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Cypress Semiconductor Corporation (NASDAQ:CY)

Q2 2013 Earnings Call

July 18, 2013 11:30 am ET

Executives

T. J. Rodgers - Co-Founder, Chief Executive Officer, President, Director, Director of Cypress Envirosystems, Director of Agiga Tech and Director of Bloom Energy

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

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

Dana C. Nazarian - Executive Vice President of Memory Products Division

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

Analysts

Blayne Curtis - Barclays Capital, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

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

Ian Ing - Lazard Capital Markets LLC, Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

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

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

Ruben Roy - Mizuho Securities USA Inc., Research Division

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Srini Pajjuri - CLSA Limited, Research Division

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

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

Operator

Good morning, and welcome to Cypress Semiconductor Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] This call 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 second quarter of 2013. We'll start out with Brad Buss giving financial and other metrics. Brad?

Brad W. Buss

Thanks, T.J. And thanks, everybody, for attending. Just to click a couple of disclaimers. Everything here is based on our preliminary unaudited results. Take a look at our 10-Q when it will get filed in early August. And obviously, we'll be making a lot of forward-looking statements. We don't have a duty to update them. Please take a look at all of our nice risk factors, yadda, yadda, yadda.

Housekeeping, nothing really going on. We had a really good quarter as we've been saying. We felt the Q4 issues with some of the end customers was an aberration. We're back in the saddle, and we feel real good about where we're going. So look forward to sharing some of that with you.

And so specifically on Q2, our revenue came in at $193.5 million, well ahead of the top end of our guidance of $178 million to $186 million. We increased 12% sequentially, and obviously that's a rate that's much higher than normal seasonality.

By division, MPD increased 7%, driven by pretty broad strength across our nonvolatile product lines, our Async and our clocks. DCD decreased 6%, and they are driven by some customer-specific declines in USB, offset by some really good strength in Trackpads, where we hit record revenue for us in the quarter.

PSD was the big gainer. They increased 24%. We had a lot of China design wins and TrueTouch beginning to ramp, and we had very strong seasonality in CapSense with some of our major handset customers.

Some additional revenue color by end market. We saw great, good increases in handsets, industrial computation and automotive. We saw decreases in consumer end markets, nothing really outside the norm.

By channel, our direct sales channel increased 10%, our disti channel increased 13%. PSD is accounted for about 75% of revenue, which was pretty much in the zip code as prior quarters.

By geo, all geographies except Americas grew. We had decent strength in Asia and Europe. Our bookings increased 13% in Q2, driven by PSD and MPD. And by geo, Japan and Europe drove what the U.S. is lagging.

The book-to-bill was slightly up from Q4. We came in at 1.05. That's a 21% increase year-on-year. PSD and MPD were above average and PSD grew the most. And again, by geo, Asia is growing the most as we normally see in our Q3, followed by Japan. And guess what, the U.S. is lagging.

Our top customers grew 22%. We continue to have one large handset customer continue to be our only disclosable customer. They clocked in close to 15% of revenue, and I expect that percent to decrease more down to the historical range of about 10 to 12 in Q3.

For the quarter, on a GAAP basis, we had net income of $3.8 million. That was $0.02 per diluted share and that was a substantial increase from a loss of 19% in the prior quarter.

We obviously have higher earnings this quarter, and we also had a one-time tax benefit of $11.1 million, which was recorded as a GAAP-only benefit, and it had no impact to non-GAAP and had no cash impact.

Our non-GAAP net income was $21.6 million, that yielded a really nice $0.14 per fully diluted share. And as we've been talking about, we had really strong financial leverage in the quarter, and it was really across the board. We had great revenue, the margins expanded, very tight on the OpEx side. Very pleased with what the entire Cypress team would be able to pull off, and we see that continuing next quarter.

So just to put in perspective. I mean, that was a 4x increase over the $0.03 we reported in Q1. The non-GAAP gross margin, as you saw, was $53.1 million. We obviously had better factor utilization, our fixed overhead cost are smaller, our factor as revenue grows and we manage those costs. And we had a favorable product and customer mix.

If you take the Emerging Tech Division out of it, our core group gross margin was 54%, which is pretty, pretty good when you look across our competitors.

Utilization in our Minnesota sub, based on wafer starts was 71-ish percent. That was up 11% sequentially, and we expect utilization to stay up in that range due to product mix and we're also getting much better cycle times through that fab. Operating expenses, manage very tight, $79.2 million, that's down 2% sequentially, even with a big revenue increase, and that's really at the lowest dollar level since Q1 2010. We have a lot of programs still going on and we do expect to see OpEx decline on a dollar basis in Q3, as well as Q4.

OIE was a loss of $1.2 million. We had nominal interest income on flat cash and the standard charge for the revolver. Tax expense was pretty consistent at $1.1 million, about 5% of PBT.

If you take a quick look at the balance sheet, our cash was slightly flat with Q1, but we also had some pretty big payments. So we paid out $16.1 million in our dividend, $7.8 million in CapEx, just over $7 million in some final disti costs related to Ramtron. We paid down the revolver by $5 million, and we took out the mortgage on our Colorado Springs building that was at a fairly high interest rate that we inherited, and that was $3.3 million.

The vast majority of our cash is onshore. We had $30.4 million in cash from ops, so that was a huge increase from the prior quarter. That's about 16% of revenue and we had free cash flow of $22.6 million.

So we're getting much closer to the historical levels where we talked about, and I think we'll see that continue to grow going forward.

Fantastic job in the inventory area. Our net inventory dollars came in at $98.6 million, that was down 10% from Q1, as the teams there worked very hard to align all the end demand and lead times together.

Ramtron was $27.3 million at that. So if you take that out of the equation, our core business was at $71.3 million, and that was the lowest level since Q1 of 2006.

Distis increased 3% in dollars, 7% in units, mostly driven out of Asia. The channel remains very low in inventory. They came in at 6 weeks, that was down from the prior quarter and at the very low end of where we'd like to see our model at 6.8%

And again, just to remind everybody, we obviously don't recognize any revenue from any of our product lines. And so the distis have resold it, so we have a very conservative rev accounting.

Our receivables dropped nicely. They were down $18 million from Q1. The DSO went down 16 days. Most of that due to linearity and obviously the aging continues to be good.

As I said, we took the revolver down by $5 million. We're in compliance with all of the covenants. CapEx was $7.8 million, depreciation was $10 million, and again, that's near an all-time low as well.

Share count, the weighted share count was 147.3 million. Fully diluted was 159.8 million. We ended the quarter with 148 million shares outstanding.

So as we cruise into the guidance, we entered Q3 at a book-to-bill of 1.05. We're looking at revenues in the range of $201 million to $207 million, and that's up 4% to 7%. And just to remind everybody, this guidance already reflects reduced demand from a major handset customer. So if that hadn't happened, this nice guidance after a very strong Q2 would have even been higher.

We expect all divisions to increase sequentially, with most of the increase driven by PSD as we have a lot of seasonality, new customer and new programs ramping in PSD, mostly in the Touch arena.

Gross margins, we expected to increase again in the range of 53.5%. Give or take, hopefully, we'll see a little more on that on the upside. The core business will run at higher levels than that. The ET Division will continue to be a slight drag.

OpEx anticipate to go lower again in the $78 million range to maybe $79 million. And as I said, I expect to see that go down a couple million bucks in Q4.

Net interest expense of about $1.8 million. A minority interest benefit of about 400k, a tax expense of about $1.5 million, CapEx of around $10 million, depreciation around the same number.

Fully diluted share count around 161 million, non-GAAP earnings per share, if you mush all that together, would be in the range of about $0.17 to $0.18 and that's an increase of 22% to 34%, sequentially, and obviously, far better than the revenue growth.

So like I said, I mean, I think we're back in the saddle. We feel pretty good where we're going. Still low lead times. The world is a little crazy, but we feel very good with what we're doing and where we're going and I'll turn the call over to T.J. for a few comments, and then we'll go to Q&A.

T. J. Rodgers

Normally at this time, we have Chris Seams talk about the market. Brad gave a lot of that information. Chris has changed jobs. We have a big investment in DecaTech, our assembly and test subsidiary that is chartered to use SunPower wafer technology to do assembly and test at world class cost. Chris has become the CEO of that startup.

Normally, I write a little mini letter as part of the release, and I usually don't talk about it. Today, I want to talk about only the final paragraph.

We won 4 products awards last quarter, and we're pretty proud of that. Our design and architecture teams have kicked in to the high gear, the best we've ever done. Embedded Computing Designs named their PSoC 4 chip the Editor's Choice Product for May and our fourth-generation Gen4 Touch chip in June. So we won 2 awards back to back. We also won the 19th Annual Product of the Year award given by Japan's Semiconductor Industry News. And finally, AgigA Tech, another of our subsidiaries, won a gold medal for its non -- very large nonvolatile memory systems in the renowned Edison Awards.

Last quarter, we introduced PSoC 4. It is the fourth-generation product from Cypress and PSoC. It features an ARM 32-bit M0 core. Wrapped around that core, and we actually -- if you think about the value of the core, it's pretty much for free, it's what we wrapped around it that creates the value. That includes, in addition to the 32-bit computer, a 36-button CapSense block, so you can put a CapSense controller in anything you use the chip for. Four programmable logic blocks, so you have programmable logic to put your own stuff in, your own digital functions. Programmable analog, so you can put in your own analog subsystem. Programmable serial interfaces, so you can flip the switch and make it an I squared C [ph] compatible product, an I2S product, UR, whatever. Programmable I/O pins, so the parallel bus can also be programmed and then a wrap with timers, counters and waveform generators, all of which are programmable.

And all of that, with the 48 megahertz, 32-bit core costs $1, and the size of the chip we make good margin. I measured before we introduced the product, my little fingernail is 59 square millimeters and this chip is 1/10 of the size of my little fingernail.

We introduced an MFi digital audio development kit, second announcement. MFi is made for iPod, iPhone, iPad, so basically, it's a development kit that allows people to make stuff that hooks up to iPhones. So as you know, iPhones you can get glucose meters, you can get oscilloscopes, there's a huge industry that's forming or assisting the IOS system.

The idea is you can be in a garage, and then you can hook yourself up to a phone, have a lithium-ion power source you can use in the back, in the cellphone, a very high level display and even do phone calling so you can have a remote site that calls in.

Their change was to a new connector called the Lightning connector, it's got fewer pins, it changes the way the thing works. The biggest market for the MFi ecosystem right now is audio, both recording of audio, studio quality audio, which the MFi system allows for. That's done through USB, USB normally can't do high-quality audio and you have to embed a timing signal in it. We know how to do that because we've been in USB since 1998. Therefore, we have a kit, state-of-the-art for their new system. The market is $7 billion.

We introduced our next-generation Gen5 touchscreen controller. It's part of the what the good news is, the financial good news is for the quarter. What our customers are starting to discover is that noise from chargers, when you're trying to run your phone when it's plugged into the wall charging, which is a very common occurrence, it happens all the time on PCs. In cellphones, battery life goes down due to more and more features, drawing more and more power. A lot of people will have their phone and their charger at their desk, for example, and still want to use it.

It turns out the chargers in the world, the most notorious one being the AT&T charger, produces noise waveforms in the 10-volt range, and this noise can disrupt touch. It can cause the phone to think it has been touched when it hasn't or it can cause the phone not to sense a touch when it has been touched. And the problem can get bad enough to render your cellphone literally unusable.

Some vendors have solved the problem by creating their own charger and they've made high-quality chargers that doesn't have all that noise. The problem is that people buy chargers at the local electronics mart and they don't get the good one, and they're all compatible with USB. So you can charge your phone with any USB charger, and if you pick the wrong one, your phone won't work and if you have one at your house and one at your office, et cetera, you can have trouble.

The cellphone manufacturing world is discovering this is a problem. The blogs are loaded with charger noise complaints, and they started worrying about that. And we've had that problem solved for over a year, and that solution, along with improved software in our part, which has been our problem, has finally started to get us traction.

Another thing that's important in cellphones is glove. And if you're in the Northern climate, in the winter, you don't want to take off your glove and use the cellphone. The problem is the glove insulates your finger from the phone and reduces the signal.

Other companies have glove solutions, which are a little bit non-optimum in that in order to go from the normal mode using the cellphone to use the glove mode, you have to take off your glove to turn on the glove mode. In our case, when you put down a gloved finger in a cellphone, if you text with your finger, it's lower in capacitance and it automatically switches to the glove mode, and we think that's enough of a selling edge to get us some design wins going into this next cycle.

We've got a Bluetooth radio that works, we've qualified it. It's in our SA technology. That's a technology that we use to make PSoC or CapSense buttons and slider chips in our TrueTouch cellphone chips. So we will now be able to make quickly out of our library chips that have all of the PSoC capability that I've described over the years and a radio so they can hook up wirelessly from the battery-powered system.

And finally, our Board of Directors has approved the cash dividend of $0.11 per share. That's it. We're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

Barclays. Brad, if you could talk about where you saw the outside. In Touch, you said new ramps, China, is that Tier 1 or Tier 2 and then kind of how does that trend into Q3, and then kind of you just comment on is this full year forecast given the upside you saw still the right one?

Brad W. Buss

I'll let Mr. Touch respond, Blayne.

Hassane El-Khoury

This is Hassane, I run PSD. So to answer your question, it's not just in China that we had, although it was our strongest growth in Q2. We've had always talked about a strong funnel in the first half of the year, and moving forward, a lot of these phones, you know, namely from Samsung, Sony and Huawei as well will start ramping up in the second half of the year, and that's really what's going to fuel the continuous growth that we saw in Q2, into Q3 and Q4.

Blayne Curtis - Barclays Capital, Research Division

And the full year guidance is still the right one?

Hassane El-Khoury

Yes. We've always said 15% to 25%. I would expected to be in the lower end of our prior range, mainly due to the customer ramp, although our design wins have been very strong to fuel that as well.

Blayne Curtis - Barclays Capital, Research Division

And then, Brad, if you could just talk about -- I know you don't want guide 2 quarters out, but December has historically been a down quarter for you. Maybe if you can talk about -- I know there's no normal seasonality anymore, but if you could talk about the puts and takes into the December quarter, if you feel you're going to have some business that probably will see down seasonality. What are the offsets to the outset?

Brad W. Buss

I think 2 things to think about. I mean, one, the visibility is so low as you guys know. I mean bookings and backlog, I mean our lead times are 4 to 5 weeks, right? You can get a semiconductor quicker than a tesla these days. It's already plugged there, but I think with some of the design momentum that we have, we could have a little better than normal seasonality, but I think it's too early to call. Like Hassane was saying, we've got some pretty interesting thing in the hopper, but we probably need another quarter to let that flush out.

T. J. Rodgers

That was a long, "we don't know," because our -- backlog is beyond your visibility. And in our world where we're working actively in shrinking our inventories, shrinking our cycling time, lowering our lead times and thus we're in a business where we have -- we don't start seeing backlog for the fourth quarter for a while. The design wins would say the fourth quarter is going to be a good quarter.

Blayne Curtis - Barclays Capital, Research Division

Got you. And just one follow-up on the CapSense, I think there's a well-known customer there and well-known pullback there. Seems like it grew in Q2 and then maybe pulls back in Q3. Is that what I heard from you?

Brad W. Buss

Yes, I think I said when I give you the guidance, that anticipates adjustments that are going on at that customer.

Operator

Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Wedbush Securities. I was wondering if you could dig it a little bit deeper on the question that Blayne had asked regarding the guidance that you gave full year for Touch? And you said it was going to be towards the lower end and it was the timing of customers? I was wondering if you could talk about the puts and the takes on that? And then I have a follow-up question.

Hassane El-Khoury

So we talk about the growth. Like Brad had mentioned, we've always had 15% to 25%. Now, of course, our design funnel supports a very big ramp to get us into that range. But like you just said, we don't have a lot of visibility as far as the backlog for Q4 to really comment on exactly where we're going to land in that range. Our design funnel supports it, but we always have to talk about customer softness at the end customer for the ramp. But I can tell you, we released the Gen5 that T.J. had talked about, and that is not just going into new design. We're actually gaining share because of that. Customers are very sensitive now to noise performance. For example, T.J. mentioned that you can buy charger off-the-shelf. The flip side of that also is that user experience is starting at the store, and the store has just these black chargers that you get on the stand. So customers are seeing really performance from the store. Our end customers are coming to us based on our Gen5 launch and actually asking for it. Therefore, the market share is going to increase, our design for new phones is going to increase, and we're just waiting to see a little bit more of the backlog to see really see where we're going to be between that 15% and 25%.

Brad W. Buss

Yes. I think the other comment in there is there's -- obviously, we're dependent on the customer. I think like you said, our design positions actually got better throughout the year, not only for this year, but building for next year as well. And I think you'll be pleasantly surprised to see where some of those chips will be going, going forward in some of the higher end phones.

Betsy Van Hees - Wedbush Securities Inc., Research Division

That was very helpful. And then as we look at the product division, we saw a really nice bump in of course, PSD, but then also MPD had a nice move. And I think you talked about Ramtron, the nonvolatile memory being one of the drivers for that. And I was wondering if you could talk about how we're seeing the SRAM business and how you guys are -- what you're hearing from your customers regarding demand, actual orders for backlog as we look into Q3? And then, my last question, within that question, is if you can help us rank the divisions, which ones you think are going to grow the most in Q3?

Dana C. Nazarian

Okay. Betsy, it's Dana. I'll answer the memory question and then I'll let Brad answer your last question. On the SRAM side, both the demand and the backlog is pretty steady. We see flattish to slightly up revenue projections. So it's a pretty steady market and we're continuing to gain share. On the growth in the division, it wasn't just SRAMs, probably more than 1/2 of it was due to the F-RAM acquisition that's continuing to grow. We're getting very nice, broad customer base that's developing. We increased both our revenue and our customer count by double-digit percentage wise. And we still have some legway to grow there. So the thing that we'd like so much about the business is that's a very broad customer base, many, many small and midsize customers, so it's a very solid base that we can grow from.

Brad W. Buss

And then Betsy, like I said before, every division is expected to grow. I mean, the majority is going to come out of PSD, but we do expect MPD and DCD and even our little ETD engine to continue to grow as well.

Operator

Liwen Zhang.

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

And would you please give us the booking -- book-to-bill numbers for each business unit as you did before?

Brad W. Buss

We're just kind of given the color on that. Like I said, PSD and MPD were above the average, so they're slightly above the 1.05. Nobody was at like 1.15 or anything like that. So they're all relatively around the average.

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

I noticed that you guided Q3 gross margin up versus Q2 allow and the utilization rate is to be stay flat. So what will be the driver for the gross margin potentially for this quarter? That's all.

Brad W. Buss

Most of it's products and customer mix going on in the quarter, plus, again, like I mentioned before, the fixed overhead. Obviously, it's fairly fixed. So as revenue grows, that percent becomes a little smaller, so you get a little bit of benefit from there.

Operator

Doug Freedman.

Doug Freedman - RBC Capital Markets, LLC, Research Division

RBC Capital Markets. I guess to start with, let's dig in on USB 3.0. Any signs of progress there? What are you guys seeing that had been reported to be a pretty strong design win area for you?

Badrinarayanan Kothandaraman

My name is Badri and I run DCD. We'll give you a quick update on USB 3.0. Our design win pipeline remains very strong. In fact, in the quarter that actually ended, we had our maximum number of QFTs [ph] that we call it that is quality footprint select, which is also another name for design win. We have over 750 customers who are either sampling or placed prototype orders with us. We got a bunch of diverse applications designed in into USB 3.0: machine vision, cameras, 3D gestures, then surveillance cameras, HD capture cards and we got new applications such as the FX3 going into service. With regarding revenue, Q2 was slightly down with respect to Q1 because a couple of big customers -- we had a couple of big customers for sure. We think that's going to be covered by Q4. So we still remain actually pretty excited, and we will continue to grow every quarter, and we'll continue to grow more in 2014. I'll also give you color on 2 new products that we will be talking about very soon, and we are working on them as we speak, and we expect to give you an update on it next quarter.

Doug Freedman - RBC Capital Markets, LLC, Research Division

All right, great. Dana, real quickly, can you give us an update on the SRAM legal battle with GSIT? Are there any dates that you care that we should be paying attention to?

Dana C. Nazarian

Well, in the last quarter, the ITC ruled that GSI didn't infringe the 4 patents that we have asserted in that case, which surprised us. However, we still have a battle going on in the District Court. We're going to continue to fight for the IP that we created, we've developed and we invested in so heavily.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Any dates in that District Court hearing that we should be paying attention to?

Dana C. Nazarian

None in particular. That's going to be fairly drawn out.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Okay, great. If I could move onto to PSD, the Touch stuff. Can you we get the color on sort of where the design wins are? Are they in mainstream handsets, mainstream smartphones? What are you guys seeing? In terms of, are these high-quality touch or are these guys just looking at pricing being the key driver?

Hassane El-Khoury

Doug, this is Hassane, again. It's actually across the board. We don't look at it as low-end or high-end. A lot of our wins today, they are ramping up, as well as our design wins, majority of them are flagship products. Therefore, they require a more performance. Glove is one of them that you just mentioned, but a lot of more advanced features like the noise performance. Now from the ASP side, I don't look at the ASP as a regional or a category. We purely look at it as a volume, and that's across regions. So based on the volume of phones, lower phones, even in China, lower volume will demand higher ASPs, and we're seeing that as well. But when you add to it the improved features that we are putting whether in Gen4 already and Gen5 in the second half of the year, that is what's going to live drive our growth.

Brad W. Buss

I think like he's saying with the Gen4 ones that are coming plus, particularly with Gen5, you'll not only see flagship, but you'll also start seeing more of the higher end stuff that you guys all like to focus on. We are -- like we've said from the beginning, we're very focused on every segment in here. The low end of volume stuff from a contribution margin standpoint, they all contribute very well.

Doug Freedman - RBC Capital Markets, LLC, Research Division

How does the blended ASP look? Any idea that you can give us on the trend to that?

Brad W. Buss

It's been pretty consistent with what we've expected. I mean you get a little bit of downward decline in that, really based on volume. But like Hassane is saying with some of the higher end features coming, and especially as Gen5 ramps, that tends to be a higher ASP that will help start benefiting things on a going forward basis as well. So the gyrations in price that you saw 1.5 years ago, I mean those are long over.

Operator

Vijay Rakesh.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Vijay from Sterne Agee. Just a question on Gen5. It looks like you're starting to get some good traction on Gen5 and as you've mentioned, based on some design wins, some new high-end forms by the end of the year. So looks like a nice turnaround there. Can you give us more color on what you think that is the Gen5 setting you break back into some of the -- some of your legacy Tier 1 accounts?

Brad W. Buss

Yes, so that's part of the comment I talked about earlier regarding we are gaining market share with our Gen5. Not only Gen5 though, I want to focus on also Gen4 and the performance that T.J. talked about as well. But to talk about Gen5 specifically, there are 2 drivers. We have a Gen5 M, which is a mid-range size for phones, and that's driving a lot of the flagships and allowing us to get back into a lot of the flagship phones with a lot of current OEMs. So gaining share at an existing OEMs, but also when you look at the broad China customer base, it allows us to penetrate that market as well. We have another chip coming out, which is good, we're working already on first silicon, which is going to address the bigger size, and that's going to fuel more design wins in the second half of the year towards Q4 to really get us back on track in 2014 as well.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

All right, great. And going back to the industrial auto side for PSoCs. What are the big tailwinds there that's driving growth there?

Hassane El-Khoury

Specifically for automotive, this is Hassane again. In the automotive section, we see a lot of the gain in also the TrueTouch or the user interface, both in the touchscreen arena, as well as capacitive sensing. When we talk about noise performance or reliability in the cellphone market, you can imagine how important that is in automotive. It's not, you can return your phone, get another one, that doesn't work out for a car. So when a customer are putting advanced UIs or user interfaces in their car, they look at Cypress as a very high reliable, high-quality supplier. So we've had a lot of traction, specifically in Japan. You've seen some of the press releases that we had with Toyota and Tesla here in North America. The second half of the year is going to be a lot more models coming on. As you know, a lot of the new models for 2014 will start ramping up around the September timeframe. So we're going to maintain seeing growth with a very high market share in automotive there. To follow-up with that, we have PSoC 3 and 4, what we call platforms. That's a longer design tail for an automotive, but that's going into body electronics, comfort and convenience, power seats, power mirrors and so on. And that's going to follow-up our user interface ramp towards 2014 and 2015. That's the long tail for automotive for you.

Operator

John Pitzer.

John W. Pitzer - Crédit Suisse AG, Research Division

It's Crédit Suisse. Brad, just quickly, when you look at the September revenue growth, about 4% to 7%, is there a big differentiation among products groups or is everything expected to be up about the same, can you give us a little bit color around that?

Brad W. Buss

Yes. Like I was saying, I mean, the PSD is going to grow substantially more than any of the other group in a percent-wise and a dollar basis.

John W. Pitzer - Crédit Suisse AG, Research Division

So Brad, everything's growing in September?

Brad W. Buss

Yes.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, when you think about the touch market, can you guys help me understand how tablets and PCs are starting to bleed into this year, and if not this year, next year? How do we think about touch in, specifically, smartphones, tablets versus PCs?

Hassane El-Khoury

John, this is Hassane, again. Today, we see -- for us the growth is -- a lot of it is in the unit sales of cellphones, both high-end and low-end cellphones, that's really the volume drivers. We're watching the tablet market, as well as the ultrabook market. As you know, there is a lot of softness there. So we're putting a lot of our focus on the cellphone and that's going to be the primary growth. As you know, we're -- we won the Amazon eReader platform. We're heavily engaged for the tablets, but that's more into the 2014 volume for production. But we're heavily engaged across the board because our products, as I mentioned, are starting to target the higher sizes as well.

Brad W. Buss

I think, John, going forward in '14, you'll see more revenues and design wins, especially with some of our Gen5 and bigger chips. But like Hassane is saying, that whole notebook thing been very choppy, been very inconsistent, but we do expect to be a player in the large formats as well.

John W. Pitzer - Crédit Suisse AG, Research Division

And Brad, can you just remind me, as the screen size gets larger, how the economics work? Is it the higher revenue, higher gross margin? Or how do I think about that?

Brad W. Buss

Yes. I mean, it's obviously a higher revenue. I mean, they'll be single-chip solutions, but they'll have a much higher ASP than a high-end smartphone.

John W. Pitzer - Crédit Suisse AG, Research Division

A higher revenue imply higher gross margin? Or TBD?

Brad W. Buss

Yes, normally, yes.

Operator

Christopher Danely.

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

JPMorgan. Guys, can you give us the margins by segment?

Brad W. Buss

We're not breaking them out anymore, Chris, but every group did increase sequentially.

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

And then maybe talk a little bit about margin trends in PSD and touch and how to get them back to historical levels or keep them going in the right direction?

Brad W. Buss

Yes. I mean, like I said, they went up, they'll go up again. The PSoC, the PSD group is a big owner of the fab, so they obviously get the benefit when that fab gets fuller like it is. And once that's full, like it did in the prior years, and we go to the foundry, they are definitely a beneficiary from that end of it as well. So they're not too far off from where the corporate average is, and it remains a very profitable area for us, which only will get better as the revenue grows.

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

Perfect. And then my last quick question is, can you just talk a little bit about the Rammer? How that's going and what the outlook is there?

Dana C. Nazarian

Rammer, okay. We call that nonvolatile products now, but -- this is Dana. It's going very well. We finished the acquisition in Q4 last year. We fully integrated the site. As you know, we had our own nonvolatile business, running out of Colorado, about 7 miles away from where Ramtron is located. They're now all on a same building, in one place. We've been continuing to send a message out to the customer base. We're going to do with nonvolatile products what we did with SRAMs: Continued focus, continued investment and just become the #1 embedded nonvolatile player. The traction that we've got is fantastic. The excitement is there. We have literally thousands of customers right now. Many, many small design wins that build a solid base that you can grow from and those are starting to replicate with more design wins. So the field has been alerted now. They know Cypress is in the game for the long haul, and we're just going to continue to drive that business like we did in the SRAM business.

Brad W. Buss

Chris, I'd say it's good or better than what we expected. We're not going to be breaking that out, talking about it because now is just another one of our product lines. And just to emphasize what Dana said, I mean, it's thousands of the customer and the good thing is they're industrial automotive guys, where they tend to not have been our bigger segment and we're now able to go in and cross-sell the rest of the portfolio with those customers who are overjoyed that we've taken over in profitability into their products. So it should be a win-win on a going forward basis. We even changed the street sign from Rammer Boulevard to Cypress Boulevard, so it is officially integrated.

Operator

Ian Ing.

Ian Ing - Lazard Capital Markets LLC, Research Division

Lazard Capital Markets. So how much gross margin runaway should there be at this point going forward? Maybe mid-50s and beyond? Is that possible, given you got, what, 70% utilization right now and you'll go outsourcing after that?

Brad W. Buss

Yes. We said that mid-50s is probably the right range to think of where we want to operate. Based on the end segments we're in, the growth that we want to drive, I mean, we want to grow faster than industry, we want to get our OpEx around that 30% level dropped to 25-ish to the bottom, 20%, 25%. So that's kind of the right expectation. And there's always going to be volatility in the mix. The utilization is one aspect of it. And like you're saying, Ian, as we get that fab, kind of in that high 80s, 90s, which is really kind of full capacity with the mix of products that we have, we will get some incremental benefit from the foundries.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay, great. And then PSoC 4, pretty nice low-cost part here, could you talk about the applications that you're targeting here? It sounds like it's outside of handsets and are gross margins there sort of roughly in line with PSD?

Hassane El-Khoury

Ian, this is Hassane. PSoC 4, obviously it's a general-purpose PSoC for us, and so far, the broad base of application is ranging from UI to low-end white goods or home appliances, all the way to -- we have some penetration in automotive as well. And really, what gets the part selected is, number one, the simplicity of it from one side, but also the heavy integration that T.J. mentioned. So we're -- to answer your question about the gross margin, it's actually -- when you look at it from the PSoC side, it's much above the average for PSD. Just because when you talk about analog integration, that warrants a high ASP as well, because you're adding a lot of value because you're basically replacing a lot of high-end analog that, otherwise, will be just spread around the board. The nice thing about the part, too, that I'd like to highlight is, it is our fastest ramped part. We're actually going to start seeing revenue very shortly, which is just 90 to 100 days after we sampled the part. So that's a great thing to see in the PSoC platform, and that's going to complement a lot of the growth that we're seeing in industrial with PSoC 3 and 5 today.

Ian Ing - Lazard Capital Markets LLC, Research Division

And that ramp's gross margin should be in line with PSD?

Hassane El-Khoury

Yes. It will actually be higher than the average, as we ramp up volume on the PSoC platform of it towards 2014, because there's a long tail for industrial ramps. We're going to start seeing that gross margin creeping up for PSD.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then my last question is in touch. I mean you've talked probably in -- not a while, about the Japan market. I think in the past, you used to have a pretty dominant position there. Maybe just an update on the Japan market. And then with the Softbank-Sprint deal, is there an opportunity to introduce more Japan phones into the U.S. market? Just want to get your thoughts on that.

Hassane El-Khoury

So focusing on the Japan market, obviously, we've had a dominant -- we still remain a dominant player in Japan, especially with our Gen5, as you know Japanese market warrants a lot of the high-reliability products in their phones. We've launched with Fujitsu, we're the premium supplier for a Fujitsu phone, and that's going to start ramping up and now you're going to start seeing in the market. Sony Mobile is another one of those customers. So there's a lot of designs ramping already, as well as complemented by a stronger funnel, specifically in the Japan region that's going to start being deployed in the second half of the year.

T. J. Rodgers

Let me make some general comments on gross margins. We've had many, many questions and we answered them all straightforwardly, but I was sitting here trying to sort out what I would think if I got all that patchwork of answers and it's not coherent as it could be if you just address the topic of gross margin as a topic. We don't break out gross margins, but I'll give you data for last quarter. Our lowest gross margin division is 48%, the highest gross margin division is 60%. So when we report in the low 50s, there -- it's pretty tightly grouped around that. And when we say we want to get to the mid-50s, we have active programs to do it, and it's more than just selling after fab. Our OpEx was $79.2 million and it's headed down, and the same program which we use, which has over 100 managers in it to reduce cost of everything, everywhere, the cost of a subsidized sandwich in the cafeteria, that program also works on manufacturing overhead. And therefore, it is another component of gross margin going up that has really nothing to do with either pricing or volume and loading. With regard to gross margin on our TrueTouch chips, let me tell you about the family. And this is one more detail, but it'll explain how we think about gross margin there. Gen 3 was the chip we used, a 10 square millimeters that was the big ride in 2011. A huge profit, a huge volume and revenue. Gen 3, at its time, was the best chip there was. It had, and we didn't know it that time, not so good noise margin and we learned that. Gen4 was the chip we introduced at the beginning of -- at the end of 2011 and I bragged about it at the end of 2011, said it was best in the market. Then 2011 was -- 2012 was a pretty ugly year. The reason was not the chip, the reason was our firmware. We got to the point where our informally managed firmware efforts weren't good enough for these high-performance 32-bit systems. We promoted an EVP in my staff, that is "software guy" and we've got our firmware act together the discipline that we have on chips. So that Gen4 chip was as good as I said it was, before we had a terrible year in TrueTouch, is now taking off and the noise story I told earlier is the reason. It is getting us into flagship products, and those flagship products, with the noise immunity story, allow you not to suffer the cost reduction curve that is happening right now in TrueTouch. With Gen 3, we had to match the price of the lowest cost Asian manufacturer because everybody made a chip that worked. With Gen 4, we have noise immunity, they don't. And we can hold pricing. So it’s not about prices going up as much as about holding prices in the market that is -- where pricing has gone down. Gen5, which we have just introduced, is a chip which is smaller and more economical and will allow us to make more money, also with noise immunity. We told you there are 2 Gen5 chips, the one we call Atmel Mobile, which is for cellphones, typical 4.3-inch cellphones to 5-inch cellphones; Gen5 L goes up to tablets that are 10 inches. So we have both chips working, we got our next generation already ready to roll. And we're starting -- just now starting to make money in Gen4. So we're ahead of the game. Therefore, I think we'll be able to stabilize our ASPs in TrueTouch. And with the cost reductions we've got, and with the fab loading we've got and with the design wins piling up on us because of the performance, that's what will lead to improved gross margin and not necessarily an improvement in cost. I've said this 2 meetings in a row, I'll say it one more time and then not say it again, if you want to look at the end of the game for TrueTouch, you can look at our CapSense group. CapSense was the hot thing in 2005 and '06 of the Apple iPod. It's was the touch of its day. And it had -- it was hot getting in it that news was, did you get in this model, or that model, with carryouts and all that stuff. And it's no longer news, but the fact is, that division makes 25% pretax profit. I reviewed it yesterday, 25% pretax profit. So it's more profitable than Cypress on average. Its average selling price is $0.42. Let me repeat, CapSense division is the largest in the world by far, it's 40% market share, it makes 25% profit and sells its chip for $0.42. I don't expect TrueTouch to go down that low because the chips are bigger and more complicated. But I do expect the way we work and think in the future, when 3 years from now, when TrueTouch has become commoditized the same way. We will be able to make high profit on prices that other people can't match with engineering excellence. So that's our view of gross margin. We're starting to get where we want to be. Our number is mid-50s, and as we get to the mid-50s, we probably would go for share more than we would for driving it higher than that, and we've designed programs in our company, we've got a product portfolio, we're ahead of the game now with chips that work and have yet to be introduced to achieve that gross margin capability. That's how we think about gross margin, and that's why the numbers are currently moving in the right direction, because we thought about that a year ago, even though we were suffering with bad reports, we were doing the stuff I just talked about a year ago.

Operator

Sujeeva De Silva.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Topeka Capital Markets. Is the book-to-bill, being above parity, given the short lead times, conspicuous in terms of indicating end market demand or the number's not big enough to mean that?

Brad W. Buss

No, I think it's a very good sign. I mean last quarter and this quarter were the first 2 above one in almost a year. And the fact that it's up year-on-year, I think it's indicative as well. I mean, you're starting to hear, the customer base starting worry a little bit. We're holding inventory to low, lead times are low, what if they start extending. So the good thing is, in a choppy world, I think having lead times low are actually very good because we at least know that stuff going out the doors is being consumed, right? So we get very good visibility into that. And things are much more efficient because guys aren't stocking s*** that they don't need. So I think you're going to see it stay that way, it's kind of the new world. We are all very efficient. Like I said, I mean, our own fab cycle time is going down in the second half of the year. Part of the reason you'll see the utilization stay lower is they're becoming even more and more efficient. So that's goodness. I like it. It makes us better. The customers get great service. The on-time delivery's through the roof and they're happy campers.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

Sounds healthy for the industry. My other question on PSoC 4, I know it was asked before, but more specifically, does PSoC 4 help accelerate the non-touch PSoC revenue growth? Or is that just a steady contributor? I was fairly big refresh for you guys so I'm curious of the impact to be.

Hassane El-Khoury

I think it will help accelerate the platform and my revenue. I mentioned earlier the design cycle for PSoC 4 is much shorter than all our other platforms just because of the markets that it's going into and where we're starting to see the strongest funnel, which is more in the APAC. So we're seeing about 1 to 2 quarters between design in, because of the simplicity of the part, to production, because of the design cycle of the end product. So that's going to give us a boost in the platform while we wait for the more industrial and potentially higher volume opportunities to roll into production on the 3, 5 products as well.

Brad W. Buss

And you're also seeing, again, new customers coming into it that get introduced to the platform, to all of our UI stuff. And we're hoping to take them up the food chain as well.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

And the timing of that acceleration is now or next few quarters?

Hassane El-Khoury

It's starting now, as far as the design funnel, but as far as revenue, just because of the markets that platform goes into, you're going to see it more in the 2014 full year ramps.

Brad W. Buss

Yes, but it's not going to be a big step-up quarter. I mean, don't get too excited on it, if was building a huge nut, that'll continue to grow. Just like PSoC 1, I mean, that thing came out 10-plus years ago and it's still a very nice franchise and look at this as an upgrade and an expansion of that.

Operator

John Vinh.

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

Pacific Crest Securities. Brad, just want to go back to your prepared remarks about your largest customer. It sounds like, based on your commentary, you're expecting that revenues from that customer could be down 20% in Q3. Is most of that decline coming from CapSense? And then how much of that decline is timing-related, share-related or do you think it's all end demand-related?

Brad W. Buss

So just so we're clear, I'm not giving any percent or whatever on any customer, just so we're on the record for that. And yes, the vast majority of it, almost all of it, really, all of it, as confirmed by Mr. Touch, is 100% into CapSense stuff, for us. We'll actually see growth in the touchscreen stuff for that customer throughout the second half of the year.

Hassane El-Khoury

And also to clarify, none of it is market share loss, it's all end customer ramp.

Brad W. Buss

How'd you like that quarter, John?

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

Pretty solid. And then my follow-up question is, how much did TrueTouch grow for you in Q2? And then given your updated outlook on true type for the full year, how do we think about kind of the first half, second half split between TrueTouch?

Brad W. Buss

So I mean it grew substantially in Q2. We're not going into any more competitive detail on that. The second half obviously will be greater than the first half, but it wasn't -- it's not a back-end loaded year, like you guys are always worried about, I mean, it was a substantial increase. I would say even a little better than what we expected in that quarter. And I think the nice thing is, the growth will continue strongly, I think, into next year. I think we'll probably have a better year than this year, but it still too early to tell.

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

So sounds like it's a little bit more even keel, but slightly bigger in the second half versus first half?

Brad W. Buss

Oh, yes. Definitely, I would say more than slightly bigger the second half. And like I said, I think the momentum exiting the second half will be very good and carry forward into the first half of '14.

Hassane El-Khoury

Yes, that is really the critical part of exiting the year with a lot of new design wins that we've had and we've been talking about in the funnel, will contribute a little bit in Q4, but really will move into more volume into next year.

Brad W. Buss

Yes. I mean, this year was a transition year, like we said many times and we feel very comfortable. We feel better I think in where we're going to touch than we did 3 or 4 months ago.

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

Okay. And then last question for me. You feel pretty confident about getting some Tier 1 flagship designs, it sounds like it's going to be more meaningful in '14. What's the timing of when you would expect to get better visibility of those design wins going into '14 at this point?

Hassane El-Khoury

I think we'll start to see much better visibilities during the Q3 towards the end of Q3. That's really when a lot of the final decisions are done. We're actively in the design phase right now. We're starting to see a little bit of pre-orders in Q4 and then that will give us the exit velocity for 2014 that Brad was talking about in touch.

Operator

Raji Gill.

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

Needham & Company. If we could talk about, on the touch side, Hassane, the competitive dynamics, your major competitor positively pre-announced raising numbers pretty significantly. And it just seems like your other competitor's focusing more on notebooks and tablet. Describe kind of how you look at the market from a competitive point of view and from a share point of view, and if there are a significant amount of design wins in the funnel, who are you gaining share from? Is it from the Tier 1 touch controller suppliers or is it from the lower-end players, as you move down into China and such?

Hassane El-Khoury

Okay. In general, the competitive landscape, as you've described it very well, our position today is -- and T.J. highlighted a little bit about it, when he's talking about the features, is we're not just another touch supplier. Everybody today can read 10 fingers, can do a little bit of buttons and a miniature glove mold that you have to take your glove off and put it on. Where we're at today is really -- we're taking market share because of the feature set, not just because we do touch, that's number one. And as you go more into the flagship products, you've seen some of the highlights on current production phones, they're asking more and more for glove, noise, a little bit of proximity, as well as you're going to see more and more focus on stylish. Our products today, Gen4 and Gen5, have hands down, apples-to-apples, much better performance than everybody else. So I would look at the competition, not just the top guys nor the low-end China suppliers, I look at it as we're taking market share from everybody. Our customers know it, our customers are asking for our products because before they had no option, now they do, therefore, they're moving flagship product to us. That's really what's -- we keep talking about the design funnel, that's exactly what is been driving it, and it's across the board. It's not specific to a region or not. It is really specific to a customer and where their design base is at.

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

Yes. But do you see one touch controller supplier deemphasizing the handset market and focusing more of their efforts in terms of the design and the strategy around the larger screens? Or is it the same intensity that you're seeing?

Hassane El-Khoury

Okay, so specifically, to answer your question, yes, I do see one of our competitor from where I look at, from the customer, and engagements that we have diverging more from their focus on the cellphone market and more into the tablet, and that's our friends down the street at Atmel. I don't see them more into cellphones, especially in light of the new products that are coming out. But I do see more and more on tablets and ultra books, that's where they must have decided to put their focus on. But where we play today... yes?

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

And on the F-RAM business, you talked about an expected annual run rate of 48% to 50%. And last quarter, the acquisition has proven better-than-expected, in terms of accretiveness. Is that the run rate we should be looking forward, Dana?

Dana C. Nazarian

It's the right zip code, yes.

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

Okay. And then this last question, T.J., in terms of the technology on touch, if you look at your other competitor, it seems to be focusing more on -- I mean, they're focusing on reducing the system cost and they're working with the LCD manufacturers, and they're coming up with applications that are -- that are integrating the touch controller, the LCD display driver and single layer on-cell type of applications. How would you address that? Because your approach is more kind of in 3 years, this will be commoditized, so we need to have more profitable chip, if the ASPs fall to $0.50, $0.60 in the next 3 years, what's the -- where are we profitable on a per chip basis? And these seem like very different strategies or approaches.

T. J. Rodgers

They're not. And I can understand why you'd say they're different. My overall reaction to your comment is, Fudd. And I'll explain what I mean by that in a second. Our CapSense chips can sell for $0.42, are extraordinarily high technology with state-of-the-art analog in them, and they provide a 100:1 signal-to-noise ratio that allows you -- and self tuning. So when you make a CapSense board -- to again use this analogy, you can lay it out, you can put the different wire lengths to different buttons and not worry about it. The computer will actually ping like radar, ping each button and tune itself and remember the tuning for each button. So on a $0.42 chip, you have 36 self-tuning buttons with a 32-bit microcontroller watching over all the buttons and making them perfect. And that's why the junk vendors in Asia are trying to cut prices, can't get into our market. So I said it was low cost but I didn't say it's low tech. And it is going to go low cost and the winner is going to be the company that can make very high technology at low cost. Okay. You said lowering overall system solutions is the focus of our competitor. Well, yes and no. The industry is going to lower its own cost by lowering the solution cost of the screen and sensor, and that's going to happen and it's got nothing to do with any chip company, regardless of how much credit they would like to take for what's happening elsewhere. And specifically, what's happening is, today, you buy an LCD from one vendor, let's say in Japan, and a driver chip for that from another vendor, and then you buy a sensor from another vendor, let's say in China, and then you buy a driver -- a chip for the sensor from an Atmel, Cypress or Synaptics, let's say, those are the Big 3. And that's your solution. The cost of what I just described, the chips are $1 each, the other stuff is $10, and at $10 or more, so the cost is really on the sensor side. So what's happening in the sensor industry is that the LCD companies that are more sophisticated and bigger than the companies that make the touch sensors --a touch sensor is nothing but 2 layers of IPO and, I call it saran wrap. We call it IPO and saran wrap in the corporation. Basically, it's a couple layers of IPO you can see through, you glue it on the thing with optically cured clear adhesive, we use the term OCA so it sounds high-tech, and glue it on with glue that you can see through and then that's your sensor. Well, they don't want to deal with companies who make that. They don't want to deal with 2 companies. So they want to buy one display that's got the display and the sensors built in. And then they want the sensor basically to be a couple more layers you add into the LCD process, and that's happening. And there are 2 major types of that so-called on-cell and in-cell where the sensors added on top of the LCD as layers by the LCD manufacturers, so you buy one unit from one manufacturer and get it, and then there's in-cell where they can take the sensor layers and they can move it down deeper in the stack of the LCD and make them more cheap. That war is not over yet and everybody has got an angle of how they're going to win. At the end of the day, it will be better for us, too, because instead of us having to wonder what LCD we're going to be on, what kind of noise it's going to create, what kind of environment we're going to get in and then what kind of sensor we're going to have from yet another company, we've got to make a chip that deals will all that. We will deal with one company that makes a sensor LCD combo and so will everybody else and I didn't do that and I'm not trying to take credit for it. And then we will make a chip and we'll be able to tune up our chip, we'll be able to make it cheaper by throwing some stuff off forward. We need it just in case the wrong combo came up from 2 vendors, and we will then proceed to get down to the low-cost I talked about before. So it's reasonable for you to infer low-cost commoditization doesn't equalize tech but it's not true. It will be very high tech just like having [ph]. I was expecting this question, they were actually hoping for it, and I reviewed this group yesterday. We have our ops reviews this week and next week for the quarter, and I pulled Page 91 out of the ops review and said it's an appendix slide for our current activities in the in-cell and on-cell. And we have currently 14 programs going with different cellphone companies for either in-cell or on-cell designs. The -- they're 4 of the 14 programs, have revenues in the double-digit million dollars, the largest of them being $30 million potential. We are dealing with technologies for the sensor that are called on-cell, hybrid on-cell, in-cell sensor on pixel, ICTA, OCTA, hybrid in-cell, and we are working with sensors from 7 different vendors that have integrate -- that are integrated into the LCD. So that's something everybody is going to do. You're not a hero for recognizing the obvious and we're involved in that. And we've been, until this minute, not very vocal about just saying we're doing what everybody else is doing. [indiscernible] It's going to go down in price, it's going down to $0.40, it's going to be high tech and we're going to be crawling out of the hole after the nuclear war because we've always done that. Now you can go ahead, please.

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

So basically, there's nothing inherently in the actual touch controller when -- in terms of the technology when we're kind of moving more to the integration of the sensor to the LCD screen. That's just a phenomenon that's happening in the industry across the supply chain, the simplification of supply chain and which is going to happen regardless and there's no really differentiation, I guess, on the touch controller side?

T. J. Rodgers

Yes, based on what I told you, but there's an asterisk on it that I'll get to because the LCD sensor industry is going to consolidate and are going to have 3 or 4 competing technologies and we're all going to be in the race for making the best chips the fastest for it and then also staying up with the brutal cost. There's one asterisk on it, which our competitor will claim, and that would be that well you see now you get down with one screen and instead of having 2 chips to drive it, the chips that looks at the sensor and the chip is tries the LCD, we're going to get down to one chip. Well, I don't see that yet. A lot of talk, a lot of PR, but if you go out and look at money, I don't see it. And I'll draw another analogy there. 20 years ago, I could have said, it's only a matter of time with Moore's Law, until the main memory, the dynamic RAM memory is going to be on a microprocessor. And basically, you're going to buy a single system chip that's going to be PC on the chip, including all of the memory. Well, that didn't happen. And the reason it didn't happen is that the 2 chips, the Dynamic RAM and the processor are very different and have different processors from each other. So you don't take the 40-mes processor, the microcontroller, and also use some of the area you make Dynamic RAM. Those with Dynamic RAM probably has 30 mes of its own and half or more of them are different. So you go from 40 to 55 mes, you make your microcontroller more expensive with mes that doesn't need to make you Dynamic RAM very much more expensive with a lot of mes it doesn't need and you end up with the non-cost optimum solution. Today, sensors require analogs, sophisticated analogs, they require microcontrollers, so you've got a mixed signal integrated circuit that is a system-on-chip. If you look at the chips that drive the LCDs, they're made for DRAM technology literally, they have a lot of bits and they're sophisticated, they've got their own vector and they've got their own competitors and there is no overlap between the competitors making LCD driver chips and the competitors making touch chips. You give me a lot of layers of nuance today on the touch chip, subtleties, the things we talked about, et cetera. Okay, well, there's a war there for all those little features. There's an equivalent war for all the little features in the LCD. And I believe there's the A of technology and compatibility that I'd rather have the best touch sensor I can get and I'd rather have the best LCD driver I can get and they're both $1, so I'm not buying both of them on 1 chip for $1.60, it's going to save me $0.40, but it means I'm going to have an inferior touch chip or I'm going to have an inferior LCD. Because the probability that one company is going to make the best of both worlds is not there, and nobody is going to risk a $200 cellphone and a multimillion dollar project in that really tough cellphone market guessing and not having the best of everything because the guy who's got the best of everything for an extra $0.20 is going to prevail. And if you got a nice combo chip and you can brag about integration because Gordon Moore is still going to that and Gordon Moore is my neighbor in Woodside and I actually know the guy. That's cool but if your touch doesn't work right and your proximity doesn't work right and you've got to take your glove off to turn on the glove mode, then that's not cool. So there's no dollar validation for the combo chip today in the market, and my bet is it's not going to happen. If it does happen, we'll work on it, we'll acquire somebody, we'll go forward. Right now, we're not betting on it. Right now, I'm betting on an integrated solution that is going to happen, we're working on it with a bunch of different vendors and different technologies and it's going to be driven with the best chip in the world to sense the touch and the other best chip in the world to drive the LCD to make the highest resolution display. That's how I see it and I think we're positioned exactly right for that.

Operator

Ruben Roy.

Ruben Roy - Mizuho Securities USA Inc., Research Division

MISO securities. T.J., can you give us an update on Deca, especially in light of Chris going over there, please?

T. J. Rodgers

Sure. First of all, chip scale packaging, skip the package, make it cheap, put balls on top of the chip, make that chip look like a micro bug [indiscernible], put the chip upside down directly on the board. That technology has been around for a long time. The technology to put the balls on the chip is fab technology. So if you look at the assembly and test manufacturers, Amkor and ASE, although they are assembly and test manufacturing characterized by low cost in that industry. The fact is they have little mini fabs with multimillion dollar pieces of equipment doing flow lithography to put the copper interconnect and the balls on the chip. And therefore, the cost of putting the redistribution copper there in the balls on the chip is on the order of $100 a wafer, sometimes even more. So CSP, although it should be no package therefore cheaper, is actually more expensive. The idea behind DecaTech was to take SunPower technology. SunPower can make a 6-inch wafer with 3 masking steps for $3, including the wafer. SunPower's technology is 100x cheaper than fab technology. So the idea was to use SunPower technology and we signed a deal with our former partner -- or our former subsidiary, SunPower, to use their technology to make chip scale packaging, and that's what we're turning on at DecaTech. We're making an independent company. We want to use it. We're going to get most favored nation pricing, but we want then to have multiple customers and turn into a real company with the possibility of spinoff in the future, that's the goal. The company was big enough earning $4 million a quarter. So everything we report to you is minus $4,000,000 or $0.02 due to DecaTech and it was hung up getting this technology commercialized. Chris Seams ran manufacturing in Cypress and before they ran our fabs and the best we've ever been run and before that, you run -- the best that's ever been run at that time, they're running better now. And before that, he ran R&D. So I needed a guy to get us over the hump at DecaTech. They were stuck and we're burning $4 million a quarter and that's not good, and I want that to end and I want it to start making money quickly. So I had to grab Seams and put him over there. And we reorganized so as not to replace Seams right now. Our VP of sales, Gary Saunders, now reports directly to me, I kind of like being more directly connected with customers, I'm not sure he's enjoying it as much as I am. And then we've got marketing reporting elsewhere in the company. So we've not added to cost and we're covering what -- this company is well enough managed that we don't have crises and things and we can kind of spread ourselves a little bit thinner and get away with it. Meanwhile, DecaTech is going better and start making money for us. And that story will unfold, we'll be talking good things about DecaTech in the middle of next year.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Got it. And then just quickly for Brad. On the commentary around just the inventory moving a little bit higher, I think, most in Asia, you've said, can you just gave us kind of where the level is on a relative basis to normalized levels historically?

Brad W. Buss

Yes. So like disti in total, I said we're at 6 weeks, that was down and that's actually 2-0 in our opinion. We expect them to run in that 7 to 8 range and that's why we pay them. So obviously with lead times low, they can get stuff pretty quickly. So I would expect them to go up over time. I don't think you're going to see it anytime soon. The Asian guys in particular have taken things down in Q2 and with PSD growing, I mean, that's generally fulfilled through Asia so they should be going up and they did go up to support that ramp. But it's lead times, right? The customers, the distis, they're taking advantage of every OEM right now and keeping their working capital low.

Operator

Sidney Ho.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Nomura. So first question is, can you comment a little bit on what you're seeing in the comm infrastructure or maybe the networking market? Do you have better visibility into that market right now than 90 days ago? And specifically, the China markets seem to be the wild card and when do you expect that to pickup in spending there to contribute to your MPD revenue?

Dana C. Nazarian

This is Dana. Now I've got about the same visibility as I had 90 days ago and I can only see about 90 days out and it's pretty steady. They generally -- China generally spikes up with big deals that they get and then there's a big rush to see who's going to win the bids and then massive spending spikes. We can't see those right now. I think it's steady as she goes right now. But I'd say it's better than it was, much better than it was in the second half of 2012 but not massively growing.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Great. Maybe moving to your touchscreen again, the touch controller, specifically on the large screen. With most of the products probably going into single-chip solutions now, ASP compression probably is over. What kind of ASP are you guys, let's say, expecting when you are going into the design piece phase? And then, is there a significant difference in terms of technology or sales channel that makes it less attractive investment for you at this time or is it just a falling deficit that is too low to put any bets on them?

Brad W. Buss

I'll address the investment part. I mean, like I've said before, we've made some investment in and to that -- we do very well in it, we make good money, we've got the right structure, fantastic products and we only see that becoming more accretive as we go from here. So we're fully invested in it, and we expect that still again to be one of the fastest-growing markets that you're going to see in a slow growth world. And we are definitely going to get a disproportionate share of that. And then on the ASPs, again, it varies by volume, a it varies by feature, but the lower end China type of stuff in the $0.70 to $1.00. Phones can run around the $1 range and as the features get added, they can move north of $1 from there. And then obviously, the tablet stuff is screen dependent and that's well north of the cellphone area. And we see that being relatively in the range for everybody right now. To answer your question, specifically to technology, as well, we don't see any technology difference. I mean, it's really in the -- that the key here is in the analog portion of that chip and the rest of the scaling is really the number of channels that you replicate to do bigger or smaller screen, but the value comes from the firmware that we have, as well as the advanced feature that we put on the chip and that scales regardless.

Operator

Srini Pajjuri.

Srini Pajjuri - CLSA Limited, Research Division

CLSA. Brad, just a couple of clarifications. What was your largest customer as a percent of sales in Q1?

Brad W. Buss

In Q1? I think it was 11-ish give or take.

Srini Pajjuri - CLSA Limited, Research Division

So from 11% then to about 15% then coming back down to 10% to 12%. So that's a pretty steep inventory correction. I'm just wondering if this is a one-quarter event and -- or if you expect this to continue into Q4?

Brad W. Buss

I think we've taken appropriate adjustments in the number to account for it.

Srini Pajjuri - CLSA Limited, Research Division

Okay. And then another clarification on the touch side as well. Touch being so strong in the quarter, you're expecting it to grow again in Q3. But yet, it's tracking to the low end of your original guidance range. So I'm wondering where the discrepancy is?

T. J. Rodgers

The discrepancy of the waffling you got earlier is that we're very bullish on our design wins. We've got some big wins, we know we're in the driver's seat, but that market is a bucking bronco, it's off this town. There's winners that you didn't expect, there's -- some of the guys that have been powerhouses lose share, and then you look at the overall economy with stimulus going on, et cetera. So there's just uncertainty in the market, the shortening of our lead times means that our visibility window, you've got 8-week lead time, you got 8-week visibility plus a little more if they're nervous they can't get it. So it's uncertainty about the macro and the winners and losers among the cellphones has caused us to waffle and in terms of how much Touch is going to grow. We've taken a key step forward which is to get those big design wins, and we're not sure what that will do in terms of revenue. Back on your question about inventory. Yes, there are inventory corrections that you build and then you win and don't win big wins, but these parts are fungible. And therefore, if someone doesn't buy them, we can move to another company. We have programmable chips, we have PSoC technologies that powers our 3-touch chips. So we can reconfigure and ship the chips. The inventory drop you saw really has nothing to do with the give and take of winning and losing some big win. The inventory drop you saw is a structured program in the company, is one of our cost-reduction programs where we've decided to cut down our inventory. We put $10 million out of inventory, $0.11 per share we pay you guys last quarter, $0.07 and $0.11 we've paid by taking money out of the inventory and giving you guys the cash. And we're planning on doing that all year long. So our inventory is going to go down because of the management program, not because of give and take of some designer.

Operator

Jeff Schreiner.

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

Feltl and Company. Could you elaborate a little bit more, Brad, more about the structural expense reductions that were referenced in the press release and what impact these are going to have in terms of ongoing OpEx?

Brad W. Buss

Yes. So I mean, we've looked across the company in many areas and as T.J. has mentioned a very formal program, some of it have been ongoing for years, some it are new. And we're looking at -- obviously, we have projects that are rolling off that contribute, Cypress Enviro is gone. But we're also looking at the headcount. Where we're deployed, how we're organized, how many levels of management. So those are real structural things that we're looking at. We have a broad portfolio of products. Which ones do we want to invest in more? Which ones are less? We're looking at our sales and marketing channel and what do we do direct versus disti versus rep? So there's a lot of levers, and there's contributions that are coming on from really every group in the company. So -- and like I said, it will go down in Q3, and I expected it to go down again in Q4. And that's pretty impressive after you think we also have absorbed Ramtron. We absorbed the building, we absorbed a bunch of people, we absorbed a bunch of new products. And I think those are levels that will be maintainable going forward because we birthed some pretty big platform level products over these last 2 years. So like a lot of companies chasing Moore's Law that are hitting huge R&D bills going forward, we don't have that ahead of us. And I think the investments we've made in the sales and marketing that are driving some of the designs will start paying off. So we expect to see the revenue contribution grow much faster than the OpEx needs over the next couple of years.

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

Okay. And then given that you guys have kind of talked about being maybe near the lower end of what your prior full year TrueTouch guidance was for '13, that would likely put you even maybe the smartphone side perhaps that had a -- more than -- a slower pace in the market, more market estimated growth rate. And we've heard a lot of talk today about momentum and design funnel going into '14. What visibility do you have now to be able to talk about the ability to possibly outpace estimated count of your '14 smartphone growth at this point?

Brad W. Buss

Well, you've got to remember with the year-over-year stuff, I mean, that Q1 was a really big drop off, right? And we had a very strong second half in the prior year. So a lot of it's just the math. The key as we've talked about, I think, is the exit rate. I mean, we had substantial growth this quarter. It will continue next quarter and into Q4. I mean, even if that exit rate stays flat, which we don't expect to happen obviously, I mean, you're going to have a pretty strong year-over-year number in that perspective. So we're focused on the exit. We're focused on those designs. The newer high platforms and actually additional customers. So I think as the year ends out, then we'll talk further at the Analyst Day because we'll have much better visibility. I think you're going to see us one of the stronger guys out of the competitors that are there, if not the top guy. And again, all we can do is get the designs, right? And I think the teams executed very strong for this year and next. And as Hassane and T.J. have talked about, the inventory, the who wins in the market, there's not a lot you can do to control that. So I think from a competitive end of it, we're stronger than we probably ever been even if you go back to the heyday of '11 when it was blowing and going. I think we're stronger technically in design and more importantly, the breadth of the design continues to grow. And again, we haven't even really tackled the tablet, larger form factor stuff and we are going to be coming strongly into that next year. So there's a whole other area of growth that's really been untapped for us.

Operator

Charlie Anderson.

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

Dougherty & Company. I knew we were going to have an Analyst Day again. So I remember back going to '11, there's was a lot of rhetoric in the industry about the non-smartphone markets and touch would eventually be just as large, that really hasn't materialized. I noticed in the press release you guys talked about qualifying Bluetooth, low energy and a lot of people were talking about the wearables market. Is there a design phase for that market you guys are going to participate in that could give us some meaningful units over the next couple of years from your vantage point right now?

Hassane El-Khoury

Charlie, this Hassane. The quick answer to your question is yes. We've been heavily engaged in the first half of the year and it is part of our non-cellphone touch program. Our parts are perfect for it. We have a portfolio ranging from the small footprint to view the small screen, very, very competitive. And what I would like to add to it, it's again not just Touch, our Touch portfolio does waterproofing, which we're talking about wearables. That is the key of it. You don't do waterproofing, you're going to have false touches or no touches when you have sweat or a little bit of salt water on it. The other aspect that's really getting us the traction that we need and putting us in the forefront of that ramp is also our low power. So we have technology that allows us to play with the low power. You're going to see a lot of that funnel starting to go to production, so end products releases in the market in the second half of the year as well. Bluetooth for it, it basically adds a little bit of gravy where we start integrating more of the functionality that already exists when you have a wearable or a fitness band, you end up having to connect to either to a PC or even to your cellphone to download the data. So that really is part of what Cypress is very well known for, which is integration. We do it in PSoC and now, we're doing it with the touch with BLE.

Brad W. Buss

I think that whole wearable market, as it grows, we -- yes, there's tens if not hundreds of billions of unit opportunity and I think you'll see us as one of the leaders coming right out of the gate in that area. I'm going to be wearing so many at the Analyst Day, I'm going to add 10 pounds.

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

So just a clarification, what was Ramtron revenue again in the quarter?

Brad W. Buss

So it's above expectation. It had a one in front of it.

T. J. Rodgers

Triangulators asked if we were passing through the $15 million annualized run rate and we said, yes.

Operator

John Lopez [ph].

Unknown Analyst

Vertical. The first question is just for your external lead source wafer, I think, you guys are still like 50-50 external, internal or something in that range. Have you seen any change in the lead times you're getting from your external partners?

T. J. Rodgers

No, no, not at all. The foundries are starting to fill up. The foundries are starting to give us warning signals about get your orders in, but right now, we can get all we want and I don't anticipate there being a crunch this year because I don't see based on the comments earlier, I'm a little worried about the macroeconomy in Q3 and Q4, but the foundries, I wouldn't say are on the edge, but they're starting to fill up.

Brad W. Buss

We don't do a lot with TSMC, which is I'm -- I think what you're trying to triangulate to.

Unknown Analyst

Yes, just broadly. But yes, there's, obviously, that's a topic. Second question is actually on your Trackpad business, which I know is relatively small. But my recollection as you grew that business sequentially in Q1, and it sounds like you grew it again by a pretty healthy clip in Q2 and obviously, it's not been a terrific PC environment. I'm just wondering what the dynamic is there? Why are you growing that business, I guess, a. And b, do you have sort of a specific share aspiration? My recollection is Alps is more or less out of that market at this point or awfully close to it. So what's sort of the plan in that market and why is it growing for you?

Badrinarayanan Kothandaraman

Okay. So I'll give you a brief color on the track pad market and what we told to you before. In the prior conference calls, as we said, we will more than double from 2012. And I think we are on a good trajectory to do a little bit more than that. Q2 '13 was stronger than Q1 by about 15% in terms of revenue. Q1 was stronger than Q4 of last year by 40%. We are gaining excellent traction on the chrome books. There, I believe, we have very significant market share and we're continuing to win more. In addition, we are also winning a lot of designs on the wireless peripheral. For example, wireless keyboards, wireless mice. That's a place where have we have started to increase a lot as well. In terms of the market share, I think we'll steadily grow throughout the year. And again, we plan to nearly double next year. So significant gains in market share through the next 2 to 3 years.

T. J. Rodgers

So the short answer there is PC market has been tight, we are penetrating, but our story wouldn't be as good. The chrome market is taking off and that's when you feel that everybody's had an equal chance. And I believe we're #1 in that market. And then finally, the peripheral add-on companies are starting to make mice and keyboards with Trackpads, and those Trackpads, again, are open game. You don't have to penetrate an OEM, PC manufacturer. So we're in effect taking advantage of the new growth in the market. We would expect to go back and take some share in the PC market when and if it turns back around.

Dana C. Nazarian

Yes. And just to be clear, we're not trying to target the entire, we're being selective in the growing areas with a differentiated programmable solution. And to your point with the concentration there, the customers have been dying to have somebody that's capable and can bring new ways of thinking into that market, which Audrey is doing with his group. So even though PCs are going down, we continue to see us gaining substantial share.

Unknown Analyst

Got you, very helpful. Last one and it's my sincere hope this is the last question period, but the -- I think you guys said, I guess, just as a clarification, I think you said explicitly with your largest customer that you would grow through touch both in calendar Q3 sequentially and in calendar Q4 sequentially. Was that a comment that you made or intended to make?

Brad W. Buss

Yes.

Unknown Analyst

And that's sort of seasonally, your largest customer in general is in sort of inventory work down mode in the calendar fourth quarter just by practice. Is it that you have incremental designs that are ramping up part of the calendar year offsetting that sort of typical seasonal pattern? Or is that not the typical seasonal pattern that you happen to see? Is there anything you can share with us on that?

Brad W. Buss

It's very typical and yes, we have additional share and yes, we always account for some of those seasonal patterns. Thank you, everybody. We're excited on where we ended up and we look forward to delivering more.

T. J. Rodgers

One more.

Brad W. Buss

All right, you're going to have to handle it. One more.

Operator

The last question comes from Liwen Zhang.

Liwen Zhang - Blaylock Robert Van, LLC, Research Division

T.J., you talked about integration technology in the capacity of touch. And how about thin film [ph] applications? As you know, your major competitor, Atmel, is working on metal mesh and semantic is working with UniPixel. Is Cypress still working with any thin film [ph] touch panel makers around the supply chain?

T. J. Rodgers

Yes, we are. Metal mesh is another way to get rid of the IPO on Saran wrap that I talked about. You can make superfine wires that you can see through like a screen door that's almost completely transparent. That's an interesting technology, and it's got possibility of being important, and we are working with a couple of Asian partners who are also working on the technology. So the deal would be there as opposed to us trying to go on the sensor business, which we think is a fairly cutthroat business. We would partner with large sensor manufacturers right now. We're also looking at metal mesh technology. And we're doing that actively. We have designs -- we got metal mesh right now?

Dana C. Nazarian

Yes, that's right. It's going to ramp.

T. J. Rodgers

We will have revenue on metal mesh this year, but not -- we won't be making a sensor, we'll be partnering with a sensor company.

Dana C. Nazarian

But also to expand on that, when we look at different technologies, we also have been inventing different sensor layouts to make the whole system cost cheaper. We talked about what are the dynamics to really allow that whole different cost to be cheaper and T.J. mentioned, there's more dollars spent on the non-touch controller, and our play on that is we're strongly been inventing what we call the slim, single layer sensor, which makes a very ultra cheap sensor element also for our end customers. We have today the best performance on that slim sensor. We're actually in production, and we're shipping volume with Nokia as we speak. So we're also allowing and contributing to the ecosystem to really allow lower end costs and system not just on the controller, but also on the -- from the customer side as well and there's some very strong adoption on that. So it's not just a technology, but also a sensor design play.

Brad W. Buss

Thank you for calling in. We enjoyed a good quarter and we projected an up quarter for Q3. Good day.

Operator

Thank you. This concludes today's conference call. Have a nice day. You may disconnect at this time.

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