SAN JOSE -- Cypress Semiconductor Corp. today (March 5) announced significant changes to its IC-distributor agreements outside the U.S. to become more competitive in Asia and Europe, and the company said it has entered into a inventory consignment arrangement with a major chip customer.
As a result of these moves, Cypress will carry more products on its books until chips are sold or used in end equipment. The changes will also cause Cypress to reverse previously reported sales by $34 million with a one-time revenue reduction in the first quarter.
In addition, the San Jose company today downgraded its revenue forecast for the first quarter. Instead of a sequential decline of 4-to-9%, Cypress now expects a 15% drop in sales due to weak business conditions.
With the additional one-time revenue reductions for distribution and inventory changes, Cypress said the total sequential drop in the first quarter will be 24%, pushing sales down to about $280 million in the period from $370 million in Q4 of 2000. Compared to a year ago, the expected sales total will be 6% higher than revenues in Q1 2000.
"Average selling prices are reasonable, but our unit volume has dropped as our customers burn up their excess inventories," said T.J. Rodgers, chief executive officer of the company. "Cypress experienced cancellations and push-outs in January, but we were not alarmed because we anticipated them. We assumed that February and March would revert back to normal bookings but we saw no material improvement in the trends."
Rodgers said Cypress has agreed to a request from a major chip customer to set up a consignment inventory program, under which IC products will be housed in the customer's warehouse but still owned by Cypress until the devices are used in production. The CEO did not identify the major customer.
"To change over, Cypress will reverse revenue of $9 million for the unused inventory that is at the customer's warehouse at the end of the quarter," he said.
Cypress is also changing its business model with chip distributors in Europe and Asia to account for sales when products are bought by customers instead of when devices are shipped to resellers. For U.S. distributors, Cypress does not recognize sales to major global distributors until products are sold to end customers--a conservative practice aimed at preventing "so-called channel stuffing," said Rodgers.
In the U.S., Cypress also allows these distributors "certain stock rotation privileges" for a small fraction of ICs that are not moving in the channels, Rodgers added.
But in Asia and Europe, Cypress has "been more stringent," Rodgers explained. "We have demanded a 'you buy it, you own it' policy."
"The net result is that these distributors order from us only what they already have orders for or know they can sell quickly in their non-US operations. This practice limits our distribution business in Europe and Asia," he added. "To sell more, our global distributors need to be changed over to the U.S. method--end sales accounting."
The change will result in a $25 million one-time revenue reduction for Cypress in the first quarter of 2001. The company is expecting earnings before goodwill (EBG) "in the $0.30-$0.34 range," Rodgers said. A year ago, the company reported an EBG of $0.74 per share in Q1 of 2000.
