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Executives

T.J. Rodgers - President and CEO

Brad W. Buss - EVP, Finance and Administration and CFO

Chris Seams - EVP of Sales and Marketing

Norm Taffe - EVP, Consumer and Computation Division

Ahmad Chatila - EVP, Memory and Imaging Division, Manufacturing

Dinesh Ramanathan - EVP, Data Communications Division

Shahin Sharifzadeh - EVP, WW Wafer Fabs & Technology; President, China Operations

Analysts

Glen Yeung - Citigroup

Suji De Silva - Kaufman Brothers

Chris Danely - JPMorgan

Uche Orji - UBS

John Barton - Cowen & Company

Tim Luke - Barclay Capital

Srini Pajjuri - Merrill Lynch

Adam Benjamin - Jefferies & Co.

Sandy Harrison - Signal Hill

Douglas Freedman - AmTech Research

John Pitzer - Credit Suisse

Cypress Semiconductor Corporation (CY) Q3 FY08 Earnings Call October 16, 2008 11:00 AM ET

Operator

Good morning and welcome to Cypress Semiconductor Third Quarter Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until the question-and-answer segment of today's call.

I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T.J. Rodgers - President and Chief Executive Officer

Good morning. We're here to give the Q3 '08 report. We'll do it in the usual style. First, we have Brad, CFO on finances. Brad?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Thanks, T.J. Thanks everyone for attending. This was a very interesting quarter and probably one of the most memorable I'll even have as a CFO.

So, I just want to remind everybody we'll be making a fair bit of forward-looking statements. They obviously infill [ph] a lot of risks, especially under this current market situation. So please ensure you take a look at our risk factors that are in our filings and also in our press release and everything is available on our website.

I'll go through Q3 first, and then I'll get into the Q4 guidance. I was really pleased with the solid financial results that we had in the semi business as well as SunPower, who again turned in stellar results and this will be our last quarter that we will be reporting on a consolidated basis with them.

So our consolidated revenue for Q3 was a record. It was $600 million, and it exceeded our consolidated revenue guidance. We grew 1% sequentially and a whopping 34% on a year-over-year basis.

The semiconductor revenue was strong at $222.7 million. That was an increase of 6% sequentially. And remember, we had a very strong 11% sequential increase in Q2 as well. So I was pretty pleased with what is going on there. We ended up the quarter at the lower end of our guidance. Really in the last week of the quarter, we saw business mainly in distribution and mainly impacting SRAM slowdown pretty strong. And I think that's pretty consistent with what we've been hearing from other people so far.

On the positive front, we set quarterly revenue records in PSoC and West Bridge, which was consistent with our guidance. And CCD grew a strong 21% sequentially, DCD grew 9% sequentially, and PSoC actually became the largest business unit based on revenue in Q3. MID decreased 5% sequentially, but more importantly it achieved its gross margin in 3% [ph] target and continues to generate strong cash flow. I've been very pleased how that division has been performing.

On a consolidated GAAP basis, we posted a net loss of $23.6 million. There is a lot of things that went on this quarter, especially in the semi business and I'll briefly walk you through them and they're explained in very good detail in the rethought [ph], so I'd encourage you to take a look at that.

So we had $192 million gain on the sale of the SunPower shares. We had $171 million loss on the convert tender offer. We also had non-cash FAS 123(R) charges of about $58 million; of which $41 million is due to the modification to adjust the intrinsic value due to the spend and the balance is the standard quarterly charges that go on.

We had a gain of $10 million related to the sale of SLM, which is now gone. We had about $8 million in restructuring cost. We had about $1.8 million in SunPower related spend cost and we had various tax charges related to a bunch of that stuff.

On the SunPower side of it, they have their pretty much standard stuff. $4 millionish related to intangible amortization. Their FAS 123R charges of $19 million and around $5 million in tax related charges, okay.

On a non-GAAP consolidated net income, we hit $52 million, which was our highest quarter since Q1 of 2000 and that led to diluted earnings per share of $0.30, which was at the high end of our guidance. This is an increase of 7% from last quarter and an increase of 15% on a year-on-year basis. So, I was really pleased with where the earnings ended up for the quarter.

The consolidated non-GAAP gross margin for the quarter was 37.3%. That was up 2.3% from last quarter, mainly due to SunPower's mix of the revenue and their ability to achieve higher margins, which they'll go through later.

Our non-GAAP gross margin for just the semi business was 50.5%, consistent with our prior quarter and within the guidance. Our product margins continue to remain strong and we're continuing to make solid gains in our manufacturing strategies and low-cost cost efforts. More importantly, it's our third straight quarter of GM greater than 50%, which is our current corporate model and we still remain comfortable that over time, we'll be able to increase that up on the back of our proprietary and programmable solutions as we go forward.

However, I do expect the gross margins to trend down in Q4, solely due to the decreased factory loadings [ph] as we continue to balance inventory with a much lower demand environment, and I'll take you through that in the guidance.

Non-GAAP consolidated operating expenses increased by only $2 million compared to last quarter. Most of that was in SunPower. About $5 million increase there, and we are down approximately $3 million in the semi business. A good portion of the decrease in the semi side was due to the valuation of our deferred comp plan, which unfortunately went down as the equity markets went down hard as well.

Remember, there is no impact in net income for us because the benefit that we received on the OpEx line is offset by a hit in OIE. So, net-net, it's just a geography issue. So make sure you take that in consideration in your modeling.

Okay, we continue to review our cost structures and we're still pretty confident that we'll be able to maintain flattish to potentially slightly down OpEx next year even as we continue to invest and grow in a wide range of new products and solutions.

Our semiconductor operating income was $23.9 million, again the highest level since Q2 of '04 and that was an increase of 60% sequentially and 15% year-on-year. Our non-GAAP semiconductor tax rate in Q3 was 3.5%. It was down from our usual 10%, due to a couple of discrete items. We had a favorable resolution of two international tax events and like everybody else we are seeing a refundable R&D credits available under the newly enacted Housing and Economy Recovery Act of 2008. And we do thank the IRS for that benefit.

If we whip over the balance sheet now, consolidated cash, cash equivalents and investments totaled $628 million. The semiconductor business has cash and short term investments down to the $333 million or $371 million, if you include the auction rate securities that we currently have classified as long-term investments due to the current liquidity issue.

We've maintained our investment portfolio at a very conservative allocation to ensure capital preservation and liquidity. If you look at our total investment portfolio including short term and long-term, we're 61% in U.S. treasuries, with 10% in AAA money market fund, none of which broke the buck by the way. We've 17% in corporate bonds and 12% in the auction rate securities. So we're pretty happy with where the portfolio is, we've very limited financial corporate bond exposure.

And the only unfortunate thing is like everyone else we've seen our OIE decrease in the quarter as the yield came down pretty dramatically.

Turning to inventory, consolidated inventory was $223 million, was down $6 million. The semiconductor business increased $4 million. However, $8 million of that was due to the planned last time inventory rebuilds related to closure of our Texas fab and we also had FAS 123(R) charges of $2 million that impacted that.

If you really adjust for the last time buying and 123(R) charge, our net inventory actually decreased $6 billion and I was very pleased with that progress.

Our lead times continue to remain very low and people are expecting they get product when they see it. I do think that inventory will be flat to down again in Q4, again absent the last time bills and 123(R) charges.

Accounts receivable was $335 million. It was down $20 million from the prior quarter. SunPower decreased $54 million and the semiconductor business increased $34 million. The consolidated DSO increased four days to 51 and the semi business increased to 57 days. And that was solely due to linearity in the quarter, as 60% of our business goes through distribution in which we don't recognize the revenue until the product is resold.

If you look at the collection effort in the first week of the month, we had over $25 million of that increase get collected in the first week.

More importantly, our aging is actually the best that I've seen since I've been here. We're about 96-97% current, and we don't have any major customer issues and obviously like everybody else, we are watching everybody pretty closely.

If you look at CapEx, it was $68 million for the quarter; $55 million from our friends at SunPower and 13 in the semi business.

Depreciation was 30.5; of which SunPower was 13.7 and the semiconductor business was 16.9.

I think you all know in September we completed the tender offer for the majority portion of our convertible bond. We retired $532 million of the $600 million and thus, we have approximately $68 million left. We're very comfortable of the debt level and the new conversion price is $5.64 and is currently out at the money. Any dilution that may arise in the remaining portion of the convert is generally expected to be minor and I want to remind you that we still have a call spread in place for that last little bit of piece and that pushes up the economic dilution to $6.37.

And since everybody is kind of wanting to know what's going on with counterparties, our call spread is with Credit Suisse and the Deutsche Bank, and they are the two strongest banks currently out there. We have no share lending agreement with anybody, and we do not have any other major counterparty risk on any other type of derivative with anyone else.

We have no need to refinance or raise any debt around our business. We have ample cash. As we stated in the press release, we have a net cash position of $302 million that we can obviously use to run the business, repurchase shares, or pursue any other strategic event that we'd see. As I talked about, we divested the MEMS businesses of SLM, which if you remember, that was part of our other bucket from a reporting perspective. We netted $11 million on that.

We also closed the acquisitions of Simtek. In mid September, we paid $44 million there. So we had about two weeks of their results, which were very immaterial in our financials in Q3, and of the full quarter. Going forward, they will be part of the non-volatile product line, which is in MID from a reporting perspective.

In Q3, we sold 2.5 million shares of SunPower at $88.99, which netted $222 million in cash. Our ownership... our basic ownership was 51%, 47 on a diluted basis and we obviously had minority interest in Q3, which will go away in Q4.

On the 29th of September, which was the first day of our fiscal Q4, we completed the distribution to our shareholders and that was worth approximately $2.6 billion and we currently own zero shares of SunPower. Okay, and as I mentioned it's the last earnings call, where we will discuss any consolidated results, and going forward you'll see all the SunPower stuff reported on a single line item as a discontinued operation.

So I think going forward, all of our results, all of my guidance, anything that T.J., I or anyone else would talk about will be purely Cypress Semiconductor.

Okay, just a quick comment on the valuation. The markets went haywire; I think semis have been overly punished. I think we have been overly punished personally and I think there's very few metrics where you can say that we're undervalued. Our net cash is equal to about 50% of our market cap, our enterprise value to sales ratio is around 0.4. And again, more importantly, have very strong free cash flow yield that I expect to grow over the next few years as we continue to grow and increase our operating leverage.

Share count, we have a fully diluted non-GAAP share count in Q3 of 164.4, which was basically flat with Q2. And again, this was all before we did the adjustment to the options related to the spent, and we repurchased no shares in Q3.

We did file the 8-K on October 3rd that took you through the adjustments to the employee equity and that's where [ph] I think most of you have seen that. We dealt with a lot of questions there. I don't think there's anything we need to go through there other than to let you know that we will obviously proactively be managing that dilution as much as we can.

So if I go turn over to guidance right now; for Q4, on a non-GAAP and again it has none of SunPower in itself, I think like everybody else, we are concerned on the economic environment discussed there. And that includes really the majority of all the end markets and in particular consumer spending. Our book-to-bill was a lot lower than we've seen in the past. And we are seeing customers being very cautious on planning backlog, albeit they are not significantly lowering their forecast, we do expect that to happen.

Compounding that is the fact that our lead times are actually very low. So it's been very challenging from a visibility perspective.

We've normally been down four to about 5 or 6% the last couple of quarters, and we expect to see that calm down a bit. The good thing is that we don't see anything from a competitive position that's impacting us other than the general economic environment and we actually have very strong design win penetration and we're adding new customers, and we have some tremendous new products that the team will talk on related to TrueTouch and our next gen products in all the other divisions, that we're very comfortable are going to continue to drive growth once the economic cloud clears.

So based on this, we're giving revenues in the range of $194 million to $204 million, which is down 8% to 13%. And again it's very hard to judge and I think it could vary widely. We're expecting all divisions and most product lines to decrease sequentially. And I just want to remind you that Q1 is also normally a seasonally down quarter and I'd expect that to continue at this point in time. If things change materially, we'll give the market an update accordingly.

On gross margins, purely due to factory utilization and phasing inventory down, I'd expect them to be around 47% to 48%, and we are very confident that as we balance the inventory and the demand level stabilize, we'll be back above our 50% target once that happens.

OpEx will trend down slightly and I think will be around $86 million to $87 million. I'd look at OIE of approximately 1.1 million, which reflects the current low yield environment we're in. And that's also net of 200k in foreign interest that we'd pay on the stub of the converted swap [ph]. And again, all of that assumes no major swings in our deferred comp plan that I mentioned before.

I think the tax rate should be back up around our 10%, basic shares of around 155 to 157 and then probably 175 to 180 on a fully diluted basis. And again, that's going to vary with the price of the stock, any stock repurchases that we do, the exercises, and currently the bond in the call spread are not diluted because they are out of the money and if that changes, they could go into the number.

Q4 semi CapEx is about $9 million and depreciation is about $15 million. So if you blend all that together, that looks like non-GAAP EPS in a range of about $0.04 to$0.07. And again, it's really just a factor of the reduced demand that we see out there.

In summary, I think we had a very strong Q3. We're making a very good progress in all of our strategic fronts, in a lot of the new product and design wins. So I'm very comfortable that when the cloud clears we're going to continue to grow and generate a lot of cash on a going forward basis.

And more importantly, we have a very strong balance sheet that's going to allow us to have a lot of flexibility going forward. So that's it for my remarks.

I'll turn it over to Chris for a brief review of some of the end markets.

Chris Seams - Executive Vice President of Sales and Marketing

Thanks, Brad. Let me go through some of the normal indices and maybe add just a little more color to what Brad said about the market. In terms of revenue splits by geography, normal Q3 trend, Asia was the number one in the geography for us, 54% of sales. North America declined to 22%. That's really the consumer build in Asia happening. Europe and Japan were 15% and 9% of sales.

With the traditional Q3 consumer build, units increased 20 million in the quarter up to 174 million units. The pricing environment remained fairly stable in the quarter. Part for part [ph] we had fairly small ASP declines. With the larger consumer mix, our corporate ASP declined to $1.28. That was from the second quarter to $1.34.

As Brad said, our designing activity remained very strong. We set again new records for both PSoC customers, eclipsing the 80-200 mark [ph] and design wins as well for PSoC and overall design wins for the company's proprietary products were a record as well.

In terms of end markets, it was the September month when we started to see a slowing in the booking patterns. It was across all end markets. The consumer segment was the most pronounced out of those, that's because of the traditional seasonality that does happen going into the fourth quarter.

Our end market checks tell us that so far this is really end customer demand for their products, on top of the normal seasonality in consumer. We have not seen significant cancellations to this point and we know that we haven't had any major design win or share losses.

Our book-to-bill with all that said, declined below unity to 0.87. That was true for all of our divisions and our backlog for semiconductors decreased to $169 million. Versus our guidance, we do enter the quarter over 80% booked, but we are cautious with the end market outlook.

Let me turn it over to T.J. now for more details on the quarter.

T.J. Rodgers - President and Chief Executive Officer

What we, grind on more detail when we go to questions. We'll hear the last time from SunPower. Tom Werner is here, the CEO of SunPower. Brad mentioned that we distributed to our shareholders 42 million shares which were worth $2.6 billion. SunPower has been a homerun, immense help [ph] for us.

So we'd like to thank Tom and SunPower for their extraordinarily hard work and the economic balance sheet they brought to save our shareholders. Thank you very much.

They finished pretty strong, the market-to-market. And that's not strong right now, but basically in the last two quarters, they had back-to-back record quarters of about $380 million and in this quarter $0.61 a share, so they are doing extraordinarily well. And the market for alternative energy is not cyclical right now, at least in the semiconductor industry.

So I am going to turn Tom loose because I know he has got to get ready for his talk a little later this morning and go on back into semiconductors.

I want to reiterate a couple of points that Brad made. We had record quarterly revenues for PSoC. Again, the PSoC business unit became our largest business unit. We also had record quarterly revenue for West Bridge which are our peripheral controllers that feature side loading, putting data into another cell phone at high speed.

We had our programmable solutions segment of our business grow to over half of our business in the quarter. And if you look at proprietary and programmable solutions, which includes some fixed functions of the proprietary products, that's up to about three quarters of our business. So we've managed to move our business in a direction we said over the last couple of years to the point that the majority of our business is where we want it to be.

Our balance sheet is strong and we ended up with $371 million in cash and we are cash flow positive. So we're not going to need to fund ourselves during hard time in the market.

Our gross margins were 50.5% and I'll brag a little bit that in the old Cypress, the memory dominated Cypress never ever would have achieved the same gross margins in a fairly tough quarter. And we achieved an all-time record of $600 million in revenue for the quarter and exactly the quarter before, we'll get cut by back to three and go back to $200 million and see if we can start over again and build something back.

We have been attempting to get a broader base of customers for PSoC. And we track customers that we're fairly stringent when we say how many customers we have. And we define that as being those that have given us revenue on PSoC in the last twelve months. They fall off the list if they don't renew in within 12 months. And we're now up to 8256 customers, that's a growth of 5.2% quarter-on-quarter and 57% year-on-year.

We introduced the new line of integrated design tool software, we call it PSoC Designer 5.0. It allows for code-free designs, which is a big deal. You don't have to write sequel [ph] in order to get the system level of solution. I am starting to realize more and more that our business is more about software than about hardware.

We have a large and very powerful software organization in Portland, Oregon, and I'm realizing that the excellent software coming out of that group and our group in Washington as well is what makes Cypress more and more attractive to customers even more so sometimes than our chips.

We are partnering with our distributor, Avnet and Xilinx who created the Spartan-3 FPGA evaluation kits, basically we put PSoC on board and USB, USB allows for fast upload and download of program in the FPGA. And PSoC provides some programmable functions that can get with your programmable gateways very powerful boards. We expect to do more partnerships like that in the future.

One more thing that looks far forward and I realized people aren't interested right now looking far forward but I haven't taken my eye off that. And we partnered with a group called Europractice. They are basically an organization that looks at the curriculum in education in Europe and 38 countries and we've got the PSoC to be part of on their horizon. We have an active university program and I checked this morning, as we speak there are 376 courses being taught to the future customers in universities, at 302 universities.

We are in the process of revamping our sales force. And we've brought in the new EVP, our Senior Vice President of Worldwide Sales. His name is Ben Lee and he's been in the business for 20 years. His most important prior job from our perspective was the VP of Sales in Asia in the Shanghai office for Altera. And therefore understands programmable systems and how to sell in the designing business. And he will make a difference for us.

And finally, we renamed a subsidiary Cypress Systems to Cypress Envirosystems. It's not an opportunistic renaming in the green environment. The fact is after we looked at all the products they make, we realized that every one of them is about energy saving and efficiency in the plants.

They have introduced some new products; I'll just mention two of them. And these products now are getting in sort of the work today [ph] world that the Cypress has not been, in routers and all kinds of hi-tech stuff.

We've introduced a wireless pneumatic thermostat and why does it matter? Pneumatic thermostat is a thing that you all have to mount it on your wall and a distance [ph] and when you put your finger on the knob and it actually uses air pressure to power the thing and change the temperature in the room.

These thermostats are deployed in 98, 99% of the buildings in the world. The problem with them is that either you must train your employees to shut down every thermostat in every time, in every floor, in every building, everyday or you'll be air conditioning your building all night longer or heating them all night long. And therefore they are big money wasters.

And the other problem is that to go and redo them is incredibly expensive because they are wired with pneumatics, they are powered to set that air. There is a compressor and is added to every building that press a little tube with compressed air that is doing it's best to run. So, to wire them up connecting to your computer and then program the computer to turn things on and off or up or down during the day to save energy is incredibly expensive as you're rewiring your entire building.

The solution to this problem is I thought was very innovative is to create a mechanical wireless phone. So, as your thumb goes on the wheel and moves it back and forth to turn the temperature up and down, we've actually created a small battery powered actuator that moves the temperature up and down on an existing pneumatic system the way your thumb move. And then since there are no wires to that pneumatic actuator, it's wireless. So basically on every floor you put in a little wireless controller which we make with the wireless new P chip [ph] and plus actuators named PSoC and another wireless USB chip; so at night computer can send a message to the wireless hub on the floor which sends a message to each of the pneumatic thermostats and then the thumb turns the temperature down.

So there is a massive replacement market, these things are a couple of hundred bucks each and where we can go in and in fact retrofit buildings that are not computer controlled for energy and put our products into those buildings with a ASP a 100 times higher than our chip ASP.

One last comment, this one is even more 1950s vintage. We now have a wireless steam trap. I became aware of stream traps in my job as a trustee of Dartmouth College where I approved capital to redo the heating system at Dartmouth, which contains a bunch of steam traps. Steam traps are just after laying the trap in your sink and they are all over in miles and miles of pipes where water collects because water in steam pipes proves harmful.

Sometimes steam traps don't work and they don't let the water up; sometimes they start leaking to let out steam. In either case, they can cost a huge amount of money in central steam heating systems which almost all universities and other companies in the world. Here in California, we heated pretty much with natural gas but in rest of the U.S. that's not true. So this is the steam trap that measures if you got water in it or if it is leaking, puts in on a wireless signal with battery powered transmitter goes through a hub, stage [ph] thermostat and can come back to the central PCE very cheaply and then somebody lets the status of their mile steam pipe.

Again, it sound kind of 1950s but the fact is that infrastructure in America's heating and we are developing products to save energy in that area. I apologize for the long description, but there is no short description of what is a steam trap. So we're ready now for questions.

Question And Answer

Operator

Thank you sir. [Operator Instructions]. Glen Yeung, you may ask your question and please state your company name.

Glen Yeung - Citigroup

From Citi, thanks. T.J., you've answered this a few times on these calls, you've obviously been through this a lot of times. I wonder if you look into your distributor network now. Obviously, you are seeing weakness but anything different this time? Are they somehow reacting differently to this cycle given what they have been doing up until now and does that have any implications for Cypress as we think over the next two or three or four quarters?

T.J. Rodgers - President and Chief Executive Officer

I don't see that, I know that the financial world is more shaken, more worried about this because this particular problem has been U.S. financial centered. But from California, from the semiconductor world, I don't see this one as being as bad as other ones.

I thought 2003 was more painful, I thought 2001 was much more precipitous from a semiconductor point of view. So no, as a matter of fact, this is more controlled. You know where we're making decent money. We will make money next quarter. We're not seeing precipitous decline.

The thing that our supply chain has learnt is not to do boom bust [ph], not to suck up a lot of products into the channel and then go for 2 or 3 quarters burning off the inventories. So right now, we're seeing a slight decline in demand, only slightly worse, like 5 percentage points worse than normal seasonal decline for the post holiday Gulf season.

We're not seeing pricing being impacted as much. You can only imagine in the old days, the old Cypress with a bunch of RAMs out there and Asian competitors starting price around RAMs. None of that stuff is happening, to the same extent it has happened in the past. I'm seeing a more stable and mature industry. As a side fact, with regard to the U.S., this one is worse, it doesn't look worse from our side of the fence.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Hey Glen, it's Brad. Just to add again, 60% of it is distribution, so we have a lot more exposure. And again remember, everybody is on sell-through. So we have no selling business at all. So I think that's important for people to understand there. And again with the lead times low, them like everybody else. I think they're managing their inventories lower than they probably would have. And I think they're a lot smarter in managing their working capital too.

Glen Yeung - Citigroup

Right. Thanks.

Unidentified Company Representative

I agree with T.J. I think the inventory have been very consistent thing, I think inventory levels in the channel which includes this event [ph] at levels we haven't seen in the last few years and that reflect that. So like was T.J. is saying, yeah, demand is soft but there is not huge cancellations and returns and you don't have... we don't stuff a channel because they are on sell through like other guys potentially could. And when it fix up, the sell through is pretty good. I think it ramp back and I think the issue could be there may not be enough inventories to support demand. But I don't think that will be an issue right now because the consumer is on a holiday.

Glen Yeung - Citigroup

Right. That's really helpful. Hey Brad, just one other question. Any thoughts about what we should model for RBACs [ph] in 2009?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I don't have any official guidance, other than to say that I think on a year-on-year basis, we're going to be flat to probably slightly down. I mean we're taking some steps obviously even prior to this as we are consolidating more things. There is still a lot of businesses we're taking out some of the extra overhead. They even know we're continuing to invest in PSoC 3.5 [ph] and a host of really new innovative products in every division that will cost money.

We are going to reallocate expenses into the higher growth areas and take them out of other areas. So I will be very happy if we can keep off that practice slightly down and then any incremental GP dollars should flow a higher percent to the bottom line. So I would think of it that way and we will give more clarity I think as the quarter progresses.

Glen Yeung - Citigroup

Okay. And then last question, may be back to T.J. is when you look at 2009, obviously lots of questions about what growth, for the industry growth for the economy is going to be. But within that how confident are you that your programmable solutions business broadly defined, is a business that will grow in 2009?

T.J. Rodgers - President and Chief Executive Officer

I am quite confident. The reason is that... instead of doing turns business and the other short term thinking about sales that we used to do, we now watch funnel with quantitative metrics.

And we look at all the way up to the university program I said, which is educating future customers four years out. We look at contacts with customers, we look at design wins, we look at first revenue. So if you look forward in our funnel, which we've got pretty good visibility on, we've got record wins, we've got a lot of stuff coming into the funnel.

The other thing is that unlike the RAM business, where an account could dry up you make a mistake, you don't ship, they get angry. They go to someone else. Once you get a design win with a proprietary programmable product, you got the design win. So the downward when your revenue goes down, the dynamic is difference. Not explosion here and a little bit of turns there. It is broad-based customers, they all stay there. You don't lose design wins, they can't negate the product, because the economy is down. But what happens is, each of your customers buys less than they projected. So, we have thousands of design wins and each of them get smaller as opposed to things disappearing in front of your face and prices dropping precipitously.

So, it's a much... from our perspective, it's a much more stable world right now. We are optimistic about 2009, where everything is getting hammered right now, stock's hammered. We are looking into a quarter that will be now sequentially, but right now we are looking forward to 2009.

Glen Yeung - Citigroup

That's great. Thanks. I appreciate it.

Operator

Thank you. Suji De Silva, you may ask your question and please state your company name.

Suji De Silva - Kaufman Brothers

Hi, Kaufman Brothers. Hi guys. So, I think you mentioned Brad in the prepared remarks that all segments be down in most products. Can you give us a sense which products you think will hold up here in terms of sequential growth?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yes. From what we see right now, not many, my comment on most is, I mean there is small stuff that might be flattish, but I mean between the normal seasonality we have in the consumer and the macro, I think it's going to be everywhere and I think the TJ's comments even PSoC and West Bridge are immune to it. There is a seasonal impact in both of those areas. The good thing is the design wins are strong so I've looked for everything going backwards.

Suji De Silva - Kaufman Brothers

Including PSoC and West Bridge, if I understand your remark?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yes.

Suji De Silva - Kaufman Brothers

Okay.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I mean, PSoC always goes backward in Q4 in our full history because it's so fairly consumer denominated.

Unidentified Company Representative

In West Bridge and cell phones, so of course there is a seasonal peak in the third quarter, drops in the fourth quarter and phased down in the first quarter and then it takes off.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah, nothing abnormal there that we weren't already anticipating.

Suji De Silva - Kaufman Brothers

Okay, sure. And the other question I... you talked, Brad about your undervaluation that you perceive in the marketplace. You guys have a strong cash balance, give me a sense of your trade off thinking in terms of wanting to perhaps buyback shares to do more acquisitions versus wanting to preserve cash potentially in this kind of weak environment?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

[indiscernible] and we have a buyback in place.

Suji De Silva - Kaufman Brothers

And the authorization, I'm sorry the level?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

We've a $300 million authorization in place.

Suji De Silva - Kaufman Brothers

Alright then, that looks worked over, okay.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah, so I think obviously we think stock significantly undervalued and again, unless the world is slowly falling apart forever, I think you've seen us in the past. We only act when it's opportunistic and we're not on the auto buyback program like everyone and their mother.

And we have to take advantage of that and so my other point, even at significantly reduced demand levels, I still expect to be cash flow positive. We don't see a need to have a couple of hundred million dollars in excess cash sitting there, especially when you're making 1.5 and wondering if it's going to be positive.

So, we'll put it to use there and we continue to always look at opportunities. A lot of stuff is coming by us to take a look at. And we've got some interesting areas we're going into so whether we partner by with content, we are consistently looking at stuff. But I wouldn't expect any big monster deal out there.

T.J. Rodgers - President and Chief Executive Officer

With regards to acquisitions, we realized that our currency was very high prior to spin-off. We did significant work looking at opportunities for acquisitions prior to spin-off. Given that we did 24 of them in the '98 to '01 period, we are less eager to go and buy something right now. We are much more discriminating. The only acquisition that we did was Simtek.

Simtek owns and has patents for what we consider to be the best non-volatile static RAM technology in the world, meaning a memory which has all the benefits, high performance low power consumption of static RAMs, but it's also non-volatile. It's something that is very much better than the magnetic memory we tried to develop a few years ago.

So that little one which is nice margin, excellent technology, is really all we saw and we just exercised the entire food chain, we even went back and looked at companies in Silicon Valley, both semi conductor and even systems companies that might have been trapped in venture firms. We did study that. So we've kind of exhausted that. There's nothing in the horizon right now. It's not to say we, things change all the time, but right now there's not even anything in the pump.

Suji De Silva - Kaufman Brothers

Right. Brad, last quick question. What level of cash you think you can generate going forward even in this environment?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Say again?

Suji De Silva - Kaufman Brothers

I am sorry. What level of cash you think you can generate from the business even in this weaker environment?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Again, the only thing I'd say is I think, it obviously the positive rate. I mean, we haven't given any guidance there. We're in the midst of just going through the '09 plan right now. But, I'd just again point out right the CapEx, we're running around $40 million in CapEx in a good market. We can easily drop that down to meet demand. And my depreciation is running substantially higher than that.

So we've got a built-in cushion there plus again so, at this point don't see a quarter when we are going to lose money. So... and we're managing working capital more tightly than ever. With SunPower gone, one of the big things that myself and the rest of the executive team are focused on is, it is ROIC and really our cost structure. Because I think that's the last stage of the transformation that we have done.

And with some of the new products rolling out, and then being at higher margins, I think we'll have more leverage throughout the year. And if demand comes back, that's even more leverage will drop to the bottom. So my point is, I think OpEx flat to slightly down. So, I am very comfortable with that and I think as the economic cloud clears, I mean we are going to probably have one of the better free cash flow yield both there in my opinion.

Suji De Silva - Kaufman Brothers

Great.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

That thing sounds very important.

Suji De Silva - Kaufman Brothers

Yes. Thanks for these detailed answers, guys. I appreciate it.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Thank you.

Operator

Thank you. Chris Danely, you may ask your question and please state your company name.

Chris Danely - JPMorgan

Hi, it's JPMorgan. Hey guys. What do you sort of expect for growth? I mean, who the heck knows what's going to happen in '09 or even in case with the end of the year, but what do you guys expect for growth for the PSoC and the West Bridge divisions for '09?

T.J. Rodgers - President and Chief Executive Officer

We're in the midst of our planning right now for '09. I don't think we've got a good answer for that as we sit here. I believe that both PSoC and West Bridge will grow, what I don't know is to what level. So, that's really the best answer I can give you right now. I know there are design wins, we're expecting growth. I can't say what because I don't have a good feeling right now for what the Industry is going to do and therefore what baseline it is to put that growth again.

Chris Danely - JPMorgan

That's fine.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah and Chris, just maybe Norm can comment. I mean one of the big things is our TrueTouch stuff. It's really just starting to roll out there. I think that's going to have a very good impact regardless of the environment, maybe Norm could comment on some of he that.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yeah. Hi, Chris. Yeah, personally I'd actually like to thank T.J. for being big for a change. We think from an overall standpoint out somewhere, but we do have very high confidence that we've had a lot of success in designing with the TrueTouch in the touch screen marketplace. We have about 50 design wins already. I think that will give us a pretty nice popping growth next year. I think the overall macro economics makes me hesitate to say, what that level will be.

It's starting to contribute to our numbers at a fairly small level. Most, almost all of that will be something we reflected in the first half and second half of next year. So that's certainly one area where PSoC, based on PSoC you already have in full production. We see it as a growth driver for us next year.

T.J. Rodgers - President and Chief Executive Officer

I should explain that TrueTouch is the trade name and it's a trade name for a touch screen type product. The Apple iPhone, sort of changed the way the world is going to interact with global machines, and we have managed to program that functionality, multi touch, gesturing, things like that, into a PSoC. It kind of talks about power PSoC, the chip that came out in 2003, well before anybody even thought about anything like this, was able to program, to do the touch screen type design.

That's taking off. Obviously, the consumer world is headed towards touch screen type interfacing and as Norm said, we've got 40 wins in the pipe, and that none of them are at revenue yet, but that's the visibility I was talking about earlier that gives us a confidence for 2009 that we will grow.

Chris Danely - JPMorgan

Great, thanks. And then on the gross margin, they were pretty stable for DCD, but they dipped in the CCD and MID. Brad, can you just talk about why they dipped, and then you're forecasting gross margins to dip again. Can you give us a sense of what that looks like by division and when you would expect gross margins to bottom for the company?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Sure. Just to take your last question, I mean, the dip is basically 100% based on factory absorption right now. And obviously, taking the revenue down, we're going to take starch down. We're down to one fab effective mid-November, Shahin, thanks. So it's just our Minnesota fab, so we have the ability to manage that.

More importantly, what we manage is our product margins, right, and they remain very high. We still have the ability to manage what we call the leakage between that and gross margin. And unfortunately, just we want to manage inventory. Some companies keep full steam ahead, they build inventory. We're going to sell it [indiscernible]. We don't believe in that as a company and I think it's a short-term thing. I mean, if demand stays down, we'll keep it down. But when demands picks up, that will run up pretty hard. So, I look at it as a quarter maybe two, probably through Q1, because again Q1 is normally seasonally down too. But then I see it moving up. Because you know again like T.J. said 80% of our business is programmable proprietary, which runs very good margin. Our SRAM margin have held in very well. So, it's demand balancing.

As far on Q3, it's really just the mix of the business and who absorbs the factory loadings or under loadings that really impact the division. And a little bit of mix, nothing I get overly concerned on because things do flock around with us because of the factories.

T.J. Rodgers - President and Chief Executive Officer

So let me give a little bit more color on that. We're about to shut down fab 2 in Round Rock, Texas. It's at end of life. It's a 6-inch fab. That will be behind this quarter and our model going forward is that we have our big fab in the Bloomington, Minnesota. And then we have foundries that we're growing into. Our goal is get our fabs to be our fabbing to be 50% internal, 50% external.

That model notwithstanding what happened last quarter was the total demand, our yields are good and our total demand drops slightly. Therefore, we can't even fill into the zone fab right now. Furthermore, we compounded that deliberately by keeping a slow wafers going in our foundries. So as not to dry them up. It's really just your partnership for the future. The net result is that we've got... if you look at our P&L internally, we look at a gross margin that... may have normal manufacturing costs. We look at the second gross margin that's a normal manufacturing costs less overhead absorption inefficiencies in the fab.

And that... the delta between those two lines is about 4% of gross margin last quarter. And it'll get a little bit worse this quarter, couple more points. So we've got 4 to 6 percentage points of gross margin that are simple under utilization and as soon as our volume prospect just a little bit, we'll fill up our fab and begin to grow in the outside fabs and that's when we'll get the culture that Brad described earlier.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah and just begin remembering, DCD right. We get a lot of one-time, last time buys military stuff with some of the old common CPLD and that's been with them around a couple of points anytime. And again our model for them is really kind of 63, 65% and I think we'll maintain all of that. We're very comfortable our product margins which is the key in the ASP that underlie that have been very strong and we've talked a lot in the past about our value based selling and that's part of our religion now and it's really refreshing to see.

Chris Danely - JPMorgan

So taking all that into account, when do you guys expect to be profitable on a GAAP basis?

T.J. Rodgers - President and Chief Executive Officer

Okay, on a GAAP basis... now you're talking... you're talking in terms of the distortions in the P&L related to stock. I'll give you one recent example. We take stock charges that relate to valuing the stock option in the past and then amortizing that charge over time with the 123 charge.

That just got recalculated because we spun out SunPower. We didn't get any more of this profit or our gross margins didn't go up or down. What happen was all those charges got recalculated because we spun out SunPower. Now those have all started all over again. And those stock charges that we do it on our P&L forever. So the answer is I don't know, I don't even look at it because it simply doesn't reflect reality of our business.

When we report profit, we're reporting cash profit and that's real profit. And those GAAP charges especially when we do things like acquiring company, amortizing goodwill or writing-off goodwill and spinning out companies, the reselling stock charges, they just open overwhelm with P&L.

Chris Danely - JPMorgan

Rather overwhelming me. Thank you, guys.

T.J. Rodgers - President and Chief Executive Officer

I think you ought to go in the web. This might be from the web.

Unidentified Company Representative

I think, yes.

T.J. Rodgers - President and Chief Executive Officer

Okay and how do you get to it?

Unidentified Company Representative

Investor Relations.

T.J. Rodgers - President and Chief Executive Officer

Go to the Investor Relations site. I just run a paper which was published by the KL [ph] Foundation in Washington D.C. And I talked about ten distortions in our P&L that relate to GAAP accounting. Including the fact that the first story has happened few years ago, an investor called me up, and was worried about cash. I think this was in 2001. And I said no, we've got a lot of cash, and I have my secretary come in and lay down a GAAP report and I looked at our GAAP report, and it looked like we didn't have very much cash. And I later found out that I have to look at three separate line items, and dig into 46 pages of footnotes in our report, even to know how much cash my own company had. I couldn't even read my own GAAP report, and know how much money we had in the bank. That's one story. There were nine others like it and they are particularly... the distortions in GAAP accounting are particularly reaches for companies that acquired and spin out other company. And I've actually outlined those in the paper that was published by very credible Washington think tank. I recommend you go take a look at it.

Chris Danely - JPMorgan

Okay. Thanks guys.

Operator

Thank you. Uche Orji, you may ask your question and please state your company name.

Uche Orji - UBS

Hi, it's UBS. First question for Brad. Brad, with all your guidance 4Q, for the next quarter, what is the assumption for Simtek's contribution?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I mean we generally don't break every little product line out, but their revenue will be slightly down from where they used to be. It won't be a real bit drag on the P&L. We clip it as $5 million to $6 million contribution in revenue and pretty minor at this point in time.

Uche Orji - UBS

Okay, that's helpful.

T.J. Rodgers - President and Chief Executive Officer

The Simtek acquisition had little to do with the finances. We do like the fact that they are... they've got revenue we don't have to wait for during these times. The acquisition was more related to two major technologies that we acquired total rights to. That was our game. The non-voluble memory I described earlier, is that non-volatile SRAM. The game going forward is going to be for non-volatile SRAM in PSoC.

And we've done that now. We've got a product in the market. But this product we call non-volatile is back. We've already got design wins and traction. And what it does with the lawful system, that this is a black box. If you think about a black box in an airline, where you can download information from it and you know what happens in the minutes before crash. We've now got a black box on a chip that is, what is the magnitude cheaper.

And it could sense temperature, it can sense G-forces, it can sense humidity, it can sense with any sense you put to it, it's stored in a memory that you can pull the plug on and the memory will keep the data later on. So, this PSoC with black box capability in the real world, for example is going board in large systems, like routers for example, where a very expensive board might go out and the black box will tell you what power supply is, what temperature is, what was going wrong in the minutes before the board conked out, the system conked out. And that can allow people who demand uptime banks et cetera on your systems to debug so.

The primary thing about Simtek wasn't to get few box in revenue right now. So we get, what we think is the world's best non-volatile static RAM technology and get it in PSoC.

Uche Orji - UBS

Okay. That's helpful. Thank you very much for that. Another question for you though is, if I look at a whole SRAM business. Obviously slowing down, given the macro environment. But, you've also talked about gaining share in this market and we've heard about Samsung's non-commitment longer term to this business. Now how much share gains do you think you would expect over the next 12 months and how much can that help even if you get a downturn? And given what you described on the product you have with Simtek, I will assume that Simtek product you describe is going to be reclassified as PSoC not as part of SRAM. Is that correct?

Ahmad Chatila - Executive Vice President, Memory and Imaging Division, Manufacturing

Sorry, this is Ahmad, I didn't understand everything about your question.

Uche Orji - UBS

Yeah. There are two things. And is first is a clarification. The product you described, T.J. just described, will that be classified as out of PSoC or will that be classified as part of SRAM?

Ahmad Chatila - Executive Vice President, Memory and Imaging Division, Manufacturing

It's part of the Memory and Imaging division.

Uche Orji - UBS

Okay, fair enough. The question I was asking...

Unidentified Company Representative

Let me clarify it corporate level. PSoC now is in all three of our divisions. We want PSoC to be a corporate initiative. Therefore, we're planting PSoC in each of our divisions. When we report PSoC numbers to you, they will be reported as a single number. However, the non-volatile PSoC and the memory technology in it, is being managed and the products are being made by our MID division.

Uche Orji - UBS

That's fair.

Unidentified Company Representative

Those have power PSoC in our DataCom division. So, we now have the PSoC that is just introduced which is capable of running four channels of power at 36 volts and 1 ampere of current. So it's PSoC that can make physical objects move by controlling power. So we're branching out the PSoC technology, programmable system technology into different areas of every one of our divisions. You will see one number though in our reports.

Unidentified Company Representative

Market share in SRAM, Ahmad?

Ahmad Chatila - Executive Vice President, Memory and Imaging Division, Manufacturing

Okay. Market share, we think right now we're at the 30% range. Let me tell you how we are thinking about the Memory and Imaging division. We are like around 15 points higher in gross margin than two years ago. And the way we were doing it is, we're not making jelly beans, SRAM in volume any more. We are trying to go after applications, and specific applications and we have a huge pipeline of products that are coming out at low cost I would say, because a lot of our organization, a lot of it is in India. So we are able to actually have low operational expense, but at the same time improve our gross margins. So to talk about market share, it's going to extend we think next year.

We expect that actually Q3 to be even expansion in revenue, but September was pretty tough for us. And we do not, like Brad always tells, our CFO that if you're flat than improving your profit on a yearly basis, that's big enough. And we are not taking this actually. We're going to grow step by step and you'll see a lot from us in the future.

Uche Orji - UBS

T.J., Just one question for you. The Cyress Envirosystems, do you think this could become material over the next one to two years? If you can give... I know you described the products that could be used in this area. But in terms of how we can size the opportunity in this category, any insight will be helpful. Thank you.

T.J. Rodgers - President and Chief Executive Officer

Sure. Cypress Envirosystems is an effort to get more value from the capabilities we have, in just doing demonstrations for the market for PSoC we make some pretty interesting things here and we started the systems companies. It takes some of our things to market and I described two of them earlier. With regard to this financial impact on the company, it's a new company. Its revenues well in sub million dollars per quarter range right now.

But over the next two years, this will build up we hope to a $10 million per quarter, 20% pre-tax profit business, that's our plan. And then we can see where it goes from there. We also have the opportunity to expand in markets we've never been in before. So if you want to talk about acquisition opportunity, there is an opportunity for us to grow faster as we see areas where like for example, I never thought about pneumatic thermostats all my life, and as we run across opportunities like that, there are numerous small companies in this area that we might acquire to build it up faster than the $10 million per quarter, 20% pre-tax number I just gave you.

Uche Orji - UBS

Right, okay. And then please finally on West Bridge, in terms of what progress you're making outside of fairly customers you have now. If I look at it, top five handset manufacturers, when shall we start to see more meaningful contribution from the wider handset marketplace?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

This is Dinesh Ramanathan, I run the Data Communication Division. As I've told you before, we are engaged with the top five to six handset manufacturers which pretty much contribute 80% of the market.

Uche Orji - UBS

Sure.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Design wins in this case, typically take anywhere between six to nine months to actually get into full production. So, the impact of most of our activity you should see in the Q1 actually in the Q2 timeframe. That's when we hope some of the design wins that we are working on right now will come into production.

Uche Orji - UBS

Thank you very much.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Sure.

Operator

Thank you. John Barton, you may ask your question and please state your company name.

John Barton - Cowen & Company

Thank you, Cowen & Company. Just to go back to the comments on gross margins by product line, particularly DCD, Brad, I know you made a comment that if that gross margin bounces around based upon last time buyers, I believe there is military CPLTs, gross margins are up 220 bps, the revs were up about 9.3% sequentially. I think West Bridge is consolidated into that number. What I am trying to figure out, is it possible that West Bridge is actually pulling that gross margin up or am I mixing the one-time pops for military. And if that's the case, how is the profitability of West Bridge like?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi, this is Dinesh again. So, West Bridge is as profitable as I had predicted before, which is gross margins that are typically between the 50% and 55% range. Overall for DCD, we are seeing fabit [ph] affect as you mentioned in the military market. And we're able to offer very, very high gross margin products into that space.

So, as Brad mentioned there is a certain amount of weight that the West Bridge business does bring in but that's typically ended up being overwhelmed by products that we're able sell at significantly larger margins, in the CLD as well as in the communications business.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah, I mean it was... the increase is a 100% due to com CPLD and specialty number in Q3.

John Barton - Cowen & Company

Okay. Just looking on the couple of comments we came out with respect to memory in the call so far, Brad, you opened up by saying that you saw weakness late in September primarily DCD, primarily SRAM. I guess, I'm curious why the SRAM, are you walking away some business because you don't like the pricing? Then there was some conversations that the fact that you will continue to gain share but also a lot of focus on profitability and T. J. made a comment we haven't seen pricing pressure than any great extent that we would in this type of cycle historically with agent, supplier's bombing price.

The question I'm really getting at is the strategy in pricing for SRAM still remains one of focus on profitability and if indeed this turn... the downturn does get enough to put ASP pressure on the more commodity SRAMs. Do you walk from the business at the cost of revenue?

T.J. Rodgers - President and Chief Executive Officer

Okay, I'll that, John. First of all, we are disciplined on pricing but at certain accounts if we feel that our competitors are trying to think that we're weak on competing, we will not allow that to happen. So I just want to make that clear. However, our costs structure is improving very fast as well. So balancing that with some pricing pressure that we get from time-to-time, I think we're in good shape.

Overall, we don't see pricing pressure from the competition, anyway, because some of the products we have, they don't have. So from a balancing act, and the answer they were reviewing actually with T.J. and the staff our pricing results. Even with weak September and October looking out nothing has changed in a big way. Do we get some affect in one account. Do we have some challenges in one place and another? Yes. But overall, I don't see a major gross margin decline for this division. The change for us in pricing in SRAM, is that when SRAM were three-quarters of our company and the prices where they are and people were trying to take business and if you didn't match it that then you are making the problem even worse. You simply have no choice. Despite DRAMs are today where they were as [indiscernible] as always full to fab in this month, the only variable is led by CF charge in order to make sure everything is bought. And sometimes prices in DRAMs today have negative gross margins.

But the luxury we have with SRAMs being not the largest business anymore. And with our... we've been moving toward more highly value added high performance proprietary type of products. We have the proprietary SRAMs too. Is that... we know... aren't forcing in that kind of price wars anymore.

So to the first order... we're going to price right and we're not going to war on prices. Then we said that clear Ahmad made it clear that anybody is opportunistic wants to involved in prices to take a major account from us, we won't let him get away with that either.

Unidentified Company Representative

Looking at one last comment, John, so that you understand. People brag today our completion brag that they just introduce 113 on some Ace and Stanley [ph] or whatever. We had 90 nanometer size five bore [ph] a year ago. So our cost structure is way beyond what they can put. That's why I don't think people play games with us, they know that they are willing to go to very deep end and still win and have high gross margin. So that's a situation right now, it's very healthy.

John Barton - Cowen & Company

All right. And in my last question. And T.J the question eventually get to here. What is Cypress look like in three years. And I understand the focus on programmability. I understand the focus on proprietary products. I understand that real men don't have to have fads but you just distributed $2.6 billion of the value SunPower... of the SunPower position. With that off your plate and actually that's said, I remember three years ago you're being criticized for putting money in a science project, called SunPower, I remember what it was a year ago, being personally chastised because you weren't spinning it out fast enough and here we got $2.6 billion going out to shareholders. So, again my personal congratulation, I wish all my calls were that good. But three years out what does Cypress look like, I mean other than the stuff articulated to the best ability?

T.J. Rodgers - President and Chief Executive Officer

Well, we think we can go to microcontroller business and I don't want to do math on my calculator or my head real fast but we know that the microcontroller like business which we have a super set up of programmable system on chip can be $1 billion business, that's very clear we have got competition. We got a better mouse trap and they're reacting quickly enough to it. Our second generation will be out in the market within the matter of few months.

Our third generation is very shortly behind that. So I'm looking at $1 billion microcontroller business, West Bridge frankly with a business priced for us. It was a clever invention. That business can also be several hundred million dollars. So, we're looking to double in size over the next three years period.

Again I'm not trying to make comments about what's going to happen in the market. But given a normal market, doubling in size over a three year period is not out of the question. And doubling in size with good product in excess of 50% gross margins is certainly in the picture for us. That's what we're doing and the company work everyday, we work on that stuff. I'd like to be a football player, we're worrying about winning the next game, we're not worrying about status of the NFL right now.

John Barton - Cowen & Company

And actually one more if I could. So, Cypress Envirosystems puts you two, three steps closer to the true consumer of a product. I know you haven't been in there that long. I know that the touch isn't that broad. But being that close to guys, really thinking about spending their money, any inputs on changes of thought you have seen over the last month or so as a result of all the turmoil in the credit area?

T.J. Rodgers - President and Chief Executive Officer

Oh yes, when your selling small systems which we do. And your pitch is you can help your company be green and do it very economically or you can save energy and the return on investment will pay for the system even in a year. Many of our customers, by the way, one of our biggest customer groups in Envirosystems is semiconductors industry. Many of them say that's great, our new capital budget is capital needed to survive, we don't need you to survive, come back and see us in six months. So a lot of these nice to have environmental things are getting pushed back, so we see that end market, the end market is pretty cautious right now.

John Barton - Cowen & Company

Thank you.

Operator

Thank you. Our next question comes from Mr. Tim Luke. You may ask your question. Please state your company name.

Tim Luke - Barclay Capital

Barclay's Capital. I was wondering guys if you can just give the book to bill for the different businesses?

Chris Seams - Executive Vice President of Sales and Marketing

Hi, Tim. It's Chris. CCD was 0.88, Memory division was 0.91 and Data accomplished 0.77.

Tim Luke - Barclay Capital

And Brad. You talked about seasonality for the first quarter, usually being lower. Could you just remind us where you stood framed [ph], first quarter seasonality?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I mean, historically, it could be 5 to 10%. I mean, I think the question is how much of that will of that will get absorbed in Q4 versus not and obviously will sell-through in Q3. So, at this point, I think that's as good as anything to look at, and it's probably the cautious, conservative, and right thing to do right now.

Tim Luke - Barclay Capital

And with respect to the share count, Brad. How do you think we should plot that for the next few quarters?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

It's kind of the million dollar question. It's like the stock market. I would have said it would have been a lot higher, but obviously as price moves up, which I sure expect and hope it will. But for diluted share count is going to move [ph].

I mean, for Q4, I kind of plug in 175 and 180 like I guided and...

Tim Luke - Barclay Capital

Yeah.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Keep it around that level or edge it up probably slightly every quarter assuming the markets return and obviously, that caveat is on not including any buybacks that we do which again, I'd expected that we will be doing something along that line. And I think we will just let that come through?

Tim Luke - Barclay Capital

Just to be clear on what you said on inventory. You said that you expected to be flat to slightly down, is that what you said.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah, flat and slightly down. Taking the last time build for Texas and 120 yard stuff that fluctuate in it. As other comment on GAAP, it was only clear to me and maybe you guys are finance guys, you would understand it but you guys understand that when you spin out a company, you recalculate stock charges for the company spending and that recalculation created the charge that has nothing to do with either cash or profit. And that charge actually goes in the inventory.

So we actually have stock charges and inventory that are part of the picture. And that's why we would not like to do it but that's why those distortions as we see them are removed in what we report as non-GAAP numbers. It's not stock and inventory, I'll just tell you, going to [ph] inventory defines no share as anywhere.

Unidentified Company Representative

Yeah, we actually did an inventory count and couldn't find it.

Tim Luke - Barclay Capital

Just a couple of other quick clarifications Brad you said the account receivable was up a bit, although you shipped less than you would have expected at the end of the quarter because things weakened at the end of the quarter. Could you just talk through that and then also in guiding the revenue down to 10 or 11%. Should we expect the similar trend with the memory business to be the one that is sequentially the weakest or CCD because it being a larger piece of the pie and having more consumer exposure at the beginning in the fourth quarter?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yes, again on the AR I remember 60% of what we do is through distribution. So they issue orders from the month and we sell to them and that creates an AR [ph]. Does it mean that sold it through to the customer, right you get the DSO we will make, it may not have the revenue even though you have a receivable. So the fact that they slowed down in the last week is on sell through. Right so that's to say that doesn't mean we didn't sell into them we are doing, it actually went up slightly in the quarter. So it's really a timing of when we build them versus when they feel less up, it could be a week apart, it could be a month or two months apart.

So, the key and that's I gave you the other data point, the key is the vast majority of that $20 million plus literally got paid the next week on standard payment firms and the way we go. But I wouldn't... there is no concerns there. It's just kind of how it works and you have a heavy feisty model that's all sell through.

To your other point on which group where, I mean like I said every group is going backwards. CCD always goes backwards and we estimating that will go a little harder because of the consumer end. So I would say they are probably more than MID and DCD is probably the least of them all. I just have it ordered that way.

Tim Luke - Barclay Capital

If I may be if I could, CCD and DCD what the percentage of these two units are PSoC and West Bridge, more or less respectively now?

Unidentified Company Representative

Good try.

Tim Luke - Barclay Capital

Can you give us a range for this?

Unidentified Company Representative

I am not because that's against my policy but if a gentleman want to talk if off.

Their record it's in there up.

Tim Luke - Barclay Capital

And...

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

At both the end, PSoC is the biggest product line I mean...

Unidentified Company Representative

And two of [indiscernible] are at a $48 billion dollar run rate right now.

Tim Luke - Barclay Capital

Very helpful. Thank you very much guys.

Operator

Thank you.

Unidentified Company Representative

Thank you.

Operator

Srini Pajjuri, you may ask your question and please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Hey Brad. Couple of clarifications first, I know you guys are not big fans of GAAP accounting but I'm just wondering, do you have a range in mind for the past 120 for the expense line?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Big.

Srini Pajjuri - Merrill Lynch

How big?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I think if you [indiscernible] it will be that and then be roughly flat or take down a couple of million for the next few quarters. Because like TJ said that modification charge, the intrinsic gain of it was equalized, right? We didn't give out new shares and we didn't do anything different but unfortunately if there is a charge and we follow wherever is called where we do the accelerated amortization.

So that majority of that's going to come up in like the next year, year and a half. So I would just look at the current rate and maybe trend out a couple of million bucks through '09.

Srini Pajjuri - Merrill Lynch

Okay, got it. And then on the factory loading, you said you're taking them down pretty meaningfully. Can you give us where you were in Q3 and where the loadings are going in Q4 and also as they head in to the first half of '09? At what revenue run rate you think you can get back in to the 15% gross margin levels?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah, I'll let Shahin give you some factory data.

Shahin Sharifzadeh - Executive Vice President, WW Wafer Fabs & Technology; President, China Operations

Yes. This is Shahin, I run the fabs. As they start their Q3 range in the 80% to 85% range loading. And Q4, we expect to get back things down to around 75%. About 5 to 7 percentage points below. So, to answer your question, last quarter was 223 million. And we're forecasting roughly 200 for the fourth quarter, perhaps the same for the first quarter and 222.7 million, we rolled 50% gross margin. And when we pop back up there again, we would expect to go back about 50% gross margin.

Chris Seams - Executive Vice President of Sales and Marketing

Yes, I want to emphasize the margin decrease is purely due to factory loading period. We're not seeing product margins, ASP. We don't have anything else weird going there. If anything we think they will be stable and up into the right due to the product mix of the proprietary programmable stuff as we go forward. And again, we're taking other actions in that area, and again, in the back half of '09, I get some nice depreciation roll off coming too.

So, barring we're not in total doomsday scenario in the economy, our margins will jump 50, 51ish maybe 52 in the back half of the year potentially. But again, that's just the plan of where we could be if things hold together and a lot needs to happen.

Srini Pajjuri - Merrill Lynch

Okay and then Brad, if you look at the CCD business. You guys had a very strong growth in Q3, somewhat similar to what happened in September. But was... you also had some inventory issues back in September of last year. So, I'm just wondering how much visibility do we have to say that it's not going to repeat again this time?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

I guess I don't follow the inventory.

Srini Pajjuri - Merrill Lynch

Well, my question is in the strength that you saw in Q3. Is there any potential risk that some of that is inventory build at your customers?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

You only get one of 2 excuses. You can either pick my fabs are under loaded, therefore my margins are down excuse. Or my margins are good but I build too much inventory excuse. We picked excuse A. So, we've cut back. We're not going to overbuild inventory and we're not going to overshoot. So, no, we're not going to have an inventory problem like we had last year. Our inventories are higher that we did like to be right now but we are beating them down. And we are taking the hit by under loading the fabs, the 75%. and hurting our gross margin by a few points.

Chris Seams - Executive Vice President of Sales and Marketing

Yes, and I think specifically on norm's stuff, there is no issues that we saw there and specifically his inventories, the lowest level I think I've seen in couple of years.

Unidentified Company Representative

We were in a good position on both fronts. One, lead times good, and yet inventories are low. At the same time, it's important to emphasize we're sell-through now so we don't have big inventories in the channel that we're crediting to money. And we do still track inventories in the channel and they at very reasonable levels, they're not inflated. We do see obviously some end customer demands go down but do not expect inventory to be the impact, to have the impact on the sales?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah I think we're going, I think last year Norm's lead time were lot higher in CCD and you're down for one half.

Unidentified Company Representative

Everything is under six weeks is not an issue?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

So that's pretty incredible to be under six week in the area where he's out where I think you are running close to 8 to 10 last year what could have exasperated some of the ordering and builds of the end customers. Norm's in fine shape.

Srini Pajjuri - Merrill Lynch

Okay and just one more clarification Brad, you said you expect to maintain the OpEx flattish? Did you mean flattish on a quarterly basis or is it on year-on-year basis?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Year-on-year flat to slightly down what I model right now.

Srini Pajjuri - Merrill Lynch

Flat to slightly down for the year. Okay got it. Thank you.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

G&A remaining heavy and increase in all.

Unidentified Company Representative

That's an inside job.

Srini Pajjuri - Merrill Lynch

Thanks, Brad.

Operator

Thank you. Adam Benjamin, you may ask your question and please state your company name.

Adam Benjamin - Jefferies & Co.

Jefferies, thanks. Just to follow-up on SRAM, there's been a lot of questions. You guys have been keeping the margin steady in the mid 40s. You saw a dip down in this quarter but based on what you're saying, it sounds like due to fab loadings and pricings been relatively stable. We should expect that to snap back in the December quarter and get back into the mid 40s even though revenues down. Is that right?

Unidentified Company Representative

Yes.

Adam Benjamin - Jefferies & Co.

And then, on the PSoC business, just to clarify, I think... I'm not sure I caught that correctly. You said it was 0.25 billion run rate, was that PSoC and West Bridge together or was that just PSoC?

Unidentified Company Representative

Together.

Adam Benjamin - Jefferies & Co.

Okay. So getting the PSoC, you guys have been talking about 20% growth on a year-over-year basis, given the decline, your forecasting for Q4, even though you had a good Q3, it's lower than that. Can you talk about what change either through the quarter, outside of just the macro environment, what else was causing that to be lower than you thought?

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yeah. This is Norm. So let me give you some numbers that I did through the year-on-year growth is now looking to come in below that what we've originally expected. Couple of data points, Q3 was year-on-year 15% growth, may have slightly lowered our target at NAV [ph] but still very healthy. From an overall annual growth right now it's more like 5 to 10% year-on-year. The fact is if you actually remove the top two customers from our business, we grew over 25% year-on-year in 2008. And so, we do have a situation where which there is a goodness to it. We are expanding our base, couple our top customers while still very big and important to us are not as big they used to be, but the broad base of both the number of customers and revenue is increasing dramatically and we are much less focused than we were a year ago.

But they did decline more than we expected, which was really the reason for the overall growth. The other point I'd make is, we are gaining market share and declining market to reasonably significant amounts. So the market overall is declining. In this past quarter we actually hit 4% which may now seem like a big number. But in the $4 billion market size which is the AF [ph] marketplace and important space and obviously a lot of room to grow.

So, we're gaining market share, had some large customers come down relatively more than made up for that in broader base and as I said outside them, grew more than 25% year-on-year.

Adam Benjamin - Jefferies & Co.

Okay, that's helpful Norm. Just a follow up so you had those two customers roll up and as they roll up in the beginning of next year, and it makes the compares obviously tough because you had them in the first half. 10% or so is probably expected for '09 as well given a fact that its a little bit depressed due to those tough compares?

Unidentified Company Representative

I am hesitated to declare more. But I would that would be... we would expect more than that. And I think the other statement, I'll be careful on it, while we have a roll off in those top customers, I don't think we'd have fairly believe they will be the further backwards next year. I have to look at the data. Again I am not going to slow it much but I think with touch screens, we would expect more growth than what you have speculated.

Unidentified Company Representative

Being the roll off, if you look at the mega wins, it is really more cyclical. It's up and down depending upon and not necessarily the market but the specific of new products in the market with our end customers. North [ph] point was more to the fact that they... the thousands of customers they get by the beginning is now starting to grow and exceed big customers.

So it seems like I've started with a couple of makeovers. But now we are holding the base. The least of all the other customers and therefore the growth of those two segments, they are together, so as to meet the line [ph] but we're not losing shares with the big guys, we are just not getting the little guys such as they start to show up on the radar screen along with the big guys.

Adam Benjamin - Jefferies & Co.

Got you. And Brad just one follow up on OpEx, I know it's been a lot of questions but historically you've talked about Q1 seeing annual merit increases. And then on top of it you should have an increase of what 4 to 5 million for Simtek as that closed to the end of September coming online. I'm just trying to reconcile that with your comments about seeing on the year-over-year bases, flat to down, is that excluding Simtek or is that just down on absolute level?

Unidentified Company Representative

We just laid off people in the path based on the under-loading I talked about. We are doing small amounts of trimming on multiple organizations in the corporation. We are moving functions from expensive areas, to less expensive areas that I... don't need to be here. So the increase you get from raises in the first quarter for example are going to be offset by other costs reductions we're making and we expect our OpEx should be going down modestly even if we grow next year the OpEx will be going down modestly.

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Yeah. I think the slight up-tick in Q1 really more than payroll tax issue, Adam just because all of that reset and there's nothing we can do about that and like T.J. said, you look at the year-on-year. I really expect will be flat to slightly down.

Adam Benjamin - Jefferies & Co.

Got you. Very helpful, guys. Thanks

Unidentified Company Representative

Yes.

Unidentified Company Representative

We're managing it very tightly.

Operator

Thank you. Sandy Harrison, you may ask your question and please state your company name.

Sandy Harrison - Signal Hill

Yeah, thanks. Signal Hill. T.J. in you prepared remarks, I guess you talked a little bit about how software is becoming a bigger part of your business, just a couple of questions on that. How stocked are you in that department. Is that something that you got plenty of resources in or is that something that you may have to go and acquire and does that Brad over a longer-term change, any of the operating metrics of your business.

T.J. Rodgers - President and Chief Executive Officer

I don't think we have to acquire anything. The sort of data points that was assumed in my comments that I'll make it explicit now is that we were in the CPLD business, programmable logic business, since our founding in 1986. and as such we don't have a significant components [ph] software group in Portland, Oregon to do that.

Then when we got PSoC up, we built the second high quality software organization in Seattle to work on PSoC. So as we needed more software people for PSoC, we asked the Portland Center to switch over their activities pretty much 100% toward PSoC. So we've got a big confident two site software organization and we've also build... we're starting to build in India which of course is the software capital of the world. So no, no acquisitions and no massive hiring. We're happy with this group pretty much the way it is.

Sandy Harrison - Signal Hill

Got you. And then, you talked a little bit about the stock buyback and you got 300 million. How much is that all left and what are the typical rules about quiet periods or so forth associated with or blackout periods associated with this sort of activities?

T.J. Rodgers - President and Chief Executive Officer

Blackout period associated with buyback?

Sandy Harrison - Signal Hill

Correct. Like when you can go on the market when you can that kind of thing.

T.J. Rodgers - President and Chief Executive Officer

What time the market opens tomorrow morning.

Unidentified Company Representative

9:30.

T.J. Rodgers - President and Chief Executive Officer

The blackout period ends with 9:30 tomorrow morning. And then like I said, we have a kind of share prices as long as we have cash. We are restricted in the amount we can buy the ROF [ph]

Sandy Harrison - Signal Hill

All right.

T.J. Rodgers - President and Chief Executive Officer

Can't go to a major equity transaction buy back a massive amount of stock and because of both that's driven [ph] out. So those are my two answers.

Unidentified Company Representative

Yeah. And this standard can be rules right applied for everybody else. There's a certain amount we do it ourselves. There is a certain amount of today's trading. 20 or 25 I think. So there are... there's no sort of massive change coming. We're all out by 20% or so the daily buying and we have a limit on the total that we can buy because of debt. We'll watch earnings come out and see where the manic markets go.

Sandy Harrison - Signal Hill

Got you. And then my last question is, any 10% customers or any change in the customer make up in Q3 and do you see that changing dramatically in Q4 with the market mania?

Chris Seams - Executive Vice President of Sales and Marketing

Sandy it's Chris Seams. No 10% customers in the quarter and we don't see the customer ranking if you will, changing dramatically with what's going on.

Sandy Harrison - Signal Hill

Got you. Okay, thanks you guys.

Unidentified Company Representative

I just want to clarify one thing on the Simtek for everyone. From an OpEx standpoint it's not going to be a huge impact. I mean margins are sort [ph] of rationalizing and integrating that with our current month's offering. So I expect it to be accretive actually in Q2 as we go through the transition and make the things aligned with where we want to go. So just so we are all in the same page. And that 5 million or 6 million I haven't quoted I am assuming new net revenue not OpEx. Just so everyone understands that.

Unidentified Company Representative

I think he is right that's what that their OpEx but that's will not be our OpEx.

Unidentified Company Representative

Yeah, exactly.

Unidentified Company Representative

I think you are right [indiscernible].

Unidentified Company Representative

Exactly, I mean remember we are a public company dealing with SEC GAAP, I mean there is millions of dollars that regardless of your size, for the sixth spot, but not disappears the domain [ph]. He's rationalized a fair bit of the company already and we'll continue through Q1. So, we were partners with them in the non-valuable SRAM business prior to the acquisition.

Therefore, we have a complete structure where we can simply run more orders through. The headcount, we will keep and the cost we will keep in Simtek are minimal.

Unidentified Company Representative

We need to wrap up pretty soon. If there are a couple of questions, we will take them. SunPower needs to jump in here for the grand finale.

Operator

Thank you. Doug Freedman, you may go ahead and please state your company's name.

Douglas Freedman - AmTech Research

AmTech Research, a division of Broad Point. I'll help, you to call short. A lot of my... all my questions have been asked and answered. So just I guess the only one left is how is this year's vintage?

Unidentified Company Representative

2006 was a very, very low yield year on the remainders of 2006. I'm following my 2006 right now. 2008 was a very low yield year was exceptional for all of you.

Unidentified Company Representative

You forgot to ask if you want some order form.

Unidentified Company Representative

Yes.

Unidentified Company Representative

You mail me and you'll get on my list.

Douglas Freedman - AmTech Research

As an analyst, I can tell pricing is going up. Thank you. Have a good one, guys.

Operator

Thank you. And our last question comes from Mr. John Pitzer. You may go ahead. Please state your company name.

John Pitzer - Credit Suisse

Hey guys, it's Credit Suisse. Couple of quick questions here. Just Brad, you talked about your use of cash around stock. What's your thought on the debt here and wouldn't that be a more elaborate way to turn off this in dilution?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

On the debt all I'm not sure where it's been traded. That should be trading under par so we're all equivalent to do that. We've got the fundamental changes done, the new conversion ratio has been set. There'll be an opportunity for that to get put back to us. So, yeah I feel very opportunistic there as well as the stock.

The point is, we've got the excess cash even with the assuming that the 100% of the bond went say tomorrow that we can put to use on the stock or just keeping cash.

John Pitzer - Credit Suisse

And then guys, almost impossible to forecast in this environment if you look at sort of chip company that have reported I think guidance for December, ranges anywhere from plus 7 to down 20. When you look at the guidance you guys gave, what are some of the underlying assumptions? You are just looking at the booked revenue and making some assumptions around turns and cancellations, or help me understand the confidence level, understanding the confidence in this environment is difficult.

Chris Seams - Executive Vice President of Sales and Marketing

John, Chris Seams, So, basically the map that you just outlined is what we use and I gave a number that we were over 80% booked to the guidance we gave. And barring anything dramatic in the booking patterns that are going on for the last 4 to 5 weeks, we think the guidance is where we'll end up. We'll actually work with the sales force in getting into the bigger customers and just to make sure. And obviously, we're not getting the warm fuzzy from a lot of people. So, I think what we've done is that it makes the most sense at this point in time.

John Pitzer - Credit Suisse

Then Brad, the last question from me is; is it the credit crisis resolve itself only to go into a deeper, longer recession. Where could you take breakeven? How quickly could you act? And I guess what are you looking for within your business to try to make those decisions?

Brad W. Buss - Executive Vice President, Finance and Administration and Chief Financial Officer

Well, I think to our earlier point, lot of the cost structure adjustments we are doing, that's been in the works for months. That was even power [ph] that's coming down, right? So, we're planning on rationalizing our cost structure anyway. So, I think we can obviously continue to do that. If you looked at a variable cost, I mean 30 to 40% of our COGS is somewhat variable, R&D is probably the less severe, it's less 15. Sales and marketing probably 20 to 25, G&A kind of around 10 to 15% though. Commissions change, bonus plans change.

Everyone has been playing coach for the last year and a half as they can well testify. We're pretty frugal there and we'll act accordingly. At the same time, we continue to invest in the high growth areas. Ahmad, for instance, his full async business units in India, right for part strength you see there is that we're more creative in offshoring functions I think than any company out there.

I mean 70% of my finance staff, even though my compatriots here think G&A is high is actually in the Philippines. I don't know any other company that has that never mind its semi company, out there so we'll be really creative where we need to be.

Unidentified Company Representative

Quantitatively, quantitative answer is I think we can drop 10 percentage points from revenue and breakeven current structure. And the current structure could be shrunk. We've got two or three things that are record of the company and there are obviously we have the both results in business units and the last of them could be chosen to reduce costs.

We're not concerned. We've been fairing down and making the company more cost efficient for the last couple of years. We are not concerned about cash flow liability kind of things at all.

John Pitzer - Credit Suisse

Perfect guys. That's extremely helpful, I appreciate it.

T.J. Rodgers - President and Chief Executive Officer

By the way, I want to clarify one thing. We don't fly coach in the company, excuse me, we don't fly non-coach in the company. We have a policy which will lift you in a transcontinental flight, the European or Asian flight, you could go in business class and we'll even fund that. So we've now got people flying 20 hours to Bangalore coach, so that downgrade from business to coach is a very long flight, a change we made about a year and half ago.

T.J. Rodgers - President and Chief Executive Officer

Thank you very much. I appreciate you calling in. We are happy to have a 50% quarter profitability and record revenue in our two key product lines.

Operator

Thank you. This does conclude today's Cypress Semiconductor third quarter earnings release conference call. Have a nice day.

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