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Cypress Semiconductor (NASDAQ:CY)

Q4 2012 Earnings Call

January 24, 2013 11:30 am ET

Executives

T. J. Rodgers - Co-Founder, Chief Executive Officer, President, Director, Director of Cypress Envirosystems, Director of Agiga Tech, Director of Bloom Energy and Member of Board of Trustees at Dartmouth College

Brad W. Buss - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance & Administration and Corporate Secretary

Christopher A. Seams - Executive Vice President of Sales and Marketing

Hassane El-Khoury - Executive Vice President of Programmable Systems Division

Badrinarayanan Kothandaraman - Executive Vice President of Data Communications Division and Executive Director of Cypress India Limited

Cathal Phelan - Executive Vice President of the Consumer and Computation Division

Dana C. Nazarian - Executive Vice President of Memory and Imaging Division

Analysts

John W. Pitzer - Crédit Suisse AG, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

William Harrison - Wunderlich Securities Inc., Research Division

John Vinh - Pacific Crest Securities, Inc., Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Charles L. Anderson - Dougherty & Company LLC, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

Operator

Good morning, and welcome to Cypress Semiconductor Fourth Quarter 2012 Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. T. J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. J. Rodgers

Good morning. We're here to report the Cypress' fourth quarter and year results. We'll do it in the usual manner, starting out with our CFO, Brad Buss.

Brad W. Buss

Thanks, T.J. Good morning, everybody. Thanks for joining us. We're going to go through Q4 and the year, and I'm glad this year is done and behind us. And the only good thing that I've seen so far is that San Francisco is going to the Super Bowl, and the Sharks are 2 and 0.

So anyway, we're going to go through the preliminary unaudited results. Our 10-K will be filed in mid to late February. So we encourage you to check that out. And as usual, we've got all our stuff posted on the web. We've got full GAAP to non-GAAP recons, et cetera, et cetera.

So just on the housekeeping side on Ramtron, I think as most of you know, we closed the acquisition on November 20. We have most of the cash costs behind us in Q4. We've adjusted their cost basis. We've moved our team that was in Colorado Springs into their building, and they are now part of our F-RAM product line that is part of our nonvolatile business unit, which rolls up into MPD. So everything Ramtron-related, you'll see under the MPD division breakdown. The integration has gone well. It's on schedule. We expect everything to be done on time and to be accretive beginning in Q2.

As well, we divested Cypress Envirosystems, as T.J. had talked about in the prior call. As such, we're no longer consolidating our financial results. We have a very minor ownership position, and the cash proceeds will be mostly earn-out-based over the next couple of years. We wish them a lot of luck. They've got some interesting things going on, and we hope they bring it to fruition.

As you also saw in the press release, we have 4 internal divisions that we're moving down to 3 divisions. T.J. will talk on some of the minor personnel changes associated with that. But from your perspective, I don't expect that you'll see a lot of changes in the segment reporting that we do in our press release and our public filings.

So for Q4, we ended up at $180.3 million, which was slightly above our guidance that we gave out on January 8. But unfortunately, that was an 11% sequential decrease. By division, MPD decreased 12%, mostly due to lower SRAM revenue as we expected. And as everyone knows, the comm end markets continue to remain pretty lackluster. DCD decreased 12%, driven by weak PC sell-through and lower wireless revenues. PSD actually decreased the least. They were only down 9%, and that was mostly due to normal seasonality in CapSense and some lower PSoC and handset revenues. And that was offset slightly by a little bit of growth in Trackpads. PSD continues to be our largest division by revenue, and TrueTouch continues to be our largest product line by revenue.

By end market, really, no major surprises, and Chris will take you through that. As we said before, our distribution channel was weaker than we expected, especially in the last couple of weeks. They were about 75% of revenue for the quarter. Our one 10% customer, Samsung, continues to be a 10% customer in Q4, and we expect them to be a 10%-plus customer in '13 as well.

We ended the year with $767 -- $769.7 million in revenue, unfortunately down 23% year-on-year. A lot of that was various product customer transitions that we've talked about at the beginning of the year, and we're looking to turn that around and head to a growth phase for 2013.

For the quarter, on -- we had a net loss of $24.2 million on a GAAP basis, about $0.17 a share. A lot of that was due to the various Ramtron charges that we took, and you can see that in the press release. On a GAAP -- non-GAAP net income, we ended up at $8 million. That gave us earnings per diluted share of $0.05. It would have been $0.03 higher if it wasn't for Ramtron and another $0.03 higher if it wasn't for the Emerging Tech Division. So decent earning potential in the core business, and like we said, I think the Emerging Tech and the Ramtron stuff will start becoming less diluted to us as we move throughout the year. The non-GAAP net income for 2012 was $91.1 million, and that was $0.55 a share fully diluted.

Our gross margin for the quarter was 51.3%. It was down from Q3, really due to the higher factory absorption we had to take since we took our starts down. You'll see our inventories down nicely. We have some product and customer mix impacts obviously in the quarter. We have some impacts from Ramtron, and we took a couple of inventory reserves. Our core semiconductor gross margin, if you exclude the Emerging Tech, was 52.4%. Utilization was down fairly heavily, down to about 63.3% as we aligned our wafer starts with revenue and booking levels. And wafers from our foundry partners was about 30% of our total. The non-GAAP gross margin for the year was a pretty healthy 55.4%, and, again, it reflects the earning leverage that we have in our business model. And we look to start turning the gross margins back up as revenue increases.

We managed the OpEx very well in the quarter. We came in at $82.9 million. That was an increase of 2.5% sequentially, but that included an incremental $5.2 million related to the rammer. So if we excluded Ramtron, we decreased OpEx by 4% sequentially, and that's really the lowest level that we've seen since early 2010. We are going to take further action on the OpEx area as we mentioned in the press release, and we're taking this very seriously. And we'll look at all areas throughout the company. For the year, we ended up at $329.5 million. OIE was a loss of $1.6 million, basically nominal interest income and the expense related to the revolver. Tax expense for Q4 was light, it's 138k.

On the balance sheet, so the cash and investments were down $117 million -- I'm sorry, the total is $117 million. That was a decrease of $102 million. But in Q4, we spent $115 million to complete the Ramtron acquisition and some various expenses. $32.3 million to purchase 3.2 million shares, and we had our regular dividend of $16.1 million. About 85% of our cash and investments are onshore. We generated $18.7 million in cash from ops, and that was about 10% of revenue. And we had free cash flow of around $11 million.

For 2012, we generated $136.4 million in cash from ops, equal to a very healthy 18% of revenue. We think we have one of the better returns of capital strategies in the industry, and we have the cash flow and balance sheet to continue to execute that strategy, which, obviously, the dividend is a key part of in 2013 and beyond.

Our inventory dollars was $126 million. That increased $36 million, but most of that was driven from Ramtron. So we had an incremental $44.7 million related to Ramtron, of which $23 million of the $44.7 million is the noncash wacky fair market value purchase accounting. So, again, if you excluded Ramtron out of there, we decreased our inventories a whopping 9% sequentially. So I was very pleased to see what we've been doing on the inventory management front.

In addition, our disti inventory decreased 16% in dollars, and we saw that drop all across the global, as well as the independent. So weeks of inventory in the channels dropped to 6 weeks. That's at the lower end of where we wanted to be and, hence, the reason you saw the deferred income drop from $170-ish million to $131 million. And remember, we do 100% of our rev rec on sell-through, including all of the Ramtron in the quarter. So if you look at it from an inventory end of it, we took ours down, the distis are down and we think inventories are very lean in the channel. So I think from an inventory perspective, the company has done a fantastic job, and I think we'll -- you'll see us take the inventory down a few more millions next quarter.

AR dropped a lot. Basically, that follows the disti. It's in good shape. No concerns there. The debt, we ended the quarter at $232 million. We drew down only $34 million to finish up the Ramtron stuff. No real changes to the rates or anything that's going on there. So we're pretty good there. All the covenants, we are in compliance with at the end of the year as well.

CapEx was $7.8 million, depreciation was $11.4 million. In our share count, we ended up the quarter at $143.6 million weighted basic shares. Fully diluted shares were $157.3 million. That was the lowest level of diluted shares in over 7 years. So we're pretty happy to see that. We took out 3.2 million shares, which is another 2% of the outstanding shares in the quarter, and we ended the year at 144.2 million shares.

So now we flip over to guidance, and, again, this is 100% consolidated guidance. Ramtron's in it, everything's kosher here, so you don't have to worry about looking at things with or without Ramtron, okay? So we entered Q1 with a book-to-bill ratio of 0.88. While it's below 1, it's the best we've had all year so that's been encouraging. We're 77% booked for Q1, again, lower than we would normally like to be but up from Q1. And we expect revenue to be in the range of normal down seasonality of about 5% to 9%, so that equals about $163 million to $170 million. And most of the decrease will be driven by regular seasonality in PSD. We actually think our MPD and DCD divisions will be flat to slightly down.

Gross margin will probably be around 51%, give or take. The core will run higher. The Emerging Tech will continue to be a drag. We're managing the inventories down. We're going to have a little more factory overhead that we have to eat. So I think the margins will be artificially depressed due to the manufacturing through this quarter than we would expect to start seeing them move up.

OpEx, again, we're going to work pretty heavily on that. I expect it to be flattish to down slightly around $82 million to $83 million. We've got natural increases in Q1 from the Q4 holiday shutdown that won't repeat, as well as the Q1 FICA tax resets, and we're going to offset that with some tighter cost controls and some more of the OpEx that rolls on from Ramtron. And our goal for the year, as we'll probably talk about further on the call, is to have OpEx drop on a year-on-year basis.

Net interest expense of about $1.7 million, the minority interest benefit of about 400k, tax expense of about $0.5 million, CapEx around $10 million, depreciation around $12 million. And I think we'll see the fully diluted share count continue to remain flat around $157 million, and that will vary with whatever we do with stock repurchases. If you roll that together, we get to a range of about breakeven to about $0.02.

So I just want to wrap it up there, and I'll turn the call over to Chris, and then we'll go into some questions.

Christopher A. Seams

Thanks, Brad. Some of the usual indices and then some comments on the end segments and booking trends.

No real big shifts in our revenue shipments by geography. Asia Pacific and Japan are still about 3/4 of our revenue at 74%. North America and Europe are 17% and 9%, respectively, so the remaining 1/4 of our revenue. Our largest end market segments are still handset, industrial, comm, computation and consumer. We saw all of those major end segments decline in the fourth quarter. And looking into the current quarter, we're forecasting most of them to decline due to seasonality. But we are seeing and forecasting the comm and the industrial segments to be flat in the March quarter.

As Brad said, our corporate book-to-bill remained below unity. That was for the third consecutive quarter. But it did increase sequentially to 0.88, and that's even in light of the drop in the stocking levels at our distributors.

On a positive front, the booking rates have picked up. We've seen that since December and into the first 3 weeks of this current quarter. Our backlog levels, as we said last quarter, remained very reflective of short lead times and the associated short lead time ordering patterns. This order activity is still accompanied by low cancellations, low pushouts, and we are seeing a modest increase in expedite levels. So it's very reflective of the low inventory environment, as Brad said.

Now let me turn the call back to T.J. for more comments on the quarter.

T. J. Rodgers

So our earnings are down, unacceptably so in my opinion, and my opinion matters because I can act on it. We have decided to cut costs in a couple of ways. We have divested Cypress Envirosystems. They were making revenue, but my judgment was that they would never move the needle for us, and by move the needle, I mean, make $10 million a quarter, $40 million a year, a 5% increase in revenue for us at 20% pretax profit or more. And they were costing us a couple of million dollars a quarter. So that's behind us.

We also added the division a couple of years ago. When PSoC got into touchscreens, TrueTouch, we decided to add a division to focus on that submarket and nothing else. We've -- that division is not going to go away, it's what we call CCD internally, that we don't report to you, is going to be merged into PSD, Programmable Systems Division, the PSoC division. And all the PSoCs will be put back together again under Hassane El-Khoury, who runs PSoC.

PSoC -- the touchscreen business is starting to commoditize. Even sophisticated controllers are now under $1. We're going to go into a war, I'll talk about later, where it's a RAM-like war in which millions of chips will be ground out, the prices will go down. And I'm confident that the game of who's got what design win where, that stuff is going to wear down and basically who's the long-term player in a super-high volume commodity market, I believe we will take our place in that market. I'll talk more about that in a few minutes.

Cathal Phelan, who ran CCD, did so with an agreement with me that he would do it for 1 year. That year is up. He has turned around that effort. It is more competitive right now. You don't see that yet. The designs wins we've gotten and the new products we've got aren't showing up in the numbers yet, and I realize that's to be proven to the investors. But the division has turned around. I see that in sight, and now we need to cut costs. And getting rid of the division, an entire financial structure, management structure, et cetera, will be a major change.

Brad made a point I'd like to reemphasize, with those 2 changes alone, and there will be others, but with those 2 changes alone, our OpEx in 2013 will be lower than our OpEx in 2012. That means we're going to give raises to our employees. We're going to absorb Ramtron with significant OpEx. And all of that is going to happen on fewer dollars of OpEx spend than we spent in 2012. So we're going to have more sources of revenue, and we're going to be able to grow better. And we're going to do it on less dollars. And that transformation is well underway right now. We will unfold over the first 3 quarters of the year but a significant part of this quarter. This is not going to be delayed and be a program. It's going to be a change.

Some comments on business issues, and then we'll go to questions. We introduced a second version of our PSoC 5 product. It's called LP. LP means low power. PSoC 5 is a ARM Cortex-M3-based machine. So PSoC is a powerful 100 MIP computer from ARM. The new deal here is low power -- low operating power. So this machine, which includes analog, programmable analog, programmable digital, programmable I/Os, very powerful PSoC, the most one we -- the most powerful one we make, operates this 4 milliamperes of current, 25 megahertz, 4 milliamps from a 1.8 volt power supply. That's less than 8 milliwatts. So we're looking at a powerful computer, including a 20-bit analog to digital conversion, a bunch of other analog stuff and a small but still reasonably potent programmable logic section, a little bit of Xilinx, a little bit of a Linear company's programmable. And the whole thing runs in 4 milliamperes of current. That's a very potent product, and it's the latest and greatest from our PSoC offering.

We work with some of our partners, ARM, which is now our vendor of central processors, our distributor, Arrow, Macnica, Tokyo Electron Devices, Axios. And we had a PSoC -- a program called PSoC World, and we managed to get 4,600 people to show up for it. We're starting to emulate the kinds of shows that the programmable logic companies do as we're trying to do a better job establishing the branding and the uniqueness of PSoC.

We introduced some new touchscreen controllers. We call them Gen4X. What's important about them is that they are noise immune. And, again, I realize that needs to be proven. But these controllers are 3x more noise immune. In particular, the bad noise that comes from a wall bug, when you plug in your phone and plug it into the wall while you're using it, the noise coming out of your charger is significant. And it's enough to screw up the touchscreen in the cell phone. And the big break in that market has really been to figure out how to get rid of that noise. And this new product we've introduced is 3x better than the next competitor in that regard. And we are taking design wins as we speak, but like I said, they haven't shown up in revenue yet.

CapSense was the last big thing in PSoC. So around 2005, Apple introduced the iPod nano. It had that round quick wheel on it, and that was the first big application of capacitive touch. And now, of course, we've gone from capacitive touch buttons to capacitive touchscreens as the world has moved along, but CapSense is a big business, and the order for us in the order of $100 million. And we've been in it since 2005.

We just introduced our latest products. We call it QuietZone. That's a trade name. The deal is, signal-to-noise ratio is 100:1, meaning that if you look at a button that's a capacitive button, the noise signal coming from it is 100x smaller than the signal that comes from it when you touch it with your finger. That means the button is very reliable that when you touch it, it absolutely record the touch and you don't have false triggering. It's, by far, the best SNR of any button around. Now we make not only buttons but sliders, which are 8 or 10 buttons side-by-side, and keypads, which are x, y rays of buttons. We have dozens of products in that area. The latest angle here is that these new buttons need only 15 microwatts, not milliwatts, microwatts of power per channel, and they're very accurate. They are water-tolerant. We even have products that can work underwater. There's a Sony underwater camera that works under saltwater with our touch in it. And we do proximity detection, meaning you can hover your finger centimeters away from the screen and the button will know that you're there.

With all this proliferation of products and our 8 years' worth of work since we introduced our FirstTouch, and I'm analogizing this story to what's going to happen in TrueTouch and touchscreens, we've generally worked our way to become the #1 company in this area. There used to be a talk about microchip and other companies getting into the area. We're #1, and #2 in this market is 4x smaller than we are. I'm just telling you, I'm not bragging, I'm just telling you our intent that we will put that kind of effort and that kind of manufacturing muscle into our TrueTouch over time. And the story is about this design win or that design win will begin to matter less as we build our portfolio and drop our costs so that we can have world-class pricing and still make good margins.

There's a company called Leap Motion, a startup, and we've got our FX3 or USB 3 chip designed into it. It's not just USB 3 chip, it's got other things in it, including a significant processor. Leap Motion, their technology is, again, human interface. It's another form as opposed to a touchscreen, which is a 2-dimensional flat. The button is 1-dimensional. A touchscreen is 2-dimensional and flat. Leap Motion is 3-dimensional. They use a couple of cameras. The cameras take a picture of your hand, they have got a processor that can render a 3D image of your hand and we're now going to start seeing interfaces that are rivaling what you saw in the movie Minority Report, with Tom Cruise waving his hands in the air and moving documents around. This is a sensor that will do that. We're their supplier. We hook their system up to the computer with our FX3 chip.

We have a subsidiary called AgigA Tech. They make nonvolatile memories. They make very large nonvolatile memories. The way they do it is they take the cheapest DRAM available in the world, that's a high-quality DRAM, and the cheapest NAND Flash in the world. In the normal mode, their product looks like a DRAM, exactly like a DRAM because it is. When the power goes off, they have circuitry that cuts off signals from the world so you don't get a bunch of noise, in a systems crash polluting your data, and it methodically moves data from the DRAM into the NAND Flash to keep it alive. The product stores enough energy to get that transition done. And then when the power is turned back on, the system senses it, and it takes the data from the NAND Flash in a serial stream, moves it back and repopulates the DRAM. So when you turn it back on, the DRAM's got exactly the data it had when the power went off.

The new news there is that they've introduced -- they've got a deal with Micron. Micron, the maker of DRAM and NAND Flash, a very high-quality, low-cost manufacturer to make an NVDIMM. DIMM is the personal computer memory, the memory in personal computers. And we make an NVDIMM with Micron, meaning that it's not only the DRAM, which is what a normal DIMM is made out of, but it's also got the NAND Flash in it. So the product looks like a personal computer-compatible DIMM, but the data in the DIMM will survive a power-down. We think that, that -- and it does today exist, work and ship into personal computer-like, server-like applications. So the partnership with Micron gives us a memory muscle behind it. We have the technology for power storage, data transfer and in system control during power-down events, which is nontrivial.

Finally, a couple of words on Ramtron. We've completed the acquisition. I've been there. I've been through their technology and their products mask-by-mask and chip-by-chip. I like their F-RAM technology. We plan on supporting it. We bought Ramtron specifically to add it in to our nonvolatile memory group. We have nonvolatile memories made with our technology called SONOS. We intend to support it. SONOS is a parallel technology, many addresses in, many data lines out. It's useful for our microcontrollers or PSoC. The F-RAM technology dominates in the serial memory market where you basically have a single pipe that goes into an SRAM and data goes in and comes out. F-RAM is characterized by having the lowest power of any nonvolatile technology, and we intend to add that to our portfolio and have the largest, the most potent nonvolatile memory group in the world. That will bolster our memory products division SRAM effort with another division that's now big.

When we acquired Ramtron, we discovered that they were using, let's just say, old accounting techniques, where they were accounting for revenue when they shipped the distribution. Furthermore, they were shipping the distribution not in line with the needs of the end customers but shipping the distribution to report results. That stuffing the channel meant that we've got a bunch of inventory out there. We believe we've got a company where after whatever transition in business is going to take place because of an acquisition, that we've got about a $48 million business there, $12 million a quarter. It's going to take us 3 quarters to ramp to that kind of run rate. So we're happy with the Ramtron acquisition. We're happy with the price. We believe it's going to be accretive. And the only surprise, the only difference -- and of course couldn't know this because it was a hostile takeover and we had no information -- is that we've got an inventory bubble that it's going to take 6 months to burn off. But that, if you look at it another way, will provide us a ramp of revenues, a smooth ramp up to the $12 million per quarter range.

Those are all the comments I've got. We're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] John Pitzer.

John W. Pitzer - Crédit Suisse AG, Research Division

Yes, it's Crédit Suisse. I guess, Brad, can you talk a little bit as to your comfort level that the guide for the March quarter is going to be the bottom for this cycle? As you look out into Q2, how dependent is kind of sequential revenue growth on industry conditions improving versus product-specific things that you guys can see coming down the pipeline?

Brad W. Buss

I think I would say it's more product-specific. I mean, the macro is always the macro and a huge variable for us and everyone out there right now. But we do have a lot of new programs that are ramping. We've had some very good design activity in touch, in particular, where we have much better design visibility this year than we did last year. The USB 3 stuff is ramping. We're not waiting on a Hail Mary in comm, albeit we think comm will eventually start turning. We're not counting on that. So I would say it's heavily weighted to just really new programs that will ramp.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, Brad, specifically, did you guys hit a utilization bottom in the December quarter? How do we think about utilization growth from here and the impact to margin?

Brad W. Buss

We are going to hit utilization bottom in Q1. The degradation of our gross margin by several percentage points, basically, the river level has gone low enough to uncover some of the rocks. So our strategy is, we keep our internal fabs loaded, therefore, not having unamortized overhead...

[Audio Gap]

...that we feel obliged, if you're going to have long-term partnerships with your fab suppliers, to give them certain level. And therefore, you underload your own fab by choice. You don't have to but you do. And we're doing that this quarter. And therefore, what that does is -- the way we run our -- the way we think about it inside the company is their fab's the P&L, and it looks like an external foundry. So it has a profit and loss statement. And what happens is, the fab transfers the transfer price it agrees to, and that's what the product lines pay. But then the fab -- the internal fab has a loss, and that loss is going to be several million dollars due to unamortized overhead in the first quarter. We believe, based on the volume of products and design wins we can see, that, that will go away in the second quarter, for sure in the third quarter.

Christopher A. Seams

Yes, definitely. So I think -- and then to translate into margin, you definitely have a couple of points that will be there, and that's the same story with Ramtron, right? They have some fixed overhead. The revenue is lower, obviously, because we converted them to sell-through. So that's why I think from a margin end of it, we have a very good ability to keep margin back up a handful of points. And so with increased revenue, some increased margins from where we're at and then managing the OpEx, we're expecting pretty strong fall-through. And I would expect, again, earnings to grow much faster than the rate of revenue.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, guys, my last question -- maybe for both Chris and T.J. -- as tablets and notebooks started moving towards touch, there was a hope that there would be a mixup phenomenon in the TrueTouch business. I'm kind of curious, how do you view that positive mixup with kind of the reality that the first billion smartphone users came in at about $500 ASP device level, the next billion are probably going to come in with something significantly below that? As the Chinese OEM smartphone providers start to become the big engine of growth in smartphone, how do I think about pricing in that market and the margin profile longer-term for you guys?

Christopher A. Seams

John, a lot of questions embedded in there. Let me unravel them a little bit and go backwards. So how do you -- how do we feel about going into the -- what we've called the mid tier and even the low tier now of the phone segment? Because we're seeing low-tier phones actually convert to touch. So we've got a very full portfolio of solutions depending on what level the handset manufacturer wants to convert their phone at to capacitive touch, and it's actually going to be one of the growth areas for us this year is penetrating that lower-end market as taking away share from resistive touchscreen suppliers. We're already see that happen in many handsets in Asia in the emerging markets made by several OEMs. And then in the mid-tier, we go with our partners and the panel makers and basically take cost out of the actual ITO panel, and we don't really have to sacrifice too much in our price and all along the way, as T.J. has talked about, we're cost reducing our solutions. So for us, as that volume grows, we'll have healthy margins into that end segment. And in terms of the tablets and PCs and what that means for large screen, it's too early for me to call. But for us, in terms of the market x Apple, pretty much we're focused on that e-reader and smaller tablet size because that seems to be the high volume point for the industry, and we have good offerings there.

Operator

Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Wedbush Securities. You guys came in at the higher end of your negative pre-announcement, and I was wondering if you could give us a little bit better understanding of what happened with distribution because you guys did such a great job of managing that business, and it seemed like it really took you by surprise. And I was wondering if you could tell us what happened and give us assurance that we won't see that happen again this quarter and into this year. That's my first question.

Brad W. Buss

Betsy, it's Brad. Unfortunately in dealing with distribution, I can't give you any assurance, right? We probably do have one of the better systems in dealing with disti and getting the information. But unfortunately, like I've told people, when we left for the Christmas holidays, we weren't anticipating any miss. We're expecting to be at the lower end of guidance, maybe 1 million or 2 million off but they just puckered up, really going all the way through into the holiday. So whether it was shut down, whether it's the macro, the lead times, whatever it may be -- because it was very widespread, it wasn't one distributor, it wasn't one end market, it wasn't one end customer. We didn't have a big miss in the disti channel of over 1 million. It was every end market was off 1 million or 2 million kind of thing. So it was pretty widespread. So we're working with them to try to understand the forecasting process they go through. We obviously derate it. And we just have to continue to watch that channel. But I've always said that's a channel that could surprise a few million dollars way or the other, depending on what they end up doing at the end. And since we're all 100% sell through, on rev rec, you really are waiting for those last few days of POS to determine the fate.

T. J. Rodgers

So a couple of comments. We just finished 4 days of operations reviews where we reviewed every business unit of the company, 13 of them. And a very common story was in work week 50, 2 weeks before the end of the year, my revenue was on the linear line. I was 100%, I was 11/13 of the quarter done. And then I went home for Christmas, and we don't go home for Christmas and kind of let it happen, but we have staffing here, but then I went home for Christmas and came back and I was $500,000 short or $1 million short and each guy had his own story. You can speculate, you can say people are dressing up their inventory for year end. But then, okay, great. That means there should have been a land rush in January, which we haven't seen. We're meeting our schedule for this quarter, which doesn't have a bump in it. How do we stop surprising you? The way I'm looking at it is we're doing statistics now, and we're starting to look at -- we now are 30 years old, been through a lot of these things. And we're starting to look at profiles of quarter end, in particular, Q4 ends and bad quarters and good quarters. And what we're going to do is put a more intelligent judgment on the number as opposed to hoping that the business unit managers, many of them young people, are going to all get it right. We're going to simply touch it statistically in the future and try not to surprise.

Betsy Van Hees - Wedbush Securities Inc., Research Division

That was very helpful. And then that kind of comes into my follow-up question about cost-cutting. I know it's tough when making difficult decisions, but if things don't play out as you guys are anticipating with Q2 coming back from a revenue growth standpoint, are you willing to make further cost cuts to right-size the ship?

T. J. Rodgers

The question has a premise in it with which I disagree. Are we willing to make more cuts? We are already going to do the more cuts. I'm already unhappy and I'm already there. We are going to cut to -- we are going to take Ramtron -- what's the OpEx for Ramtron?

Brad W. Buss

$3 million, $3.5 million.

T. J. Rodgers

We're going to take the $3 million, $3.5 million OpEx for Ramtron per quarter, which is already cut in half, and we're going take our raises, which is 3-ish percent on our salaries. And with all of that, we're going to not grow by any of that amount, we're going to go back and spend less money than last year. Cypress Enviro's gone. So we are making -- a division is gone, Divisional Vice President is going to be gone. So we are making the cut. If I extrapolate your question, what if those cuts aren't enough, of course, that would mean that we'd have to have revenue less than last year because our expenses are going to be less than last year, and our revenue would have to be lower than last year. I don't see that in the cards at all, and we're going to grow this year. Now we acquired a company, for example. And it's ramping based on inventory level like that. But the answer is if for some reason -- and I'm just trying to answer your question and you should not interpret that I believe there is a possibility of revenues going backward -- if our revenue goes backwards, we're going to do what's required to be profitable, period, and we're not even going to think about it. Not getting tough and thinking about it and going the extra mile, we will do what's required to be profitable, period. That's the way we're running the company now, and we've done that since 2008.

Operator

Sandy Harrison.

William Harrison - Wunderlich Securities Inc., Research Division

Wunderlich. Yes. So, T.J., I just wanted to dig in a little bit more on the new LP product. I think embedded in your prepared remarks the fact that ARM has kind of become most favored nation within Cypress as far as usefulness or used. Is that a change? And if so, sort of what brought that on? And then the second thing on the low power side, some of the applications you're looking at, is this an area that the Internet at things or Industrial Ethernet you're looking at, just filling out some of that, some of those areas?

T. J. Rodgers

ARM has been our processor since, what? '09, '07, '08. The reason for it is simple. Our first iteration PSoC had a homebrew microcontroller. One you make your own microcontroller central processor, you have to make your own computer language, you have to have a computer group, you have to have compiler that compiles C-code back into assembly language, and find out that, that's a sticky problem that you really aren't that good at. And then you find out that everybody's got their own microcontroller, and everybody's microcontroller gives more miss per megahertz, blah, blah, blah. And the fact is none of your customers give a damn. What's different about PSoC is programmable analog, dollars worth of analog on every chip and programmable digital, dollars worth of digital programmable logic on every chip. And they can give a damn what microcontroller is running it. It's a housekeeper. So there is no differentiation. And I think what we discovered, is now being discovered across the industry, that you differentiate your products by other things not by the microcontroller. So they aren't cheap. If you look at what we pay for, it's cheaper than the cents per unit that will cost to support an R&D effort to make an inferior product. First then you got a road map. Even if you can afford to make your own microcontroller, you can't afford to have a road map. So we now have a road map, and we can go make fast ones. You've heard today, we can make Micropower ones, so we've done some process stuff to make an extremely low power entry based device. I'll let Hassane answer your questions about applications.

Hassane El-Khoury

My name is Hassane, I run PSD for Cypress. So a little bit about the applications where PSoC 5LP will start getting designed on and we're seeing it in our funnel is a lot of the battery-powered consumer, as well as some of the industrial application. I'll give you some examples. We've been very successful on the Made for iPod range of application. But when we look out more about the utilization for the analog content in PSoC 5LP, we're looking at system management controllers, very key applications. We have gotten design wins with is solar inverters where, again, low-power for the chip or low-power for the silicon content becomes very important when you're trying to harvest a lot of energy. So that's a lot of the application that we have design-ins. We have funnel, and we're already starting to see a ramp up in revenue. And that's going to give us a lot of growth going into 2013.

William Harrison - Wunderlich Securities Inc., Research Division

Got it. And then any thoughts on sort of how USB 3 data is going to be rolling out this year? Is it continuing to move at its measured pace? Do you see it accelerating? Just kind of thinking about that product in light.

Badrinarayanan Kothandaraman

My name is Badri, and I run the DCD. USB 3.0 development has been going well so far. We have shipped over 1,000 development kits. Our revenue in the last quarter, Q4, grew many fold over the previous quarters. The main applications we are seeing are basically 3D gesture, machine vision, industrial cameras and, actually, surveillance cameras. And we expect the revenue to continuously grow throughout the year at a rapid pace.

T. J. Rodgers

The USB 3 PCs are out there now, and that's really what's required to have the market take off. Our first product is called FX3, and it is a peripheral controller, meaning what it does is, it's a USB 3 port that will plug in to a PC or any other host for USB 3 and it will move 5 gigabits of data back and forth. On the other side of the USB, it's got what we call a GPIF, General Programmable Interface. So you've got a 32-bit bus and it's programmable. So you can make it talk to other different 32-bit buses. So it moves data back and forth. We also have another version of the chip that's got SD storage card on it, so like the storage card in your camera. So you have the GPIF can talk to the system, the system can dump into a storage card, the storage card can dump on to the USB wire, the USB wire can dump on the storage card, et cetera. It's a 3-way device. We have another product, it's a 4-way device. It's got 2 storage cards on it. So our play is not to work in the -- you have end to 1, you have end peripherals that will map on 1 personal computer. Our play is not to be the 1, our play is to be the end, and of course, the 1 has to exist, which is not us. And then we will proliferate products like we've done. We have an FX2 and USB 2, we had an FX1 and USB 1. And we've been very successful in that, #1 in the world in USB unit shipments, USB total shipments in our lifetime. So that product is doing well. It's going to be a source of growth for us in 2013, more so in '14. But it's a low grower every quarter in '13.

Operator

John Vinh.

John Vinh - Pacific Crest Securities, Inc., Research Division

Pacific Crest Securities. One question I had about the competitive landscape is if you look out there, I see more segmentation than I ever have. You've got one of your competitors focusing heavily on large screen opportunities. You've got one that's focused on high-end smartphones. You guys, obviously, continue to focus on kind of the mid- and low-end range. You typically don't see this in a kind of maturing kind of a environment. So my question is, why are you seeing this -- why do you think you are seeing this segmentation out in the marketplace? And secondly, how do you reconcile this with your commentary on kind of the maturing kind of space here, if you see all these segmentation out there?

Cathal Phelan

Good question, John. This is Cathal. People try to find ways to find their own niches when markets get mature, and I'm not going to talk about my competitors too much, but they're trying to differentiate and find their own spots. We go from the bottom to the top of handsets, and we don't just go for the midpoint or for the lower midpoint. Our product portfolio goes from the low, low where people are converting from resistive touch to the big 5-, 6-inch screens in the last 2 quarters. We're seeing a lot of design win activity in that space for us. It's important to deliver differentiation to your product at the higher end, and at the lower end it's important to deliver cost solutions to your customers. So what we focus on the mid and lower end is reducing the overall cost of product, which invariably talks about the sensor itself and the package that you wrap your product in, firmware, and enable the customer to actually to get the right cost point. So our target is all handsets, and we actually go after the e-reader and the smaller tablets. That's where we play.

Brad W. Buss

And, John, like I said before, we want to be the swift arms dealer of touch, right? We're going to lead on the technology, lead on the features, and I think you'll see that be nailed home on the Gen5, which you'll see soon. And we want to be partnering with the OEM through the panel guys. We don't want to conflict with them. We want to enable the customers in that ecosystem to take this everywhere. And I think our strategy -- we've had a few bumps on the road, but I think we're through it and the recognition we're starting to see from customers and new designs, I think, is going to prove out over the long run.

T. J. Rodgers

Your comment that if the market's maturing, how come we have niches and people fighting for niches, is valid. And the parent discrepancy is really one of about a year in time. We're in cell phones. It's 80% of the volume. So if you want to make some money on the thing, you take cell phones -- and the high-end cell phone chip will run the low-end tablet, so you can take Kindle on down as being "cell phones." What happens is you start to make the big chip, which is nothing more than the same chip with more I/Os on it for more rows and columns to make a bigger screen. It's not that difficult. And as soon as you start making your big chip with your, let's say, you have 2 design teams you can afford to put on it and still make money in this division. Somebody in China comes up with, or Korea, comes up with a smaller chip for the cell phone. Well, guess what? You don't get to work on your big chip you'd like to work on, you go make your next generation small chip, which is what we've done, and our Generation 5 chip, which is now out sampling to our major customers is that chip. Eventually, you'll have time to fill out your portfolio. I gave the example earlier, the CapSense portfolio. So we're now bringing out a product, we're working on a product, which basically is going to make a button, runs on microwatts, and sells for $0.10. And then we've got other products that will run 100 buttons, and eventually, we will fill out the product line, we'll cost produce everything, and we'll have the complete store, so to speak. And that is going to take the next 2 years in this market. So you've got, right now, given the resources you can bring there and the rapidity with which the market changes, you do that kind of game where this design win, that chip, this guy's got a leg up on that guy. Eventually, and it is maturing now, it's very clear, it's maturing, and it will go to exactly what happened with its predecessor, CapSense, and we will have a family of -- pick a number, how many products do we have now?

Cathal Phelan

In silicon, 5 or 6.

T. J. Rodgers

Marketing products, when you look at all of them.

Cathal Phelan

65.

T. J. Rodgers

Today, we have 50 chips, the lowest one is $0.35, the biggest one is probably $2 or $3. And 2 years from now, we'll have 150 products on 10 or 15 chips and we'll cover all the bases, and then we'll see who can make stuff better. And we think we're going to be that company.

John Vinh - Pacific Crest Securities, Inc., Research Division

Great. That's very helpful. And then my follow-up is, can you talk about where TrueTouch revenues finished out for the year in 2012, and can you just give an update on how you guys are looking at TrueTouch growth in 2013?

Brad W. Buss

Yes, John, we're not putting that number out for competitive reasons. It was down, obviously, pretty significantly, as we talked about before. The good thing going forward is the comps become in our favor. We've said we expect to grow 15 to 25, and we still hold very true with that.

John Vinh - Pacific Crest Securities, Inc., Research Division

Can you give me the sequential growth in Q4 on TrueTouch?

Brad W. Buss

Down -- down -- 8%.

T. J. Rodgers

Let me talk for a minute about the dynamics of what happened to us. A year ago, we had -- not quite a year ago, we had a bad first quarter. And we were down year-on-year $50 million. And the reason was that our touchscreen generation 4 chip wasn't getting traction. It wasn't getting traction not because it wasn't a good chip. And we all looked at it like a chip -- today, I look at the chip and it's got the right stuff on it. We didn't have a system knowledge, and we weren't that good at the firmware. And all of a sudden, system and the firmware get complicated enough, you have to be good at that. We reorganized. I have a Vice President that does software on the executive staff right now. His name is Alan Hawse. And then we now understand that. We've got a team that does it under a different Vice President, and we got our firmware going and we thought we were going to recover. Problem was, it took us most of 2012 to recover. Meanwhile back at the ranch, our TSG4 chip became obsolescent. Chips last for about a year in this business right now. So I had the chip and no software at the beginning of the year. I had software and an obsolescent chip at the end of the year. I've now got the software and the chip, TSG5 -- and, again, I fully admit that we will have to prove this as opposed to assert it -- and we're going to go forward. So that if you want to ask why did we have a collapse, which is more than half of the reason besides business revenue, it's down below expectations this year. And we screwed up for an entire year in touchscreens, that's behind us. But you haven't seen it yet. We had the tablet collapse, and the one big customer collapse, that impacted us at the beginning part of the year. So all of those headwinds are gone, right, which is a good thing.

Operator

Doug Freedman.

Doug Freedman - RBC Capital Markets, LLC, Research Division

RBC Capital Markets. I guess to start with, it sounds like I just want to better understand how Ramtron is going to roll into your numbers. Brad, I believe you said it was going to be accretive in 2Q. But if I heard correctly, T.J., you said that the revenues, we had to work through 2 quarters of inventory. So can you walk me through that revenue ramp that you're expecting on Ramtron?

Brad W. Buss

Well, the sell-through -- the conversion from sell-in to sell-through we started last quarter when we took it, and it will finish this quarter. So that's a big impediment. So you'll see revenue going up, and obviously the margins will move up as the overhead gets absorbed. And then the OpEx is down. So hence, we'll become accretive. But that, I'm very comfortable on.

T. J. Rodgers

Our revenue will hit the run rate that we expected from Ramtron in the third quarter. The revenue will grow enough by the second quarter to be able to make money. On an incremental basis, Ramtron's going to make money for us for the whole year.

Brad W. Buss

Correct.

T. J. Rodgers

Because we've kept half the cost and we're going to get all the revenue.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Terrific. That's helpful. Can you talk a little bit about what you're expecting out of the Emerging Tech group for the year. I'm really struggling when I just look at the overall company in terms of trying to get that revenue level to grow. You're sort of implying almost double-digit growth quarterly. So I'm trying to get exactly where that's coming from, if you can help with any of those details.

Brad W. Buss

We have an initiative in the annual plan called ETD 24, Emerging Technology Division $24 million. And that includes AgigA Tech, DecaTech, our foundry business, which we don't talk about much, and we have an intellectual property business unit that's getting to be $1 million-plus a quarter of very high-quality revenue. Envirosystems, we divested, because we're starting in hard times. The good thing is you scrutinize those small efforts, which are expensive, and ask yourself should you be doing it. So they're unnoticed. Startups are unnoticed. They've been getting paid and had their 3 years in the womb, and that's great. Now it's time to start delivering some revenue.

T. J. Rodgers

So, Doug, I think that bucket will more than double, and, again, from a confidence level, they're all in the design phase ramping into production. It's based on no end customers, no end designs, no end wins. So it's just a matter of those customers continuing to grow not being impacted by the economy, whatever. But I think it will be an interesting year for those guys, and they are definitely blossoming into young adults.

Brad W. Buss

And we are -- they cost us, in EPS terms, 3 pennies a quarter. So when you're making 24 pennies a quarter and report 21 and you're investing for the future, looks great. When you're making 4 pennies, which we did in Q4 '12, 3 pennies a quarter starts to look big. So they're under more scrutiny right now.

T. J. Rodgers

Yes, our goal is to get them into the breakeven phase in the second half of the year.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Are we still on target for DecaTech to hit $10 million by the end of the quarter -- by the end of the year?

Brad W. Buss

I don't think that's going to happen, and we haven't refreshed it. I mean he definitely excelled in attaining customers. Their ramp-ups are definitely longer, and some of the playing customers aren't growing at the rate they originally thought they were going to grow. So we'll give you an update in another quarter or 2. But from a -- the customer funnel acquisition stuff, it's going actually very well.

Operator

Ian Ing.

Ian Ing - Lazard Capital Markets LLC, Research Division

Lazard Capital Markets. T.J. talked about touch becoming commodity like. So would you expect the ASPs to eventually stabilize from 4% to 5% a quarter down to 1% like Cathal alluded to earlier? Or are there some supply-demand dynamics should Asian competitors be stubborn and stay in the market with 30% gross margins?

Cathal Phelan

That's a good question, Ian. I actually think it will. I think you'll see a year, maybe, 6 quarters of continued 3% to 5%, like I said last quarter, and then I think it will start stabilizing as it becomes more and more mature, which is kind of what happens with our CapSense business.

Brad W. Buss

Yes, you're getting the price points now where a new guy coming in can't offer much on price, whereas the incumbent's going to offer engineering resources, expertise, supply chain assurance and the IP end of it, which again continues to raise its head. So the price that's happening now will limit new entries, and new entries, of course, are the guys that come in and find out the world isn't as cool as they thought, and then they drop price to get it rolling. Then the stable market will be characterized, like CapSense, like Solar. There will be a Chinese low point, which makes a just-good-enough product and you'll be able to get a 10% to 30% premium for making good product. So the argument in CapSense, for example, is you can buy Chinese capacitive button now for, let's say, $0.12. And our buttons are, like, $0.17. And then -- so somebody in China making a rice cooker will use a Chinese button. On the other hand, you're dealing with a higher-end consumer company and they say, great, their algorithm for sensing the button, we call CSA, let me tell you about the noise. Let me tell you about Signal-to-Noise Ratio, which is 5:1, not 100:1. Let me tell you about the milliampere that you're going to burn per button as opposed to the 15 micro -- excuse me, the milliwatts as opposed to 15 microwatts. And then you end up based on reengineering your product and make it excellent, being able to establish a premium. For example, I haven't been to SunPower for a while, but SunPower consistently got 30% premium over low-end Chinese panels, and then the market stabilizes, it's not attractive to jump into anymore, and then the play your share game going forward. And I think Cathal is right, that point is about 6 quarters out.

Ian Ing - Lazard Capital Markets LLC, Research Division

Great. And then in terms of this increased smartphone visibility, sounds like China is going to be pretty good this year, exposure to a lot of top OEMs. How are you going to address sort of the next leg of that China market, which is sort of the open market, the second and third tier folks that need like reference designs and turnkey solutions, not as sophisticated, et cetera?

Cathal Phelan

We already have started addressing that market. We have IDH, independent design house partners, who we support, and we are putting significant number of applications, engineers in the region to actually support them and support all the customers in the place. So, already active, already happening, already starting to see it take traction.

T. J. Rodgers

And it is the fastest-growing segment of the market. And believe it or not, from our perspective, it's a little bit more stable because although any one business is just up and down flaky, it's different from getting going with one big guy and finding that guy's cell phone doesn't get any traction. Here you're dealing with 10, 20 accounts, you're dealing through an independent design house, which you design a screen and then that screen, as a module, goes to these guys and you, in effect, serve a market as opposed to serving individual customers. So that's an attractive place right now for us.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And lastly, just a really easy question for T.J., is it regrettable that Colin Kaepernick grew up to be a 49er instead of a Green Bay Packer?

T. J. Rodgers

I was on suicide watch for 2 days after that game, and I wish them all the luck. He played a great game.

Operator

Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

Barclays. I just wanted to go back, T.J., to reorganization, what you're actually doing today. It looks like you're rolling the touch guys under the more core PSoC business. But then -- and you talked fairly negatively about the market but then it seems like you're pretty committed to rolling out the same product. So is it just removing the management and finance, or are you paring back any sort of your R&D and products?

T. J. Rodgers

That's a really good question. I don't have all the answers yet. We still have time. We discussed the theory what we're going to do several hours yesterday. The management structure is going to go away, quite expensive. Most of the products, I believe, are going to stay, then you've got to find more fat. You go on a diet, and still weigh 230, okay. What's next? So where we're fat right now is in marketing and in applications. We have almost as many marketing engineers as we do design engineers and almost as many application engineers as we have design engineers. And if you compare it to our competitors, which we have done, we're out of line. And the reason for it is you create all these divisions and you say, okay, your job is to make large touch. You focus on that market, that's all you work on. So you get your marketing guys, you get your regional marketing guys out in the field, and you build your infrastructure. So by having a diversified organization that focus on market segments, we've created a too-large marketing organization, we're going to pare that down; we've created a too-large apps engineer -- or app organization, we're going to pare that down. You now know the whole theory of what we're going to do. But we've identified the money. It's going to happen.

Blayne Curtis - Barclays Capital, Research Division

Helpful. Just a quick one, Brad, the PSD business looks like it's, given your guidance, down about 15%. The touch portion down a similar amount, and you've been talking about that business growing in a particular range for the year. Is that still on track?

Brad W. Buss

Yes; yes; and yes. So -- and just to clarify, T.J., I don't think he was being negative on the business. It's the realities of it, which again, we've adjusted to. And we still think we'll grow. I don't want you to think we're becoming negative on it or deinvesting in it, because that's not the case by any stretch. And yes, I've mentioned, and we still believe we'll grow 15% to 25%. And that obviously -- it's really seasonality in Q1 at the touch. There is really no big customer issue. We've got the roll-off of some of the eReader tablet stuff that's pretty normal. We've got seasonality adjustments in some of the customers. So there's really nothing abnormal in touch going on that we didn't expect 6 months ago happening. And then a lot of the new programs start to roll into Q2, into Q3, which we already have firm committed designs on. So we actually feel very good on where that trajectory is going, much better than we would at this time last year. We -- whether it was the Gen4 or we didn't have the design visibility, we're in a much better position to see where that year could go. And obviously, the macro and how each of this customer does is a big factor, but those are things that none of us control in life.

Blayne Curtis - Barclays Capital, Research Division

And then just a quick one for Dana, or you, Brad, again. Maybe I missed it, but with about $5 million OpEx for what you called the rammer, but yet $0.03 dilutions. It seems like very little revenue, if any, in Q4. Did I get that right?

Dana C. Nazarian

No, the revenue was on track with what we've guided, in the 4s, but the margin, again, is very weak due to the under absorption of some of the fixed costs and some of the charges we took related to the inventory and all of that stuff. So all of that will work its way out this quarter, and we'll get back into, probably not to the model margins on them in Q2, but that will probably be Q3, but things will be moving up and to the right enough to become accretive. Our nonvolatile -- our indigenous nonvolatile memory business traditionally runs 25% pretax profit. The Ramtron business is complementarity to it. And as soon as Ramtron becomes a product line and not a corporation, and as soon as we have a chance to work on some yields which have been not worked on enough, we will emerge Ramtron in at that kind of profitability level and more than double the size of our nonvolatile memory group, and that will us -- that will be the story this year. So the bad news is it's going to take years. The good news is it's going to deliver revenue, incremental revenue and incremental profit every quarter.

Operator

Steven Eliscu.

Steven Eliscu - UBS Investment Bank, Research Division

UBS. First, I want to go back to gross margin, and if we look back at your current portfolio versus 2010 and you're around 60%. Is there anything structural in your portfolio that prevents you from getting back to that level or high 50s? Or are we looking more going forward at a 55% to 57% type gross margin once you get utilization up?

Brad W. Buss

So, Steve, yes, going back to '10 and '11 kind of when we hit that peak, remember that touch stuff was blowing and going. Our factories were loaded to the gills, and, more importantly, we were doing a ton of the volume outside. So that has a very big beneficial impact on the manufacturing cost level. So I would say, yes, the ranges we've targeted up in the high 50s are still doable. We need the revenue to get back. We need the fab to get filled, and then we need to start having the positive foundry because going to the foundries is positive for us. It's not a negative. And then, obviously, you've got some product mix. The ASPs are definitely down from the touch area from where they were in that area, but we have a lot of other new products that, I think, will fill that in. I mean, PSoC is a great example that as it continues to grow over these next couple of years, it will be at margins that are back up in those ranges, and his absorption will get absorbed then his next gen of products will come out. So yes, I mean, I still think as the volume moves up into that 230, 250 range, those are very attainable. So hence, the reason, I think, in Q1, you'll see -- we should see the bottom end of the margins, and as utilization rolls up and then the mix of some of the new products, you'll start seeing us trend up. But high 50s is not going to happen this year, that's for sure.

T. J. Rodgers

Yes, the synopsis is used to be in high 50s, drop to low 50s, 2 reasons, under-absorption and the commoditization of touch, TrueTouch pricing. The under-absorption is going to go away, second and third quarter. That will take us back to the mid-50s. And we're working on -- basically, we're going to start grinding on costs. There are many things we sell per quarter that we make 60% gross margin on, and that story will be starting to unfold at the end of the year but not be complete. So the idea that we're going to go from the high 50s to the mid-50s at the end of this year is that's right. I think, by the way, that's not -- we're not satisfied with that. Our internal model for gross margin is 60%, and we will do that. And we will not invest in businesses that are below 60%, and that's what we drive toward all the time.

Brad W. Buss

Yes, I think, the key takeaway, you're going to have, as you look at your model, right, you'll have margin accretion and growth. We'll see the revenue. And like we said on the OpEx, I mean, you're going to have very nice leverage like we enjoyed back in those times as the revenue growth. I mean, I'm very confident you'll see earnings grow at a much faster rate than the top line.

Steven Eliscu - UBS Investment Bank, Research Division

Okay, that's helpful. And if I take a step back and really think about Cypress and where you've succeeded and where you haven't, I -- once you get into a market, you do a really excellent job in addressing the market. You talked about your ability to really address both the specs, as well as the manufacturing aspects. But if I look at some of the growth of the end applications, perhaps, there are some more challenges there, especially when we look at the memory side of the business. I'm trying to get a sense when you think about your business over the next 2 to 3, 4 years, say, on what you're doing from a strategy point of view to better match your skill sets and product portfolio with the growth areas of the market. Can you give us any insight as to how you're improving that process so we can get some more confidence of longer-term growth beyond this year?

T. J. Rodgers

Was your question in general or specific to memories?

Brad W. Buss

Specific to memories.

Steven Eliscu - UBS Investment Bank, Research Division

Yes, I mean, this is a general question about Cypress. I'm trying to get a view of how you think about strategy.

T. J. Rodgers

Let me answer the question. You're absolutely right that if you look at growth, you can name some areas where we're going to grow. Nonvolatile memory is going to grow. It's a growing market, and we're getting more products indigenously and by acquisition into it. Touch is going to grow, et cetera. And if you look at memories, memories has not been growing. The memory in the SRAM market has been shrinking. One of the reasons we acquired Ramtron was to put more product capability in the Memory Products division. The biggest challenge for us in Memory Products is Synchronous SRAMs. These are the high-performance SRAMs that are used in routers and other communication equipment. And that market, right now, is in a transition where the TAM, total available market, is going down. We have offset that by having share of market going up. So our share of that market we estimate will be 39%, and we think there can be growth. But that's a challenge. So that half of the business is not growing. I don't want to divulge what we're doing right now in that area. But that problem, we've been addressing for over a year, and we're expecting to put SRAMs into new configurations, into new products and into new areas, and we're working -- these are very high-performance SRAMs. So you work with partners. They are very specialized chips. It's not like you're making a generic product chips in the markets, and we're doing that. So the SRAM side of the house, 2 initiatives: more SRAMs, the different flavors, Ramtron being one example; and major initiatives on Synchronous SRAMs to maintain the high-performance end of our market. But you're absolutely right, that is our challenge for growth.

Brad W. Buss

And, Steve, the strategy really hasn't changed, right? We're focused on these high-end memories, we're focused on the USB, the connectivity and really the PSoC. The inroads we're making in PSoC, the derivatives, whether it's CapSense or touch, there's huge opportunities in there for us. I mean, what we're seeing with the analog, the new virtual analog chips we add in the software, I mean, that market could never grow for the next 10 years, and we could still be growing into that. And T.J. and I'll be retired, at least I'll be retired, before that market ever peaks. And then our complementary acquisitions that we'll do to grow, we don't -- I don't think we need to add a new product line and divert ourselves from what we're doing. And then we sprinkle a little option value with the odd-pinpointed Emerging Tech opportunity, and I think that strategies, I think, it's played out well, and we're going to stay focused on that for the future.

Steven Eliscu - UBS Investment Bank, Research Division

Well, let me just try to crystallize it with an example. If I look at some of your microcontroller competitors, they either have some pretty significant organic wireless efforts or they've done some acquisitions. So a previous participant had referred to Internet of things. So when we think about a market like Internet of things, combining the microcontroller capability with wireless connectivity are key ingredients to be successful in that market, and that is potentially a very big growth market. And so that's the sort of -- that's the type of answer -- or I was looking for was more of as you look to areas of the market that are adjacent to what you have and have the potential to grow quite significantly, are you looking to focus new efforts there, and that may not necessarily require you going out and doing large acquisitions, but they may require efforts that are a little bit different than what you've done over the last couple of years. That's really what I was getting at. And so -- and I guess, I'm really looking towards more M&A around enhancing areas to drive growth around your microcontroller and analog skill sets.

T. J. Rodgers

So in terms of wireless, that one is pretty obvious. We don't talk about it much, but we have been shipping -- when did we ship our first radio out?

Badrinarayanan Kothandaraman

2003.

T. J. Rodgers

2003. The gift I just gave UC Davis, all our fermenters, they're all wirelessly connected to the Internet. That, I guess, qualifies as a thing on the Internet, and was all done with our chips. We have a wireless group -- we haven't focused on it. We haven't done a great job on it. We've kind of milked it as a cash cow. It's in Badri's group, Data Communications. Talk about our -- what we're doing in wireless right now.

Badrinarayanan Kothandaraman

Okay. So in wireless, we are doing 2 things. One, I'll talk about the short-term thing we are doing; and the other, long term. So basically, short term, we are combining our PSoC technology into the 2.4 gigahertz proprietary radio technology, and we are coming out with an integrated chip. And that is called as PRoC-UI, Programmable Radio-on-Chip, UI is user interface. We are targeting the chip initially for the human interface device segment, which is basically touch mice, keyboards, remote controls, Trackpad, the all-wireless Trackpads, Windows 8 and so on. So that's a short-term effort, and we already have products released into the market like a few weeks ago. Long term, yes, we are looking at Bluetooth Low Energy. It is in its infancy at this point in time. But we are very serious about it. And the idea is to combine our PSoC technology there along with the Bluetooth radio and take advantage of it and try to get something in the short term -- I mean, in the long term, that's clearly 1 to 2 years.

T. J. Rodgers

Our wireless history, as we've started in early 2000, we brought in wireless teams, they created an extraordinarily robust architecture for wireless. We built up the business over $20 million. It started out being connectivity of mice and keyboards to computers. We, for example, had the Hewlett-Packard socket. Nordic, we -- our major competitor is Nordic. That business settled in at about $15 million a year, and we harvested it. Now the reason being is that if I look at making the next wireless chip, let's say, in 2007 versus making another PSoC touch chip, it was a no-brainer to make the PSoC touch chip. Don't make a wireless chip there. So we've got a core business that sits in the $10 million to $15 million range right now. A little Horizon Hobby, those little helicopters you gave your kid for Christmas, that's our wireless chip in there. The reason being that, that when you're flying something around the living room, you need very robust high-performance radio, and that's why Horizon shows and still uses us there. The dislocation coming up in that market is connectivity, and it's going to go to Bluetooth Lite DLE, and we are going to combine DLE with PSoC, and it's a natural. PSoC hooks up anything to anything. That's sort of what it does, and it does processing and digital and analog functions in the middle. So we have already got the radio team working on putting a radio on PSoC, not as a 2 chips in a package, but as a programmable radio on chip with PRoC. We sell PRoCs today. We have programmable radio chips where it's a PSoC in the radio link to a hub. We sell hubs today, the plug-in USB hub. We have the WirelessUSB products. So we've got a bunch of products. They've been on hold -- not on hold, they've been in semi-harvest mode with few introductions of new products since the Touch Revolution took off. We are now focusing on that. So we've got a good foothold on that particular ground. We've been there for a long time, and we have a lot of corporate knowledge about it.

Operator

Christopher Danely.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

JPMorgan. Guys, can you give us your expectations of the relative growth rates of the 3 product groups you guys have for this year?

Brad W. Buss

It's a little early to probably do that. We're finalizing a little more planning. But net-net, we do expect all the groups to be up year-on-year. And the order of magnitude, we'll give you a little better view on that as we progress through the quarter.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Okay. And then, so in terms of the balance sheet, I guess, your net debt is $120 million or $130 million now and payout ratio is over 100% in Q4 or Q1, maybe even Q2. How comfortable do you guys feel with the current cash versus debt level? And are there any covenants you're in danger of coming close to breaking this year?

Brad W. Buss

We feel very good with the balance sheet, very good with the dividend. Yes, definitely the payout ratio, but we look at that as high. But I mean, that's really just a lull in, I think, where the business is going. So I think we're fine from that perspective, as well as the covenants.

Operator

Jeff Schreiner.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Feltl and Company. Just wondered one thing, I guess, people have been trying to get to, but one thing I'd like to understand, gentlemen, is in terms of the kind of expectations for growth as it relates to Cypress for 2013, what percentage of that is controllable functionality at Cypress, what you guys can control? And what percentage of that growth implies some baked in estimate of potential customer shipments?

T. J. Rodgers

All of the consumer stuff is highly dependent on the customer shipments and the [indiscernible] is you pick the guy with the right cell phone. That went against us dramatically in 2012. And that's just part of our business. I mean, there's not more you can say about that.

Dana C. Nazarian

So the key there is to get as broad as possible and get as many customers and as many sockets that matter. And that's been our focus, is to get broadly adopted.

Brad W. Buss

Yes, I think, Jeff, big picture, right, I mean, we're not dependent on one end market, right? We're not 60%, 70% in comm or handset. We've got pretty good market exposure. We only have one 10% customer, and it's, quite frankly, probably the best one you could be in. And we see that being a positive net share gainer as well. So from a concentration end of it, we're probably one of the better companies out there, I think, from that perspective. And then I think same thing on the designs. We're not counting on one customer in touch to move the number for the whole company or even in the touch group, for instance. I mean, there's lots of little pieces that, I think, will contribute, but the macro and demand are going to be a factor on everybody. But we have really not many end-market or end-customer headwinds versus the prior year. I mean, I feel much, much better from that perspective. [indiscernible] customer is going to be of the year, right?

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

True. Dana, I'm going to try to just cram this into one. But was there any impact in the December quarter from the end-of-life shipments from Samsung, and given now that there's a fairly limited number of participants in SRAM, what expectations for growth is the company looking at in calendar '13?

Dana C. Nazarian

Well, as I've been saying in these calls for the last year or so, the movement away from Samsung has been happening not just after they made their announcement last year but really the 2 years previously. So I don't think it has too much of an impact. I think most of the share has been picked up through the year -- through the last couple of years, and it's just kind of smoothing out. So I don't see any significant major step change in shipments due to them exiting.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Okay. And no impact in terms of just a limited number in terms of what maybe Cypress can do as the market leader this year? Is that going to give you an advantage if the market starts to pick up? I mean, what's the, I guess, the overall expectation for SRAM growth in the general market?

Dana C. Nazarian

Yes, so we will continue to pick up, we think, more than our fair share of market share from the Samsung exits. As T.J. stated, that's partially offset with a decline in -- predicted decline about 10% next year on the overall SRAM market. And then that's why we're also starting to invest more and more on the nonvolatile side of that market.

Operator

Raji Gill.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Needham & Company. T.J., you talked about being -- you're confident about growing revenue this year. So I just want to get some clarity on that. If you did $770 million in 2012, I guess, you could add on the Ramtron business in the second half maybe of $12 million a quarter. Where could you see some upside in the businesses where you -- where it could grow beyond just the Ramtron business? Because if I add the Ramtron of $12 million a quarter, I get something to like $794 million, and so you're already up year-over-year. But obviously, the other businesses are looking to maybe grow, as well, in TrueTouch.

T. J. Rodgers

The other biggest opportunity for growth is touch and the long-awaited share recovery that we believe we will now start enjoying quarter-on-quarter during 2013. That's the big one right there. There is some growth in USB as a percentage. It's a nice number with USB 3. But those numbers aren't big in the scale of the RAM business or the touch business. So short answer is share recovery and touch.

Brad W. Buss

And I think the wildcard ends up being comm infrastructure, right, where as comm has been shitty for multiple quarters, we can't believe it can stay there forever. And I think as that turns, as Dana said, we will definitely get more than our fair share in that area. So I look at that as the wildcard. We're trying to be conservative in our planning because it's something that's hard to predict right now. There's a lot of good positive talk. But it is talk. It has not translated into orders. And I think that's going to be more of a second half opportunity, and keep your fingers crossed.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

It just seems like, based on the Q1 numbers and employing some growth in Q2, that the second half is going to grow nearly 40% over the first half. A lot of that, obviously, is going to be the Ramtron getting to a certain run rate. But I appreciate the other insight. And just one last quick question for me. On the Emerging Tech gross margins, any chance that those margins will start to improve, or is that really just a function of revenue?

Brad W. Buss

It's definitely a function of revenue. I mean, if you look at what we call kind of the product margins, I mean, those are -- they're in the model range of where they need to be. It's just all the fixed cost. So they should get better in the second half of the revenue scale. But I still expect them to be a drag on the total company.

Operator

Charlie Anderson.

Charles L. Anderson - Dougherty & Company LLC, Research Division

Dougherty & Company. Just to tag on the last question. I wonder what you guys are sort of implying on the Trackpad business in the second half if that were to ramp in your favor and if you're still devoting the resources there and still think that's a favorable market for you?

Cathal Phelan

Thanks, Charlie. This is Cathal again. We think Trackpad will double for us this year. It doubled in 2012 versus 2011, and I think it would double again. And you are right, that will be stronger in the second half than the first half, but it will be pretty reasonable in the first half, too.

Charles L. Anderson - Dougherty & Company LLC, Research Division

Are we talking about getting to like $5 million a quarter, just in terms of the magnitude of its contribution?

Cathal Phelan

It will be close to that by the end of the year, yes.

Charles L. Anderson - Dougherty & Company LLC, Research Division

Okay. And then just a housekeeping question from me. The book-to-bill by segment, if you guys have it?

T. J. Rodgers

I don't think we have that today. The reason is we're doing the 43 transition, and a lot of our data is in a state of flux. I think the book-to-bill was positive across the board across all business units.

T. J. Rodgers

Yes, all business units were up. It was 0.88 in total, and I think DCD and MPD were slightly better than the total.

Operator

Dale Pfau.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Most of my questions have been asked and answered. But I have one. How should we think about contribution margin over the course of the year? I know you say gross margins are going up. But assuming gross margin is static and you drop in OpEx, could we expect to see contribution margins closer to that 60% number?

Brad W. Buss

Yes.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Great. And then on touch, back to picking up where you see growth, and you say you've got visibility into designs out there. Are you talking across a broad range of customers, or is this just a recovery in one major customer?

Cathal Phelan

No, it's across a broad range of customers. It isn't 50 customers. It's more like 5 to 10, but it isn't dominated by one particular guy.

T. J. Rodgers

Yes, we're adding a couple of major guys that we've been underpenetrated in this year, and we're expanding share at some other major guys. And as they talk, a lot of the small and emerging guys internationally. I think we probably have the broadest portfolio of customers in the touch area, which, again, is good for stability and the ups and downs in that market.

Operator

And our last question comes from the Liwen Zhang.

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

Blaylock Robert Van. And I remember regarding TrueTouch for Q4, you guys have given the guidance around the high single-digit growth in this Q3 earnings conference call, and now, as a matter of fact, it was down 10% quarter-over-quarter. I just would like to know what caused that -- or caused that? And also, in terms of TrueTouch guidance for this year, so what would be the worst case given the Q4 results versus the guidance?

Brad W. Buss

Yes, it wasn't down 10% in Q4. I mean, it was in the low-single digits. The 15% to 25%, we're pretty comfortable with. Hopefully, it's not 15%, but I think the low end really would be the 15% unless some customer decides not to roll out a major platform or it totally sucks and -- when they didn't think, that's something we can't predict. But the team has done a great job of penetrating, I think, new customers. And as Cathal said, we're moving into some interesting phones, some bigger phones, some more of the premier stuff. We're going into the lower end. We've got a good stranglehold in the full-featured. They've broadened the base very nicely in that area. So I think we've done everything we can from a design. Go buy a new phone and help us out.

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

Okay. And then my next question is -- and to follow up on your PSoC business. Of course, PSoC has a unique feature programmable compared to overall MCU market growth in last year, as well as in the future. And do you think also this programming feature also will limit the addressable market for PSoC as well?

T. J. Rodgers

Our PSoC 1 family started out when we introduced it in 2003 as the #44 competitor in the ASIP market, and we grew from the 44th competitor to #7. And we passed by some big names, like Nippon Electric and others that you know. The programmability PSoC is revolutionary, not an impediment. And it will allow us to take share, and it will allow us to provide features to our customers that fixed function microcontroller companies cannot. We are now seeing in the market copying of some of our functionality, limited. For example, in a programmable analog-to-digital converter, you select it in PSoC and it plugs it into the MCU. When a competitor, they have an ADD converter hardwire that is more fixed. In our case, you select the analog-to-digital, it automatically gets hooked up for you, and then you go in and configure it. Do I want it to be fast and high powered? Do I want it to be slower and lower powered? Do I want it to run 20 bits of accuracy and more power? Do I want it to run 16 bits of accuracy and less power? What our competitors are doing is that little configuration tool, I just discussed, they're now starting to show configuration tools on their Integrated Design Environment, so the tools they provide their customers to use their microcontrollers. They are starting to copy us. They give software control of hardware to their customers. There has -- and that's pervasive. We have multiple competitors that are starting to show GUIs, graphical user interfaces, that looked like PSoC, and the trend will be in that direction, and we've got a decade head start in the direction. Far from being a disadvantage, we have a revolutionary product, we've gained market share, I bragged about it, put it on the cover of the annual report every year for a long time. So no, very no, it's not a disadvantage. Thank you for your question.

Okay. Thank you very much for calling in. We've just concluded the Q4 and 2012 annual report for Cypress.

Operator

Thank you for participating.

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