to persist in 1998. All of our
foundry wafers are manufactured in Fab 2, which is currently under capacity. As
long as that situation persists, the 2.4 cents-per-quarter foundry impact on
profits will continue. We expect Fab 2 to ramp to full capacity by the end of
1998, allowing for the external foundry business to be replaced with internal
production, thus eliminating the earnings shortfall.
Texas Fab 2 has just completed its manufacturing ramp of our 0.57-micron SRAM
technology. That ramp will be followed in succession by ramps of our 0.47- and
0.35-micron technologies, respectively. We therefore expect the manufacturing
inefficiencies associated with ramping new technologies rapidly in Fab 2 to
continue for the first three quarters of 1998. The combined impact of the
shortfall in foundry business, and the rapid ramping of new technologies in Fabs
2 and 3, will have an impact on earnings comparable to that of this quarter,
about 5-7 cents per share per quarter. The current analysts' EPS estimates of
65-70 cents per share for Cypress's 1998 earnings is thus overstated relative to
the 50 cents per share now estimated by the company for 1998.
REORGANIZATION
In addition to ramping our 0.35-micron technology in all of our fabs, we have
taken several measures to improve profitability, both immediately in the first
quarter and consistently throughout 1998:
o Exiting the Commodity EPROM Business. Our non-volatile memory
division (approximately $40 million per year) has been redirected.
The vice president of that division, Jeff Linden, has relocated to
Seattle to take over our profitable and rapidly growing Computer
Products Division. The former CPD division vice president, John
Torode, also a former professor of computer science at UC Berkeley,
has been promoted to chief technical officer--with the specific
challenge of expanding our most profitable businesses: data
communications, clocks, PLDs, and USB microcontrollers. The residual
EPROM business has been merged into our SRAM division where we will
continue to serve our EPROM customers in the future--but
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without the heavy costs of maintaining a product division. The design
engineers from the EPROM group are now working on other projects with
a higher return on investment.
o Exiting the Chipset Business. Three years ago, Cypress launched an
effort to make "core logic," the system logic that connects
components in a personal computer to the microprocessor. The value
we intended to add in that arena was to merge the static RAM
required by personal computers with the chipset core logic to create
a more highly integrated and cost-effective solution. Our chipset
was technically successful, and it has been designed into multiple
projects, but the basic architecture incorporating SRAMs into
personal computers has been changed by Intel, limiting the
commercial viability of our product. Furthermore, Intel has entered
the chipset market, placing our chipsets at a great disadvantage. We
have therefore decided to exit the market and to cease shipments.
The chipset business unit has been disbanded. Our Munich, Germany,
motherboard verification center has been closed. The architects,
memory engineers, system engineers, and designers who created the
technically successful hyperCache chipset product have been
transferred to the data communications group to help build that
business.
o Shutting Down San Jose Assembly and Test Operations. In 1992,
Cypress moved its 100%- American assembly-and-test operation
offshore to Alphatec, a subcontractor in Bangkok, Thailand. We
maintained a small test organization in San Jose to support
new-product and last-minute shipments. In 1996, we opened our own
offshore assembly and test plant in Manila, the Philippines. Given
the high yields and short cycle times of our new Philippines plant,
we no longer need to carry the financial burden of the small, but
expensive, San Jose test plant. It will be shut down this quarter.
o Contingency for Alphatec Bond Default. Recently, our Thai
subcontract assembly-and-test house, Alphatec, experienced severe
financial difficulties, partly due to the economic crisis in
Thailand. Approximately 30% of Cypress's production passes through
the Alphatec test area (which is managed by our people and uses our
equipment). While Alphatec is a good manufacturing partner for
Cypress, and while we are still confident that its reorganization
plan will be successful, we have taken steps to guarantee that our
production will be uninterrupted in the event that Alphatec becomes
unstable. Toward that end, we have facilitized an entire
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new test floor in a separate facility in Bangkok. This facility is
intended as a contingency measure only.
The reserves required to cover the cost of the reorganization outlined above
have been taken by the company over time as we have identified the need. The
human resource costs, equipment obsolescence costs, and inventory reserves
caused by exiting the chipset and commodity EPROM businesses have all been
managed to modest levels and recognized as period costs. The costs associated
with setting up the contingency test floor in Bangkok have been absorbed by
manufacturing over the last two quarters. Our inventories are conservatively
valued and require no additional reserves at this time. Consequently, despite
the disappointing shortfall in revenue and earnings this quarter due to an SRAM
miscue, Cypress will have no special charges to earnings and will remain
profitable.
IMPACT OF ASIAN ECONOMIC CRISIS
The recent devaluation of most Asian currencies and the potential softening of
demand in that region may have both favorable and unfavorable effects on
Cypress. The bond default of our assembly and test subcontractor, Alphatec, is
part of Cypress's Asian jeopardy. But, even that problem has a positive side:
The manufacturing costs at Alphatec, as well as those at our other
subcontractors in Asia, and at our Manila plant, have dropped. On the revenue
side, Cypress ships 9% of its revenue to Japan. That business appears to be
stable. Ten percent of Cypress's revenue is shipped to other non-Japanese Asian
sites. An analysis of that 10% of the business shows that half of it is shipped
directly to Asian companies with Asian end customers. That portion of our
shipments--5% of our total revenue--is subject to currency devaluation and
potential demand correction. The other half of our Asian shipments is sent to
the Asian subcontractors of North American and European companies. We expect
that those companies will take the benefit of reduced manufacturing costs and
that they will not be materially impacted by the Asian currency collapse because
their end markets are mostly non-Asian. In summary, Cypress has a relatively
small amount of its business in Asia, and the impacts of the recent economic
crisis are mixed for us, not just negative.
DATA COMMUNICATIONS END-MARKET SLOWDOWN
Cypress's Data Communications Division grew from $19.9 million of revenue in the
fourth quarter of 1995 to $26.2 million of revenue in the first quarter of 1997,
the fastest growth of any Cypress division. In 1997, data communications sales
leveled off with record quarterly revenues of $26-29 million, up
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35+% from 1996, but still showing the slowdown in the data communications
industry noted by others. Nonetheless, we anticipate revenue for the Data
Communications Division to grow this quarter, both relative to last quarter and
also relative to the year-ago quarter, partly because of our entry into a new
rapid-growth market segment: wireless.
As outlined in numerous Cypress reports, our new SRAM technologies produce
six-transistor SRAM cells, which offer battery standby current that is 10 times
lower than industry-standard four-transistor SRAM cells (which Cypress also
manufactures). Most SRAMs shipped in the industry are of the four-transistor
variety, while most of the six-transistor SRAMs shipped are slow SRAMs meant for
consumer applications. Cypress is one of a few companies in the world that uses
six-transistor SRAM technology to make very low-power SRAMs that are also fast.
It is precisely that combination of high speed and low power that puts us
squarely into the new wireless market for portable equipment such as cellular
phones, which are using more fast SRAMs as they go digital. This wireless SRAM
market is a new component of Cypress's growth, not influenced by fluctuations in
our existing business. We also use the same technology in our newest FIFO (First
In, First Out) memories, another integral component in data communications
systems.
The combination of a mild weakness in our base data communications market,
combined with a growing new wireless business, accounts for our growth in
datacom.
Q4 BOOKINGS, OUTLOOK
Cypress recorded $146 million of total bookings for the third quarter of 1997.
Our current bookings for the fourth quarter, as of the close of business on
December 11, are ahead of the bookings for the equivalent day in the third
quarter. Cypress will ship approximately 70 million units in the fourth quarter,
a company record, and our bookings are in line to grow revenue in the first
quarter of 1998.
We believe that the product realignment and restructuring we have outlined in
this release, even in light of the current mixed-market scenario, will lead to
sequential revenue and earnings growth in the first and subsequent quarters of
1998.
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STOCK BUYBACK PROGRAM
The Cypress board of directors approved a 2-million-share stock buyback program
on October 23, 1997 (on which day Cypress closed at $11.56). Since then, we have
repurchased 300,000 shares outright at $11.16 per share and sold 2 million put
(buy) options at a strike price of $11.00. Management will present a proposal to
increase the current buyback program by 2 million shares at the December 16,
1997 board meeting. A poll of the directors indicated that they will unanimously
approve this second program on December 16.
Cypress Semiconductor Corporation is an international supplier of
high-performance integrated circuits with worldwide headquarters in San Jose,
California. The company provides a broad range of products for leading computer,
networking and telecommunications companies worldwide. The company's product
line includes static RAM, EPROM, and specialty memories; programmable logic
devices (PLDs); data communications products; and timing devices and USB
microcontrollers. Cypress shares are listed on the New York Stock Exchange under
the symbol CY. The company has a site on the worldwide web at
http://www.cypress.com.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Statements in this press release regarding Cypress's business that are not
historical facts are "forward-looking statements" involving risks and
uncertainties, including, but not limited to, market-acceptance risks, the
effect of economic conditions and shifts in supply and demand, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, and capacity and supply constraints. Please refer to
the MD&A (Management Discussion and Analysis of Financial Condition and Results
of Operations) for a discussion of such risks in the most recent Cypress annual
report on Form 10-K, the quarterly report on Form 10-Q and the convertible
debenture offering memorandum.
