Cypress Semiconductor Corporation Q1 2009 Earnings Call Transcript

Apr.17.09 | About: Cypress Semiconductor (CY)

Cypress Semiconductor Corporation (NASDAQ:CY)

Q1 2009 Earnings Call

April 16, 2009; 11:30 am ET

Executives

T.J. Rodgers - President & Chief Executive Officer

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

Chris Seams - Executive Vice President, Sales and Marketing

Harry Sim - Chief Executive Officer of Cypress Envirosystems

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Norman Taffe - Executive Vice President, Consumer and Computation Division

Analysts

Suji De Silva - Kaufman Bros.

Doug Freedman - Broadpoint AmTech

Tim Luke - Barclays Capital

Sandy Harrison - Signal Hill

Uche Orji - UBS

John Barton - Cowen

Glen Yeung - Citi

John Pitzer - Credit Suisse

Chris Danely - J.P. Morgan

Adam Benjamin - Jefferies

Operator

Good morning and welcome to Cypress Semiconductors, first quarter earnings release conference call. (Operator Instructions)

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 give you our report for the first quarter of 2009. We’ll do it in the typical manner. Brad Buss is finances; Chris Seams with the markets; me with business news and then questions. Brad.

Brad Buss

Thanks, T.J. Thanks everyone for attending our first quarter call. All the information discussed today in our press release and on the call is based on our preliminary unaudited results. We obviously encourage you to look at our filings. Obviously there is a lot of risks and projections that we’re going to make that are subject to risk, especially in this economy.

So again we encourage you to look at all of the forward-looking language and risks that we detail in our filings. We also have a recon of all the GAAP to non-GAAP stuff in the press release and on the website. So, I’ll start with quick overview of Q1 and then we’ll go into the guidance in detail for Q2.

We ended up having better revenue OpEx and EPS than originally expect and worst gross margins really just due to the fact that we were very proactive on inventory management and we took a couple of inventory related charges. Based on what we know at this time, I expect that Q1 is definitely the bottom for us from a revenue gross margin and profitability standpoint.

Our semiconductor revenue for Q1 was 139.3 with a decrease of 15.6 sequentially and don’t forget, Q1 is normally a backwards quarter based on seasonality for us, that can range anywhere from 5% to 10%. We decreased 17.3% on a year-on-year basis.

Revenue for the quarter exceeded the top range of guidance due to a steady business pickup across most of our product lines beginning mid quarters, as we started to see customers replenish inventories that had been severely depleted over the last few months. We also had strength in SRAM focused on the China 3G deployment and we also enjoyed better than expected distributor revenues that increased late in the quarter.

From a division perspective, MID increased 2% sequentially, ECD decreased 31% and a lot of that was really due to the timing of some end of life shipment that didn’t go in Q1, but are definitely going in Q2, and we also saw CCD decrease 25%. Again, they normally have a very backwards Q1 due to seasonality and consumer exposure.

PSoC and West Bridge, both decline sequentially as we expected, but more importantly, they actually did better than our original internal plan when we gave guidance and we continue to see strength in those products going forward and the guys will touch on that later. TrueTouch, our new touch screen product continues to grow rapidly as we’ve expected and we had some initial ramps and a couple of our initial design wins and the guys will talk a lot more about that as we’re seeing very good success there.

On a GAAP basis, we posted a net loss of approximately $90 million or $0.67 per share, which was driven by the operating loss, but more importantly by the non-cash charges for the FAS 123R impact and we also have another $8 million in restructuring activity. On a non-GAAP basis, our net loss was $29.4 million, which resulted in the loss per share of $0.22, which was at the lower end of my guidance.

Even though revenue exceeding guidance or gross margins missed our target as we proactively decreased the inventory and drilled factory utilization to an all-time low, on the positive side, our operating expenses continued to decrease as we begin to see the impact of our restructuring activities, as well as additional tight cost controls we have implemented.

Our share count of 135 was actually lower than my guidance of 140, and that impacted the EPS loss by approximately $0.001, because it’s actually bizarre when you have lower shares when you lose money; it actually hurts you rather than helps you. The $0.22 loss is an increase from last quarter’s diluted loss per share of eight and an increase from our diluted earnings per share of $0.001 in the first quarter of 2008.

From a gross margin perspective, on a non-GAAP basis our semi margin was $34.7. It was down eight points from the previous quarter and it was below our guidance as we actually took further steps to decrease the fab utilization and inventory in the quarter, which we think was the right thing to do and I was very pleased with that outcome, as I’ll explain when we get to the inventory section.

We obviously had higher overhead absorption and lower revenue level. We had an unfavorable product mix as we had more coming from MID than DCD and we also took some inventory reserve charges as we cleaned up some old inventory.

So during the quarter, we reached record lows for wafer starts activities and utilization in the fabs. Our average utilization based on starts and installed capacity was 34% for Q1, the lowest level since the early ‘90s and it was down 22% from Q4 ‘08 and down 60% from Q3 ‘08. We went to a record low utilization level of about 19% for a few weeks in Q1 and we have been steadily increasing utilization in late March and into April to support our increased demand.

I’d expect our utilization based on starts and installed capacity to increase significantly and be approximately 55% to 60% in Q2 and I’d expect that based on our current expectations to continue to increase into Q3. The fab’s done a very good job of managing a lot of their variable costs and they are down approximately 35% from Q3 ’08. So this is going to give us a better breakeven and allow us to still continue to support increases in demand that we’re seeing. We still remain very committed to our flex fab strategy and that will provide even greater gross margin upside as we load them in the future.

One of the positive trends that we saw and you saw in the press release, is that our ASPs actually increased by about 11% to $1.43; that’s the highest level since Q3 ‘04. A lot of that was product mix driven, but more importantly our new product ASPs that are the big growth engines for us over the next few quarters, actually have an ASP higher than this corporate average.

We remain about 7% to 8% of our revenue being proprietary, which again provides a lot of pricing stability even in these kinds of markets. I expect gross margins to continue to increase every quarter. As the demand increases our utilization increases and we have a different products mix based on our new products and we’re still committed to achieving our 50% gross margin target over the next few quarters, obviously based on some of the increases that I mentioned.

Turning over to operating expenses, they increased marginally by about $1 million when compared to last quarter and totaled $76.8 million. This was down substantially from my guidance of $81 million to $83 million due to some one-time positive benefits and our continued focus on OpEx management.

We have the deferred comp valuation that we see every time. That added a benefit of about $0.6 million and, again just to put in that perspective, that was versus a benefit of $5.8 million in Q4. Again, there’s no impact on EPS, because the offset goes through OIE that you’ll see.

We had a benefit from lower sales and rev commissions. We had a decrease in labor due to shutdowns. We also had a lower headcount. As well we’ve been managing all of our external consulting and temp costs. Our legal costs went down as we resolved our ITC lawsuit with LSI. That lawsuit has been dismissed and we reached a settlement that had no material impact to our Q1 P&L and it will not materially impact any future P&L guidance.

Just a quick color on some of our restructuring activities; we continue to decrease our headcount in Q1 and we will over the next two quarters, as a lot of the reductions we talked about will come to conclusion. Just to put it in perspective, by the time we’re done, around Q3 ‘09, I expect our headcount will have decreased by approximately 20% from Q3 ‘08 and that’s at a level that we haven’t seen since 1999.

We’re still continuing to invest in our programmable products and new products to support the growing design wins that we’re seeing and we’ve done a lot of other things that we talked about from a cost saving shutdown, managing the OpEx. We’ve canceled broad-based salary increases for two years in a row.

The bonus plans have been curtailed until we return to profitability and most recently, beginning in Q2 we just implemented a tiered pay cut globally across the company, that will impact everybody and for example, the executives in the room will be taking pay cuts of 8% to 11% and that’s on top of not receiving any bonus. We are very committed to managing the cost structure, as you can see. More importantly, we want to remain free cash flow positive for the year.

OIE was a loss of $0.3 million and that was impacted by the offset of the deferred comp charge that I mentioned above that was a benefit in OpEx. We had about $0.6 million in interest income, 100K for the remaining expense related to the convert. Non-GAAP semi tax charge in Q1 was 900K and that’s the minimum tax payments that we pay under our international tax structures and I would expect that to continue through the rest of the year.

Balance sheet wise, you see we still are very strong from a cash and net cash perspective. Our cash and equivalents were $224 million, $258 million if you include the $34 million of the auction rates that we currently have as long term. We are still continuing to maintain a very conservative investment portfolio dominated mostly by treasuries, agencies and AAA money market and that’s obviously impacting yield in the short term.

As we get a little more comfortable with the corporate world, we’ll look at increasing our exposure to corporate bond and we have almost no exposure in the financial markets at this point in time. Inventory was a big bright spot in the quarter and I was extremely pleased with the operations group in making that happen. Our net inventory was $100 million and it decreased approximately $22 million, or 18% from Q4 ‘08 and more importantly, we also saw substantial decrease in finished goods.

Our Q1 net inventory also included $8.3 million related to non-cash capitalized FAS 123R charges and $18.3 million for the last time built in Texas. If you subtract those two out, our real operating inventory that I look at is running around $75 million, which is very good for where we’re at and potentially even getting low on a going-forward basis.

More importantly this inventory decreased as well, they decreased by $13.4 million, or 15% from Q4. So, from our perspective, these combined reductions in inventory both very well for increased demand, especially with the distributors, they’ve been decreasing inventory for quite a while and are beginning to restock inventory for normal level and we’ll also need to restock to meet increasing demand that we’re expecting to see.

We expect to keep our inventory flat to slightly up or down in the quarter, even off of increasing revenues and obviously that will drive our days of inventory down even further, so I’m very pleased where that’s heading. AR was another bright spot, our accounts receivable totaled $72 million, and it was down $20 million or 22%, which is down less than our sales decrease. So, obviously a good sign when that can happen.

Our DSO went down to 47 days and just a reminder, about 50% to 60% of our business obviously goes through distribution. Our aging is in good shape and we are staying very close to all of our customers. CapEx was $6.5 million, depreciation was $13.5 million. There’s $28 million left on the convert and it has a conversion price of 564, if you add the cost spread on top of that, that gives us coverage up to $6.37 and as a reminder that matures in September of ‘09.

There is another new APV 1411 that came out that we needed to comply with related to converts, so you’ll see some of the prior period stuff needs to get readjusted for this latest accounting gimmick that’s out there. It’s not a big deal for us because there balance is pretty low, but you will see some of the historical numbers change because of that, including the portion related to SunPower. So, we’ll be gone with the convert in September of ‘09, but the comparisons will still be there.

Share count, we repurchased 1.4 million shares at an average cost of $4.59. Remember, we are also one of the few people in Q4 that actually repurchased shares and we repurchased 24.5 million in Q4 at an average cost of $4.03. Both of these buybacks have obviously returned substantial value back to the shareholders. Due to the loss in Q1, you only use the basic share count for EPS.

Our weighted average basic shares for EPS were $135 million and that was obviously down from Q4 due to the weighting and timing of the buybacks in Q4 and Q1. We ended the quarter at $138 million and assuming we weren’t in a loss position, the fully diluted share count, assuming the average Q1 stock price of about $5.21would have been 165 million shares.

I’m now going flip over the guidance real quickly and then I’ll turn it over to Chris. You saw in the press release that we had a nice book-to-bill at 1.12. All of the divisions were above one, and CCD and DCD are driving the growth. CCD is actually about 1.2. Also, remember we have a lot of distributors that’s about 60% and we rely pretty heavily on their POS and the accuracy of that. So putting all that together, looking at our bookings and our backlog, we’re giving guidance of $145 million to $153 million, which is up 4% to 10% off a very strong Q1.

We expect all divisions to grow sequentially, driven mostly by a CCD and DCD and we also expect all our major new product lines to grow sequentially as well and obviously this is fairly high above this current street consensus of 129 for Q2. Our gross margins will increase as we increase the utilization fab on our back end. We’ll realize further cost reductions than we expect a better mix of product, as I’ve talked about with more growth coming from CCD and DCD.

As such, I estimate our gross margins to be approximately 41% to 43% and to my earlier point, we do still think we can get back to the 50% level over the next few quarters. I’d look for OpEx to be approximately $75 million to $77 million, as the one-time benefits we enjoyed in Q1 won’t repeat, but we’ll have further planned cost reductions to offset that and obviously, that’s assuming no major flux in the deferred comp plan.

The OIE should be about $0.3 million, tax expense about 900 K, CapEx of $9.5 million, depreciation of $13.2 million. The basic share count, I’d assume around $140 million to $142 million. Again, I still anticipate being in a loss perspective, so the fully diluted won’t matter, but that should start kicking back in the back half of the year.

Non-GAAP loss per share is expected to be in a range of $0.08 to $0.12, which again is significantly better than the loss of $0.17 at the street is expecting and that’s it. I’m going now turn things over to Chris and thanks for joining us today.

Chris Seams

Good morning. Brad. I’ll go through some of the usual indices I give you. Revenue splits by geography with the decline in the consumer and computation end markets, again in the first quarter, Asia declined to 43% of revenue. All of that was taken out by North America, which came in at 30% followed by Europe at 17% and Japan 10% level.

Units for us were down 23% quarter on quarter to $98 million units. As Brad talked about the pricing environment for us remained fairly stable. No real aggressive reductions. Our ASP corporately, as he talked about was up $0.14 from the last quarter’s $1.29 up to $1.43.

He talked about book-to-bill being above unity again that compares with us entering last quarter at book-to-bill of 0.7, so it’s a dramatic turnaround. I’ll talk a bit about bookings in a moment. Our backlog increased to $122 million at the six month figure. In terms of market flavor, all end markets for us declined in the March quarter, except for the wireless infrastructure market and that was driven by the growth in the China 3G build out that Brad talked about earlier.

Every end market for us is forecasted to grow in the current quarter. We enter this quarter 62% booked, that’s up 10 points from where we entered last quarter. The bookings for us in terms of how they have looked over the last 13 weeks have strengthened throughout the first quarter and that trend continued into the first two weeks of this quarter, but again, the booking lead times remained very short and our visibility beyond this quarter is very limited.

Now, let me turn the call back to T.J. now for a few more details on the quarter.

T.J. Rodgers

Thanks, Chris. Comments on gross margin; our gross margin not counting stock effects and inventories, the remnants of old companies which is what has been get those margin, but the actual operating gross margin measured the way it used to be. Non-GAAP, in other words was 34.6% not a good number. The reason for that is our fabs were utilized only to 27%. The reason for that was we have a new inventory control system in place that is very effective.

Normally in a down quarter like this, you sort of fall-off the edge kind of quarter, our inventory shoots up. The fact is our inventory was down 18% quarter-on-quarter and that happens by discipline and manufacturing, new discipline and manufacturing, but the net result is the underlying fabs [Inaudible] get very expensive in the reported gross margin goes down.

Right now, we’re running at about 50% fab utilization about double where we were and we think it’s going to drift up slightly from there. In addition to our comments and inventory now; in addition to our decrease in internal inventory, our distributor inventory also declined 15%. So, this gets back to my comments from last quarter, where basically the pipeline has been drained and that will turn around in the future.

I’d like to make a comment about our operating expense. $77 million, that was down $12 million relative to the year ago quarter. So as you know, we’ve been on a divestiture kick to get rid of the things that are no longer strategic to us for two years. We’re now cutting down what’s left to divest in effect the overhead we’ve created during the prior period of acquisition. $12 million decline to $77 million was pretty painful inside.

Brad commented that we’ve been two years with no raise. We don’t believe that’s going to make us noncompetitive. What’s happening is there is going to be a deflation in Silicon Valley wage level and it’s needed. California is not a competitive place to run a business and it will be helpful for us to hold steady for a couple of years and allow the world to catch up to us.

I’d like to reiterate Brad’s point also that there are no bonuses paid. Our board has a policy and it’s airtight and it’s very simple. When there are brackets on the bottom line, no bonuses are paid. In our case, our bonuses are more as we described as variable pay. For example, 60% of my nominal take home if we meet plan is variable. So in fact, my pay is 40% of what it would be if there are no brackets on the bottom line. So, it provides a strong incentive to the management team when we’re having those painful cuts to do what’s required.

Let me talk a little bit about products in our business and then we’ll go to questions. Programmable proprietary products, the new Cypress were 78% over revenue in the first quarter. We shipped our 500 million PSoC unit. We have achieved revenue from 9000 PSoC customers to-date.

We have moved, as we showed on the cover of our annual report from the 41 position in the 8-bit microcontroller market to number 11 for the 2007-2008 period from number 41 in the 2003-2004 periods. We’re very proud of that. Our annual report by the way, if you go onto our website to com/go/annual report, you can download the annual report.

Most important is to the quarter by a lot is the introduction of our $50 million PSoC3 device. So, PSoC3 device improves on PSoC1 in virtually every dimension of performance. It’s more expansive and there is not just better to replace the old part. It has an 8051, which is an industry standard microcontroller.

We started to realize years ago that making microcontrollers is not what PSoC was about. Therefore we rented an industry standard product with a lot of infrastructure, so that we could sell PSoC and not face the uphill battle of proprietary computer inside, but that 8051 is kind of special, it’s 10 times more powerful than PSoC1 40 MHz versus four.

We put on the chip 10 times more programmable logic, 20,000 gigs versus 2000 gigs and most importantly, I think we improved our analog. It’s about 20 times faster at a given level of precision or much more precise at a given sampling rate. The net result is that if you look at products with which we can now compete, our total available market has jumped from 1.5 billion covered by PSoC1 to 4.7 billion covered by PSoC1 and PSoC3.

We also introduced another PSoC family. I’ve talked about it for a long time, but we’ve finally turned it out, sent it off to distribution, started shipping, etc., it’s called power PSoC. It’s basically a PSoC1 device with some special analog on it and most importantly, four 36-volt one-ampere transistors. So, now PSoC can control power directly and integrate that secretary.

The primary market for that device is LED light. LED, as everybody knows are very much more efficient than in can decent lights and the growth rate in the LED market is 90% annual rate 90%. So, basically doubling every year and it’s projected to continue that way for the next five years. From a near term point of view the most important economic time to Cypress is what we call TrueTouch.

TrueTouch is our trade name for our touchscreen solution. So think about, an interface where you have a screen and you touch and it controls the device. We designed TrueTouch into a sharp phone, a Lucky Gold Star phone, and a Fujitsu phone and then for the Docomo market in Japan. So, we’re starting to get a lot of big design wins in cell phones for TrueTouch.

An interesting thing is that the design wins we have are interestingly enough, the touchscreen design wins we have are on a chip we made in 2004 and that’s really amazes me, that there was enough foresight built into the PSoC architecture by our startup internal start like this Microsystems that they could comeback after Apple changed the world with iPhone and create that functionality in a PSoC that’s been around since 2004 for five years. So, our solution is actually a firmware solution, not a chip we’ve had for a while.

I just want to point out to everybody that the touchscreen phone is capacity sensitive. The only thing, it looks a lot different, but the only thing to an electrical engineer is different is that the electrodes instead of being copper are clear color conductor called Indium Tin Oxide or ITO. So, when you’re touching that screen, you’re really putting your finger over conductors and creating CapSense signal and of course we’ve been in the CapSense market for a while.

The touchscreen market is also expanding in the MP3 players and we got a pretty important design win with Samsung on an MP3 player. In CyFi low-power RF solution, I talked about it last time was named Indian Magazine top 100 products, which remember last time, I threatened to send anybody who wanted one a kit for CyFi way to look at sensors to your computer. I ragged that a non-expert could do it in minutes. Five of you took me up on my offer and I mailed kits to you.

I got back several replies, most important one or the best one to me was one of the analysts who said that he had his daughter, who was not yet teenage hook it up to temperature sense or to computer and put it in a place in their house is being built to show that the control of the thermostat wasn’t being properly done and beat the data back through the vendor and enjoy that.

Cypress Envirosystems with finalist and startup with year in Times Magazine. They also won an EN-Genius award for their product line with wireless and monitoring solutions for saving energy, unless we talked to won an EN-Genius awards, our products are starting to take awards when the programs of a product space.

I don’t want to give short switch to SRAM, our SRAM business is pretty strong right now due to the buildup in China and we introduced the first 65-nanometer synchronous SRAMs of this year. These are devices that are very high tech, 40 gigabits per second of information flow and price tag’s up 100 bucks.

Our SRAM unit has not missed a stroke, as Ahmad Chatila left us and became President at MEMC. The number two in that group and he’s been with Cypress for 21 years. He stepped into Ahmad’s shoes in our synchronous SRAM business is doing fine.

Last comment, Friday, May 22, 10:00 a.m., that’s our meeting and you’re all invited, but actually one more comment. I have in front of me a graph of the price of sales ratio of Cypress I’ve kept since our IPO 1986. It is the market cap of the company that is last quarter fully diluted shares time’s price divided by annual sales, which is last reported quarter times four and as that point index you can keep levering them compare to any company’s good times and bad.

On this graph our average goes from 1986 through 2009, the median number for that is 2.34 over 20 year period. We finished at 2.30, just slightly below the median yesterday. So, last reported quarter and the closing price yesterday, our current PS ratio is 2.3.

Last time we talked, our PS ratio was below the 10% bell point, which is 1.5 and I commented that 90% of the time Cypress’ stock price went above was then, our multiple has expanded from the bottom of 0.7 during this recession and 2.3, so we’ve enjoyed a multiple expansion of three, but I’ll point out we’re still at the median, which is appropriate.

The economy is lousy right now, we’ve got brackets on the bottom line and we’re at the median number, but the 90th percentile point, which we achieved during good times, is 3.90. So that’s the multiple expansion possibility built into Cypress, 2.3 to 3.9. We are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from is Suji De Silva - Kaufman Bros.

Suji De Silva - Kaufman Bros.

Good morning guys, nice job in the inventory execution there. First of all on the turns you have in your guidance has come down here and many talk about visibility is still being weak, but at the margin is it improving here? Are you perhaps seeing that distributor inventories are coming down versus levels or that lead times are extending?

Chris Seams

This is Chris. Let me answer the question. Hourly times are not extending, even in spite of inventory being brought down. Our operations group has been able to keep capacity in place to respond to those short lead time orders.

In terms of distribution inventory, we don’t see a signal yet of stocking above the inventory levels that Brad talked about, but it’s in line with what we think they need to run their business and we think they will start to reorder as they see business turn up throughout this quarter.

Suji De Silva - Kaufman Bros.

Chris, do you think the inventory levels of distributors are near target levels?

Chris Seams

Yes.

Suji De Silva - Kaufman Bros.

Okay and the second question, perhaps for Brad. How is the OpEx going to trend here, Brad? I know the restructuring is flowing through and then what revenue do you see sort of breakeven being, given your current expectations?

Brad Buss

Sure. I think you’ll see the OpEx still continue down a couple million bucks every quarter. I’d like to be down around the $70 million, $72 million range in the back half of the year of the balance of the restructuring efforts take place. From a breakeven standpoint, that obviously is depend on the gross margin, but I think around $160 million, assuming gross margin is kind of in the mid-40s and then OpEx, like we’ve talked about, in the regular OIE and Cox should get us in that zone.

Suji De Silva - Kaufman Bros.

Last housekeeping question, what was the impact of reserves on the gross margin?

Brad Buss

Above two point

Operator

Your next question comes from Doug Freedman - Broadpoint AmTech.

Doug Freedman - Broadpoint AmTech

It’s Broadpoint AmTech and thanks for getting me in. Just to look at, you guys are moving the company in sort of a mixed model here where some of your suppliers coming from internal foundry some external. It was noticeable, is that the explanation to CCD gross margins holding up so well in Q1? Then, can you give me what the expected ratio of external sourcing is and what it’s expected to be going forward?

T.J. Rodgers

Let me take that one. CCD margins held up despite the fact that our wafer costs did go up. We make a significant fraction of CCD wafers in Minnesota, which is the 27% loaded fab I alluded to earlier. The good news is that we make part of our wafers in very low cost orders in China, semiconductor and HHNEC and that mitigated the effect. The other thing that offset the wafer cost increase was the fact that prices are going up we’re making bigger and better PSoC devices and CCD in general, not just PSoC and that was kind of a wash.

The biggest effect going forward is going to be when we just start filling up the inventory by supplies again and start turning back on just a little bit, not even back to normal levels and get rid of that awful 27% utilization, which as I said, we’re now at 50%. As we speak, there’s been a change.

Going forward, I don’t want all of our capacity for “now” I need the next five years to be outside. I’m a fab guy and I’m just uncomfortable losing total control of what we can do to an outside vendor. Maybe I’ll gain more faith as time goes on. So my goal is to fill up our fab, make it very low cost.

Second half of this year we’re going to have significant depreciation rollout in our fab and when we fill fab 4, which has always been a cost efficient fab and when we get the depreciation roll off that fab is going to be competitive with anything in the world and that’s what I want.

I want that fab full and then I want growth on the outside to come from ramping multiple external foundries at least two, so we can ramp fast to take upside opportunity. That’s a five year statement. Five years from now we’ll talk about the Cypress only in fabs. Right now my feeling is yes, we certainly do.

Brad Buss

I’ll give you a little color on that. Remember, our CapEx numbers are pretty low. I’m guiding kind of like a sub-30 million for ‘09, so we’re not putting any additional capacity in there, Doug and if you caught my comment on the variable cost that you need taken out about a third of the variable costs. So, our equipment’s at one level that full capacity on a variable cost levels are actually gone down. They’ve done a very good job, as T.J’s alluded to of decreasing the costs

I think you’ll see, as business recovers more and more of the incremental business will help us start coming through bounders, so the 50/50 in a couple of years with some good demand behind us in revenue that could be achievable.

Doug Freedman - Broadpoint AmTech

Great, that’s for the detailed answer. Can you talk a little bit about your comfort level with capital structure? You mentioned that the convert is going to come due here in September. Any thoughts about changing or going back to a leverage situation going forward and if so, what’s the potential timing on that?

Brad Buss

You know, not at this point, Doug. Our balance sheet’s obviously pretty strong. I mean we had negative free cash flow, as expected because of the loss position, but I expect in the back half of the year, that will turnaround and I think we’ll be flat from a free cash flow perspective for the entire year, and obviously as things turnaround we expect to generate copious amounts of free cash flow.

I don’t really see anything right now, we do something acquisition-wise down the road, obviously there’s a different decision we’ll make. I’m personally a fan of a dividend sometime down the road as well, but I wouldn’t expect any short term debt or anything scary from that perspective, because we quite frankly just don’t have the need for it.

Operator

Your next question comes from Tim Luke - Barclays Capital

Tim Luke - Barclays Capital

Thanks so much, Barclays Capital. Chris, could you probably just remind us of the book-to-bill for the different segments and I guess T.J., you speak by the expansion of the TAM with PSoC3. What’s the key catalyst for that in terms of what’s new that enabled the expansion of the time and separately. Perhaps it would be helpful if you could also just talk about your positioning in the touch market versus some of the other vendors, such as Synaptics. Thank you.

Chris Seams

Let me quickly give you the three division numbers. CCD’s book-to-bill, 1.20, MID’s without image sensors so memory only, 1.15 and data com division, 1.07.

Brad Buss

Okay. Why does PSoC3 so dramatically increase our TAM? Although PSoC1 has been great success, it has frankly a pretty anemic microcontroller in it that only produces 4 million per second. Therefore it doesn’t even cover the fully market. There are 8 per machines out there that blow it away. So when we do the 8051 and this is not just the generic 8051. Its turbo 8051is out there micro architecture the classic Intel architecture, we go to 40 MID’s.

So basically we capture the whole high end of the input market and we have enough horsepower to even get into the bottom end of the 16 bit market. So it’s new ground for us. PSoC1’s been a big success, but the TAM is only 1.5 billion and we now need new TAM in order to continue the growth to enjoy it. With regard to our touchscreen positioning relative to that, let me ask Norm to answer that one.

T.J. Rodgers

Yes, relative as far as the way we position ourselves in touchscreens, I think there’s a couple of key things that we’ve emphasized that’s led to I’d say very significant design momentum.

First and foremost, the touch technology we have, we call Multi-Touch All Point, is really the first in the world to allow independent recognition of as many fingers as you have, so 10 the max, right. 10 different fingers independently addressed, it actually gives the capability to do more sophisticated gestures than anything else there in the world and that has driven tremendous design and activity to that capability.

Even if you don’t need all that capability, it translates into lower power to do standard gesturing applications. So that’s given us a very important technical advantage over anybody and driven a lot of the opportunities.

I think secondly and maybe even more importantly, has been that we have a very different business model approach, where we have over the last year and a half cultivated partnerships with nearly every major touchscreen supplier, ITO supplier and LCD manufacturer.

Instead of competing with them, we are often being sold not by Cypress, but by our partners as a total solution to handset, GPS, other mobile device suppliers, because we sell the silicon either to them and they sell it to the end customer or we sell it to the end customer directly.

As this touch becomes more predominant, we’re quite confident that the mobile market will not support a fully integrated model and high volume and that’s certainly what we’re seeing at almost every major account and that’s quite a difference. So that real partnership model is starting to pay big dividends in terms of designs.

Brad Buss

So, let me say that the little more bluntly. So that’s the chip modules; chip plus the board or the glass, depending on cap sensor touchscreen and they charge a significant premium for the glass, for the circuit board component that would be chips and enable our module partners to sell modules with our chips on it.

We believe that in a very cost sensitive mobile market that there will be dis-aggregation and selling components will eventually rule. Today [Inaudible] is doing a great job, because it provides a complete solution in what is currently a little bit of a black magic engineering realm. As that realm becomes more and more well known, especially with the programmable product where you can fix it if you make a mistake by changing the program, we think our chip solution will become more important to customers.

Tim Luke - Barclays Capital

Brad, just with respect to how you’re viewing seasonality. Say for the second quarters as you come off the bottom, you’re guiding sort of above seasonal or seemingly so 8% midpoint; do you feel for the third quarter we would see sort of mid single digit level or below seasonal third quarter and then the usual fourth quarter slightly climb or how are you kind of framing that; and then I think what you’re suggesting is you think you can get to a sort of 50% gross margin perhaps as you exit the fourth quarter or how should we think about that?

T.J. Rodgers

We had a discussion and we were talking about how we would handle this question. Brad was actually bullish and everybody jumped on him and said “it’s too weird to do that,” so let me give you both ends of it. If I wanted to give you the aspirational view, is that we will get to 50% gross margin by the end of the year and we will have substantial increase in revenue gross margin brought in the quarter we’re in and based on that momentum, we will breakeven in the third quarter; now that’s what Brad said.

Right after that Chris Seams said, “But Brad we’ve only gone to 10% of the third quarter” and that’s sort of a tale of cold water because that’s what happens to you. During tough times, your backlog is in the quarter so you have no visibility. It’s like driving at night without your headlights on; there could be a brick wall in the road and you can’t see it and stop in time.

So we’d all like to feel good about the momentum. Certainly in the second quarter, we know it’s there. We’re a month into the second quarter and we know the second quarter is going to be better than the first quarter, period; but while we’re hopeful, we feel good and we feel good about the cost reductions in the company and all that stuff, we just can’t say.

Tim Luke - Barclays Capital

Why though, if you’re like 63% booked, you’re guiding like up 8%? How does one reconcile? Is that normal in terms of the 8% that you would have already booked at this point?

Chris Seams

This is Chris. That’s actually a low number from historicals, but given the current economic environment out there, the customer order pattern is not historically averaged. So, they are booking the very short lead times, depending on what demand signals they are getting. One figure I did throughout is, the quarter that we just made guidance on, we were 52% booked to when we entered it. We were 62% booked for this quarter, so I do feel better now than I did this time last quarter.

Brad Buss

And we’ve seen, obviously since that quarter end a snapshot and now we’re a few weeks into it, you get more booking and you’ve seen a pattern like Chris was saying, especially on the bigger guys, but they won’t book in the last few weeks of the quarter. They kind of wait to the first few weeks, and sometimes even the third or fourth week of the next quarter before they start lying in. So, the trends we’ve obviously seen quarter to-date have supported our position and we feel very comfortable with it.

Tim Luke - Barclays Capital

So the bookings trended up through each of the months of the second quarter.

Brad Buss

Well, we’ve had two weeks of the second quarter so far. So, the first two weeks have been good bookings weeks.

Tim Luke - Barclays Capital

Right. There are a couple of things. I’ve got a graph here on the word board in the room we’re in so we can answer questions that shows our percent of quarter booked at the beginning of the quarter, and good numbers. They are 70% to 80% and okay numbers were mid-60s.

What I’ve come to conclude, if that number doesn’t mean anything, the think about the opposite case, its 2000 and I ask what percent of the quarter is booked and the number literally was 110%. Well, 110% is booked right up till 110% isn’t booked and it goes down and the flipside is where we are now, where you have nothing booked because they don’t have to book, because they know they can order it in three weeks and the later they order it, the more likely it will be that the prices in the market will have declined.

So, that accordion of booking out six months versus booking not only six weeks, kind of destroys the ability to use that metric going forward, point one. Point two, 60% of our revenues distribution right now?

Brad Buss

59, yes.

Tim Luke - Barclays Capital

Okay, so now the OEM story which I’ve just told, is less than a majority of our revenue and what our distribution partners are going to ship, what they estimate is a big part of the story and that doesn’t show up in the metric of BOQ percent Beginning of Quarter percent booked.

So we have an entire team, 10 people working on this problem. This is one thing obviously you can’t make a mistake on in the investors and right now this quarter, we’re confident with the guidance growth we give, despite the fact that the percent booked doesn’t look super hot.

Brad Buss

And I’ll just give a little comment, because it’s to my point of being bullish and I think most of you know I’m a fairly conservative guy, but one of the things I take comfort in is Chris and the product line guys have been extensively on the road with customers, right and we are not seeing any end market, end customer that we’re dealing with going down 20% or 30%.

Again, the point Chris made on unit I thinks a very important one; units were down greater than the percent of revenue was down right and again, it holds a lot of credence to the end market and I think we in the industry have been severely under shipping beyond demand and the channel is bone dry. I mean guys want us to drop ship stuff. No one’s asking to return inventory.

There’s a lot of signs that kind of gives me a lot more comfort that the worst is beyond us and then we have very strong product momentum like the guys have talked about, that I think a lot of other companies are not enjoying right now. I mean the touch stuff, the PSoC, the West Bridge, all of that is moving up and we’ve had the strengths in the SRAM; but to T.J.’s point, we’re just not getting the visibility, but there’s nothing in our internal conversations with the end customers that lead us to believe that things are going to blow up. Who the heck knows?

Operator

Your next question comes from Sandy Harrison - Signal Hill.

Sandy Harrison - Signal Hill

One of the areas you didn’t touch on in your prepared remarks was the Cypress and virus systems. You guys had at press release; I think it was yesterday about some work you’ve been doing in your backyard there with Santa Clara. Have you guys done much work sort of with the opportunity there is as far as the TAM and how quickly and what the impediments are to having more storage, such as the one you had with the San Jose?

T.J. Rodgers

That’s the risk of taking them off guard when primetime with one failed scope. I’m going to let, Harry Sim President of Cypress Envirosystems to answer that question.

Harry Sim

Good morning, Sandy. This is Harry. In terms of scoping out the size of the opportunity, if we look at every thermostat out there, a Pneumatic Thermostat that we can potentially retrofit, that’s the market that we’re looking at, it’s about 60 million units worldwide. They’ve been around for a long time, since 1950s, and they continue to work fairly well. It’s just they are not amenable to modern energy savings and demand reduction. So that’s the total available market.

Now, you asked about how quickly that market can be amenable to retrofit from technologies like ours, and there are really three main areas and let me give you the components of them. We’re still working to see what really is the adoption rate.

The first element revolves around the end user and the end users are fairly conservative in this environment. So, their adoption of new technology depends on their comfort level. So, the more case studies that we see like the Santa Clara county one, more success stories, the more that would gain the confidence and feed on itself. So, that’s the first big element; it’s confidence in end users.

The second element relates to the channel. We go to the market via installers and via distributors and the channels also, they’ve been around for a long time. They are fairly set in their ways, so to get them to install new technology, to know wireless. These are people who install Pneumatic, compressed air type systems, that will be another element. How quickly can we get them comfortable, trained up and be able to sell and to install.

Then the third element relates around funding. Of course customers should like to put these in, but any help from utilities, rebates, incentives, energy service companies, federal stimulus, all these things will add to it. So, those are the three elements that would affect the adoption and we’re still working to get a handle on exactly what that ramp will be.

T.J. Rodgers

60 million unit’s times about two times $200 bucks. So the TAM of retrofitting is $12 billion and we’ve got a product that is plug and play, where it is Pneumatic on one side and fits into the legacy system and the electronics since there are no wires coming to thermostats in a normal building, the wires are hookup’s done by radio.

We think we’ve made retrofitting easy and the time to install one thermostat is 15 minutes, but the barriers we’re seeing are not really technological. It’s like how do you break into a 30 year old market and get visibility and get people who aren’t implying to use technology to solve problems to think about it and we’re starting to get some motion in that direction and things like the study where we retrofit a building in Santa Clara economy and got a lot of PR for being green and all that stuff will maybe out change minds that start helping our penetration.

Sandy Harrison - Signal Hill

Then circling back to a question earlier on some of the things that are going on in the TrueTouch, you guys have got some nice preliminary wins and you highlighted some of the dynamics in the market, as far as the competitive landscape. When do you guys think, with the Antioch and West Bridge, when you introduced those parts early on, you were right in with the Tier 1 players pretty quickly? When do you think that you guys could start seeing similar Tier 1 success with some of the newer TrueTouch parts?

Norman Taffe

Yes, this is Norm again. As far as the Tier 1’s in the mobile space, we have acted to design nearly every Tier 1 handset supplier.

Sandy Harrison - Signal Hill

In a ways these could get money from designs?

T.J. Rodgers

Latency, we’ll see impact second half of this year, significant impact on revenues throughout 2010.

Sandy Harrison - Signal Hill

Then last one for Brad; with utilization rates, where do you get the greatest leverage? Is it from 30% to 50% utilization, 50% to 70% or 70% to 90%; because usually in there is a suite spot, where you really turn the lever?

Brad Buss

Well, we’ve also taken a lot of costs down too. I mean it doesn’t really step up I think as much as you would think; it’s purely linear, so to speak. I think for us it will be Q3, where a lot of its cost reductions hit the full quarter; at the same time, I’d expect the utilization to go up, and that’s why again, I threw out the 50%, not only as an aspiration as T.J. called it, but something I think that’s very doable with some revenue uplift.

So, I think in the next two quarters it will not be unheard of to get four to six points each quarter just because of utilization coming back up to normal, and then you could get a couple of points on product mix on top of that. So the breakeven numbers, the curve was something like 50% to 55% fab utilization, where we are now, with only 45% gross margin if we can get to about $160 million.

So, our cost structure has been cut down enough to a pretty lousy utilization, 50% to 55% is not good. It will get us to breakeven and then from then on it’s linear. The more you can make, the cheaper every wafer gets; you get more revenue and lower costs simultaneously and it’s every extra wafer that matters.

Operator

Your next question comes from Uche Orji - UBS.

Uche Orji - UBS

Yes, this is Uche from UBS. T.J. can I just ask you about SRAM and the growth you saw in Q1? I know you did mention China; how much visibility do you have beyond say next quarter and do you have any sense that there was a cool-in of future demand into the current quarter for SRAM?

T.J. Rodgers

Well, let me introduce Dana Nazarian, the VP of our Memory and Imaging Division.

Dana Nazarian

Hi Uche. Yes, actually the comments that Chris made about visibility and T.J. made about visibility applied to SRAM as well. I don’t think there’s a pool-in dynamic going on. The strength in China is real; it should continue and in terms of Q3 visibility, the SRAM lead times are in-line with the rest of the company. So they’ve been pulled in just like everybody else. We’re booked very well for Q2, modestly for Q3 and we really can’t say right now.

Uche Orji - UBS

Okay. In terms of the shared chip dynamics we’ve all observed, do you think there was an element of that that helped you within the quarter for SRAM, and is there more head room to gain share in that market?

Dana Nazarian

I’m sorry, which dynamic?

Uche Orji - UBS

The market share shipped; I mean I think Samsung is kind of gradually backing away from that market and just in general, how much more potential do you see to continue to gain share in the SRAM market?

Dana Nazarian

A lot actually; so we are completely committed to the SRAM market. Our customers know that we have the broadest portfolio; we have full commitment to next-generation technology. So this 65-nanometer is the first of a long line of technology improvements we’re going to make, which is going to extend our portfolio and so gradually you’ll see us continuing to gain market share. We’ve gained market share for the last several years. We expect that to continue no stopping that growth path.

Uche Orji - UBS

Okay. Let me just ask another question. T.J., do you have the full year revenue expectation for West Bridge. I think you gave that to us last year. Do you have one for this year? I know the visibility’s really very tough now, but any idea you can give us in terms of what you see on the design wins will help us to understand the growth path for that business.

T.J. Rodgers

I know you’re asking me because I tend to be blunt and say things. I’m getting the timeout sign here, so I’ll hand the question over to Dinesh Ramanathan.

Dinesh Ramanathan

Hi Uche, this is Dinesh. Our visibility in the Q3 and Q4 still remains questionable. So I’m not entirely comfortable giving you a number that will give you a yearly number. My expectation though, is that we’d be flat if we grow our numbers.

Uche Orji - UBS

Sure, and then just finally, Brad; I’m not sure I fully understand why you had such a big jump in stock-based compensation from 4Q to 1Q for SG&A. Can you just help me understand what’s happening there?

Brad Buss

Sure. We had some RFUs release. We also had a soft vocal that went on and you also still get the hangover related to the spin. I can walk you through some stuff in some more detail. The key thing is I do expect it to go down every quarter from here as the amortization works its way through, so let me talk about the spin.

You guys were all over us to [Inaudible] power. We went out and got an early IRS release if you will, to do it and we did it. At that point in time, the stock charges, which hit us not only in dilution, in the form of diluted shares, but also in the form of expensing of stock options were totally recalculated, because Cypress is likely a new Cypress and the numbers got bigger.

So the act of spending out caused our stock charges to get bigger and if you look at the GAAP numbers, it caused our GAAP earnings to go down; it caused our GAAP gross margins to go down; it caused the impact of that spinout to become part of our inventory, because anybody who works on inventory in a company has his/her salary become part of the value of the inventory, and if they have a stock option, then that stock option is recalculated based on its spinout, it goes in the inventories. So we’re moving that thing through the bowels of the GAAP accounting system right now. It is the major effect.

When I run the company and I’m trying to think what decisions to make and how to bring cash to the corporation, I have no choice but these are non-GAAP numbers and those are the numbers that I think you ought to judge us on.

Operator

Your next question comes from John Barton – Cowen.

John Barton - Cowen

T.J. a couple of questions ago you were asked about the 62% backlog coverage and how you can have comfort and such growth with that coverage and the response was on the lines of “Hey, it’s a really short lead time environment. People are only buying exactly what they want with two weeks notice to us and we’re shipping it right out;”

However, if I go back to the press release, you are quoted in there as a statement saying basically customers are starting to restock depleted inventory levels and I’m having a hard time squaring up the two statements. So, if you could define for me what you mean by inventory restocking. First off, is it component sitting pre board level manufacturing with your customers, is it customers restocking the inventory chain.

What I’m really trying to get at here is, when I look at your forecasted growth for June, how much of that is really you getting back the true or closer to true consumption rates versus something down the supply chain, restocking and hope that some demand comes a quarter or so down the road?

Chris Seams

John, this is Chris. Let me take that question. The press release comment was along the lines that we actually saw several customers go dark for parts of Q4 and Q1 and not order anything. So actually having them do that was because they were over inventoried throughout their supply chain.

We are now seeing them turn back on, not to the historically levels we’ve seen, but we believe there’s still some growth in those numbers for those particular accounts, but we’ve seen multiple examples of people that turn back their order rates because of inventory and now they are getting closer to what they think their current quarter demand is.

John Barton - Cowen

So in essence, I mean it’s just my own little unique definition, but that’s not restocking per say, that’s just you re-approaching a true consumption rate as a result of under shipping as they depleted inventories in previous quarters; is that a fair statement?

Chris Seams

Yes.

John Barton - Cowen

Okay. If you look at the 4% to 10% growth into next quarter, I think it’s about three basic drivers, right. You have inventory replenishment what we just touched on. We have you re-approaching true consumption and then true growth in end demand. If you take of stab that, you pick the midpoint, 8%; how much of that comes from each of those buckets?

Chris Seams

I wouldn’t even venture a guess, because the statements we get for demand from our customers are always guised under demand and they won’t divulge and we simply can’t get out the components of that and I’m not going to guess.

Brad Buss

I think the only thing you should think about John is a lot of its new design driven, which to me is growth. I would categorize that as growth and that’s in DCD, with West Bridge, PSoC, TrueTouch. I mean I would personally rank it as growth and demand and then restocking last.

I still think there’s a lot of restocking that will happen as everybody gets more comfort going forward. I don’t think that’s even really started, at least for us, because our inventories in this keep going down and down and down and I think they are being very cautious. They are trying to whip it through as quick as they can.

The other anecdote that I found very interesting in this downturn, Q4 and even through Q1, is we have not had one major request for anybody to return inventory and considering the state of some of the financials on some end customers and some of the contract manufacturers, I was utterly amazed. I was expecting to get hammered with $10 million or $15 million of requests and we’ve gotten zero.

Again, if you’re looking for anything, in any downturn, that’s never happened and that’s further evidence to me that these guys are not loaded to the gills.

John Barton - Cowen

This makes sense. It’s in line with what I’m saying. I was just literally wrestling with the statement in the press release and essentially misunderstanding it, so thanks for clarifying that.

Chris, if I could just go back, I bought the topic of kind of getting back to true consumption rates and as I’ve always seen it, it’s one customer, one part type at a time. Do you think that we get back to true consumption rates in the June quarter or December that spill into the September quarter and help drive growth at that point also, just purely on that phenomenon?

Brad Buss

Again, I could be hazarding a guess, so let me hazard one for you. If you look at our end customers’ financial statements and what their sales are, none of them are down anywhere near to what their order patterns reduced to in the first quarter, and even what their Q2 demand statements are. My belief is, as we get towards the equilibrium of where their true demand is based on their end revenue and sell through, that there’s still more growth to be had.

John Barton - Cowen

Fair enough and just a last question if I could; any change in behavior of design activity at customers, meaning has this recession had them push out new development as they try and save R&D or is it the contrary trying to accelerate it so they could be most competitive in the marketplace?

Brad Buss

Yes, if you look at our all of our design metrics, we did see several cancellations of projects at some accounts. Most accounts that were in trouble financially and hit the hardest financially were the ones that did that self assessment. I will say that the momentum going now into the second quarter is they’ve all figured out that the only way to get out of this recession is to innovate and the design activity’s going back up again.

I guess what we’re lucky with if you will; we’ve created our own luck with having products like PSoC and like West Bridge that helped them innovate their way out of it. So our design activity, after taking a bit of a hit in the late fourth quarter and into the first quarter, has turned up dramatically.

Operator

Your next question comes from Glen Yeung - Citi.

Glen Yeung - Citi

From Citi. Brad or T.J., when you think about the revenue opportunity for Cypress in the next cycle, and I recognize that we don’t know when that’s going to be, but will Cypress’ revenues as be higher, obviously excluding SunPower than they were in the past cycle?

T.J. Rodgers

We feel embarrassed when our semiconductor revenues are below $1 billion and that’s our immediate target and we launch products and manage our business units in our divisions in order to achieve that. So the answer is, yes. We are now trying to bring out products that have bigger opportunities. We didn’t talk today about PSoC5, which is a 32-bit micro controller, will add how many billion under the demand?

Brad Buss

More than double the TAM, over $12 billion.

T.J. Rodgers

So, that will take us from five and change to $12 billion. PSoC5 is due to take off this quarter and so we’re absolutely doing what’s required to get a lot bigger. In the SRAM, the comments about taking share and becoming number one in the world, I’d like to second that and that market’s about $1 billion to $1.2 billion and we’re currently in the 30% share range and we aspire to be number one.

I personally worked on SRAM since 1975 and we’re going to be number one in that market. So yes, we’re going to grow and we’re going to get back to $1 billion and when we get there, we’re going to tell you what the next step is?

Brad Buss

Glen, just from my perspective sitting as a CFO, I mean we’ve got strong growth drivers in every single one of the divisions, which most companies are lucky to have something going on right now.

So I think as the economy recovers the design win momentum we’ve been building last year and into this year, to the point three and five PSoC really aren’t going to have much in revenue this year. I mean 2010 could be a water shed between those two such momentum going in SRAM here as just starting off.

I don’t see any real negatives and I think we’re pretty comfortable in aiming to outgrow the semi industry for the next few years. More importantly, we’re now going into end markets we could never address before of these products. So the TAM expansion, yes, it’s a big number, but it’s more in these verticals that you can get into and cross sales and you’re already seeing, we’re just touching where we think we can go in the handset space and more particularly, the smart phones, which even in this crappy economy are still growing nicely.

So I think we’re positioned extremely well and hence the reason we were very aggressive in Q4 when the world was falling apart, right. We’re very comfortable with what we’re doing and we have very good design visibility. I think we’re being modest in what we think we can have going forward.

Glen Yeung - Citi

Maybe as a follow-on to that, in the last cycle, I think ‘99 through ‘02 or ‘03 kind of cycle, it took a number of years for the tip industry to recover back to the peak levels and recognizing that the peak then was a bubble, but when you think about the time it will take to get back to those levels and the economy will make a difference here, but do you think the likelihood is that your slope to recovery is steeper this time than it was in the last cycle?

T.J. Rodgers

Yes, we do. In the last cycle we got cratered with the SRAM business TAM going from $6 billion. Then that recovered slowly and we had some other initiatives, but our other initiatives, namely SunPower and PSoC weren’t really that effective between the 2000 and 2004 timeframe. So, I do believe that the overall semiconductor market may take till 2011 to recover SIA figures to what 2008 was.

The only way you can grow with an individual company in that environment is to take share and then you have to get in the new products and we’ve been investing in those new products for a couple of years and one of them is out and the other one’s going to be out this year. So yes, we’re going to take share. We’re going to grow faster in the market and we’re going to grow faster than we did as an SRAM company in the 2000 and 2004 timeframe.

Brad Buss

Yes, we’re a whole different company with total different markets in this cycle Glen.

Glen Yeung - Citi

Understood; so actually Brad, just one more for you then. Operating expenses, when you kind of get back to those levels, compared to now, I mean do you think your not maybe not a dollar, but well maybe both on a dollar and on a percent basis, what do you think you need to do operating wise to get there?

Brad Buss

I’m not sure if I exactly understood the question.

Glen Yeung - Citi

Do you need to raise your operating expenses to recover back to those revenue levels and if so, by how much?

Brad Buss

I don’t think significantly. I mean we’re making some pretty heavy decisions here, we’re outsourcing more. Against Obama’s wishes we’re putting more stuff offshore near centers of excellence. I think we’re going to get the leverage from them and again at the same time to T.J.’s point, we continue to narrow down our focus right, our manufacturing footprints down, our design footprint’s down. We’re rolling out this battleship of products and we’ll list of little derivatives coming off them.

We’re making some permanent changes into the cost structure and really how we run the company. Obviously you’ll have commissions at the level and we’re going to need more FAE to support all the true touch designs that are coming in the hopper, etc, etc; but the leverage I think will be very heavy on the operating margins when we get to a normalized revenue level.

Glen Yeung - Citi

Okay, last one from me, maybe for Chris. You guys, I know China wireless is not a huge market for you, but you did mention it up in Q2. So, just want to be absolutely clear that you think that demand for your chips into China wireless infrastructure is up in Q2 and any thoughts you have about that the pattern of that business in the second half of this year.

Chris Seams

Yes, I mentioned it. It’s mostly an SRAM play for us; the major accounts while NTT for us in that market. While there’s a big build out that’s being funded there with a big burst of capital, we believe that they’ll get the major metropolitan areas hooked up on the 3G architecture, but there are a whole lot of cities. There are a million plus people that have to go beyond that and really it’s about linking up the whole country. So there’s going to be sustained revenue beyond just the initial capital infusion.

Glen Yeung - Citi

Is that to say that you think second half will likely be higher than first half?

Chris Seams

No, I didn’t say that.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

Chris, I guess back to an earlier comment, I thought I heard you say that you don’t expect to take inventory down further in the June quarter, is that correct?

Chris Seams

That is correct. Based on what we’re seeing in terms of demand statements from all the end customers, I believe that they are going to have more orders placed on them and that they are going to have to probably keep it flat or grow it to service that demand.

John Pitzer - Credit Suisse

Doesn’t that mean that the June guidance kind of is at consumption? I mean we can argue that consumption’s? We can argue that consumption’s depressed from where it was a couple quarters ago, but that we sort of [Inaudible] we are back to consumption levels, is that fair?

T.J. Rodgers

It’s fair for the current quarter. Remember there’s a big seasonality in the world, in the consumer and computation markets and therefore Q3 should be bigger than Q2 if we are expecting to sell more.

John Pitzer - Credit Suisse

Then if I do that and then I kind of look at the drawdown in Q1 and add it to the March revenue, I’m already at the high end of your guidance; you still have a fairly lead view on concept themselves. It’s not a bad thing, but I’m making sure I’m doing the math right?

T.J. Rodgers

Mine’s not math, it’s just based on the end customer statements we see for the second quarter. We believe that the guidance is in-line with what they’re going to demand from all channels.

Brad Buss

Yes, our guidance for Q2 says we’re going to make it; the consumption rate, and we could be at the high end of that guidance. Some customers get nervous and order a little bit extra for inventory. By the way that happens at every single up-turn, it doesn’t happen in the beginning.

Then what happens is, if they get an order, they call up and say “Give me ramps. Can we have some more please” and we say no in six weeks and then they panic. Then they say we better carry some safety inventory and that up tick, we’re not seeing right now, but that’s the dynamic that could put us at the high end of our range for the third quarter.

John Pitzer - Credit Suisse

Great and then T.J., on the TrueTouch TAM for mobiles, is it unreasonable to think that by Q4 we’re at sort of a run rate where touchscreen is 20% of the market and this is sort of a market TAM that’s approaching 200 million?

Norman Taffe

Hi, this is Norm. I think those numbers are reasonable. I think touch is going to penetrate not just the smart phone segment, but the high end of the mid end segment and so I think those numbers are reasonable and I think the numbers could go higher next year, and would likely go higher next year.

John Pitzer - Credit Suisse

And then Norm, opportunities within the notebook market relative to some new electrics that are coming out, do you see that and are you working with customers on that front?

Norman Taffe

We are absolutely working with customers coming out. The next version of Windows, Windows 7 is noted to have touch capabilities. That may not be a significant revenue driver this year, but I think it’s a very good opportunity next year and we’re working with large companies on solutions for exactly that.

Operator

Your next question comes from Chris Danely - J.P. Morgan.

Chris Danely - J.P. Morgan

Can you just give us a sense of what you expect in terms of relative growth rates for your three product areas and also the various end markets for the rest of the year?

Chris Seams

This is Chris. Let me give you end markets. Like I said before, I can’t give you through the end of the year, but in terms of growth rates for the current quarter we’re in from the first quarter, every end market for us will grow. The expectation is that the consumer market would rebound the hardest in Q3, but again we can’t see that yet. The markets that are rebounding, the most for us would be handsets and PCs during the second quarter.

T.J. Rodgers

Let me answer for the divisions. As opposed to polling them one-by-one and having them make embarrassing and implicating statements, they don’t know. They got 10% in Q3 booked again roughly and they just don’t know. We know Q2’s going to be better than Q1. We know Q1 is the bottom. We’re hoping Q3’s going to be better than Q2 and we’re feeling confident it may be, but we got 10% of Q3 booked, we just can’t say.

Chris Danely - J.P. Morgan

Also with the utilization rates and gross margins going up, Brad can you talk about which of the, I guess three quarters for the rest of the year you would expect your highest incremental gross margin? Would it be Q2 or Q3?

Brad Buss

Part of it will be demand. I would think it will be Q3, if I had to be a betting man, if I get a decent level of seasonal demand. With a lot of the design wins that we think if they continue to happen between the demand plus the mix, it would have a positive impact on gross margins.

Chris Danely - J.P. Morgan

Last question, you mentioned that options expense is going down in Q2 and I guess it’s going down for the rest of the year. Can you just give us a sense of the rough numbers and the breakout of your options expense for the rest of the year or how much you expect it to trend per quarter?

Brad Buss

I don’t have all the detail with me. I can follow-up with you. I would think around $5 million or $6 million a quarter decrease.

Chris Danely - J.P. Morgan

Per quarter?

Brad Buss

Yes. For the next kind of two quarters, I got to ease a visibility into that.

Operator

Your last question comes from Adam Benjamin – Jefferies.

Adam Benjamin - Jefferies

Jefferies, thanks for fitting me in. First question is for Norm on the PSoC side; you indicated you got wins at all the top OEMs. Obviously the design cycles are such that you probably have visibility into 2010 at this point, but clearly all designs are not kind of created equally. So just curious, as you look out to those OEMs, can you give us some sense as to how many OEMs you expect to be shipping in multiple millions next year? Thanks.

Norman Taffe

So I guess to add a little bit of color to the guidance I gave earlier relative to that, I think we would certainly have nearly all of them shipping in multiple millions next year. I would also, let you know one thing; we mentioned Tier1 suppliers earlier. It’s not just isolated incidents. One of the Tier1 suppliers already has it designed into more than 10 different handsets, so I think there’s a latency, but we certainly expect it to be significant and across the board.

I will tell you another thing; while we had a lot of success in mobile in CapSense, which was a smaller value contribution at each account in terms of what you’re bringing, it was also less penetrated. We are more broadly penetrated by a lot in touch than we were in CapSense. So I think both of those give us bottom confidence for growth.

Adam Benjamin - Jefferies

Then second question for Dinesh. Basically, a similar question on the West Bridge side. Obviously everyone knows you’re a big customer this year and some indications that you’re getting some good traction for next year. Can you talk about how many OEMs you think you’ll be shipping in multiple millions of units in 2010 in there?

Dinesh Ramanathan

At least four.

T.J. Rodgers

Thank you. We had a tough quarter, like the world did, but we’re feeling decent amount of prospects for the future and we’re looking forward to a nice Q2. Thank you very much for calling in.

Operator

Thank you. You may disconnect at this time. This does conclude today’s conference call. Have a nice day.

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