Cypress Semiconductor Corporation Q1 2010 Earnings Call Transcript

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 |  About: Cypress Semiconductor Corporation (CY)
by: SA Transcripts

Cypress Semiconductor Corp. (NASDAQ:CY)

Q1 2010 Earnings Call

April 22, 2010; 11:30am ET

Executives

T.J. Rodgers - President & Chief Executive Officer

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

Chris Seams - Executive Vice President of Sales and Marketing

Analysts

John Pitzer - Credit Suisse

Uche Orji -UBS

Frank Keller – Barclays Capital

Doug Freedman - Broadpoint AmTech

Adam Benjamin - Jefferies & Co.

Glen Yeung - Citigroup

Christopher Danley - JPMorgan

Suji De Silva - Kaufman Bros.

Srini Pajjuri - CLSA

Betsy Van Hees - Wedbush Securities

Jeff Schreiner - Capstone Investments

John Barton - Cowen

Sandy Harrison - Signal Hill

Charlie Anderson - Doherty & Company

Operator

Good morning, and welcome to Cypress Semiconductor first quarter earnings release conference call. Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. J. Rodgers

Good morning. We are here to report the first quarter in usual format; finances, marketing and comments by me, and questions.

Brad Buss

Thanks T. J. This was a very exciting quarter. Not only did Canada win the hockey goal -- sorry my friend in Boston, but we also had a very strong quarter. A lot of great results and I think you’ll be very pleased with the guidance.

So just as usual we’ll be making a lot of forward-looking comments. Make sure you take a look at our 10-Q that will be coming out the door in a couple of weeks, and for all of our GAAP and non-GAAP stuff, we have full recons in the press release and they are also posted on our website, so please take a look there.

I will go through the Q1 result, give you a little color and I’ll jump into the guidance. So I was really pleased that Q1 closed with better revenue, gross margins, OpEx, net income and EPS than we originally expected. It exceeded my prior guidance and it also beat the average street consensus that you guys had. Again, the thing that I was most excited about was, it was really all due to good old-fashioned normal leverage. We didn’t have any weird one-time advance or tax events that drove that EPS number.

So revenue for Q1 was $202 million. It was an increase of 4% sequentially, and an increase of 45% on a year-over-year basis. Again, it’s very important we put that in context. Since normally in Q1 we go down seasonally about 4% to 8% and also don’t forget that Q4 was a 14-week quarter. So if you just put an average normalization down to 13 weeks, we grew like 12%.

So revenue for the quarter exceeded the top range of guidance due to strength, mostly in MID and to a lesser degree an DCD. By the division MID increased 17% from Q4, driven by strength in our SRAM business, and that was a combination of market share gains, as well as the overall communications and demand in wireless and wireline, and customers that you have been seeing from a lot of other semiconductor guys.

DCD increased 5% driven by again growth in com and some end of life sales, and CCD which has the most consumer exposure decreased 9%, better than normal seasonality. One of the things to highlight in there, is that our flagship PSoC family, which is obviously the largest revenue component of CCD, they had a record for a Q1. Normally they go backwards pretty hard because of the consumer exposure, and they did far better than any Q1 in history, and we expect them to obvious have record revenue for PSoC in 2010.

Looking at net income on the GAAP basis, we posted another positive quarter. We had GAAP net income of $12.7 million, which equated to $0.07 per diluted share. That increased 250% sequentially versus the $0.02 we posted in Q4, and on a year-over-year basis we had a net loss of $0.66 in the prior year. I expect to be GAAP profitable every quarter throughout 2010.

On a non-GAAP basis, our net income was $34.1 million, a 7% sequential increase in the highest level since 2004, that yielded an earnings per diluted share of $0.17, which was well above the prior guidance I gave of $0.12 to $0.13. Again, this is the first Q1 that has grown sequentially in profit in quite a few years. As to my earlier points, we normally go backwards due to seasonality.

More importantly, the operating income increased 23% sequentially, and we achieved an 18.6% PDT percent, which again has been our highest since 2004, and again all of that was due to good old fashion leverage. We did well on the top line gross margin, and as you saw we had an extremely tight OpEx control.

Turning to the non-GAAP gross margin, that was 55.6%, up a very strong 1.7 percentage point from the prior quarters as our factories and foundry partners continue to execute very well. We had a favorable product mix, and this likely lowered inventory reserved. This is the highest non-GAAP gross margin since 2000.

Our core semiconductor gross margins which again excludes the impact of emerging tax, and I break that all on a press release was even higher at 56.4%, as the emerging tech group is still weighing down the overall leverage, but that will start to move up as they start ramping, which we’ll see back after the year.

Average utilization in our Minnesota fab based on wafer starts for Q1 was 81,% up from 73% in Q4, and I expect that utilization grow a little more in Q2. We are very committed still in our flex fab foundry. Our partners are doing very well there. We did about 30% of all of our wafers came from our foundry partners, and we still expect that to grow to probably a 50-50 mix over the next year, to year and a half, as we are not adding any substantial capacity to our one remaining fab and as our sync SRAMs will continue to transition to UNC at 65 nanometers.

Our product margin increased slightly due to cost improvements as stable pricing environment and in some selective cases of rising prices. I was very pleased with the corporate ASPs in Q1, they increased 6% sequentially to $1.48, again the highest since 2001, really due to a favorable product mix across all of our divisions.

Non-GAAP operating expenses increased by only $1 million bucks, to a total of $75.7 million, and again that included an 800k non-cash accounting charge related to the evaluation of the deferred comp plan. I think as you know, when I do my guidance, I assume that the deferred comp plan is neutral, so I have no clue which way it is going to go. So if you’re doing on apples-to-apples to track down the deferred comp, it was really OpEx of $74.8 million, and that was down a couple of million from my guidance of $78 million to $79 million, which basically flat with Q4.

All the one-time events from the downturn have all been reversed. We are operating under our normal business model, and we continued to be very vigilant on OpEx as everybody in this room can attest to and we expect to have that continue all throughout the year. Just a quick data point; our head count decreased again sequentially. As you said about 3500 people, net count 21% since the piece in Q3 ‘08 and the lowest in a decade.

We had OIE of a net 900k, and remember there is no debt, plus no interest expense. The non-GAAP tax came in with my guidance of 10% which equated to $3.7 million. We had basic shares right in the middle of my guidance at 159, fully diluted was at 199, and our yield enhancement program delivered three million shares to us in the lower $11 range, and that will start benefiting the share count in Q2.

If you look at the balance sheet, cash and short-term investments were roughly flat due to the yield enhancement program that I just talked about, that used a net $32 million. If you included the $33 million of the lovely auction rate securities that we still have, and they are classified as long-term investments, we had $330 million, which equates to $2.04 per outstanding share, with good operating cash flow of $38 million; free cash flow of $20.2 million, and I expect both of those metrics to increase throughout 2010.

Towards the inventory, I was really pleased with where that came in. The net inventory was $84.3 million, a decrease of 8% from Q4 ’09. As we continue to ship more than we are building we may be increasing customer demand. Just to put it in perspective, our net inventory is down 33% since Q3 ‘08. Obviously, the lowest level in years, and our sales, are only up about 9% I believe from that peak. So fantastic job there, and at the same time we have actually increased our on-time delivery to our customers, which is making them happy.

Again don’t forget, the $84.3 million includes our lovely non-cash stock based comp charge of $5.1 million, and there’s about $9.7 million for the last time build that we did when we closed taxes. So if you normalize those two out, we are really just a snitch under $70 million dollars or 70 days of inventory. These levels are pretty low and we hope to increase in the back half of the year, but we don’t see any substantial increased in inventory at all in the next quarter to most likely remain flat.

Our disti guides finally took some more inventory which was nice to see. It’s still remaining fairly well at five to six weeks, down from when they are normally at of seven to eight weeks; and again do not forget that we do not recognize any revenue on distribution until it’s all through and that’s 100% worldwide.

AR was $110 million of $23 million bucks, and again that was basically just timing in the quarter and some of the increase with disti are DSO remains within our target range and our aging continues to remain excellent. CapEx was $17.9 million and depreciation was $11.5. The share account I touched on, things are in good shape there, basically where we expected, and don’t forget, now that we are GAAP profitable, the GAAP share account is different from the non-GAAP. It’s actually lower due to the way you treat the unamortized stock based comp. So you can scale that on the press release.

Okay getting to the good stuff on the guidance; I think you saw on the press release, we had a monster book-to-bill of 1.34. That’s grown 19% from the end of Q4. All the divisions are north of one, with CCD growing the most. Our backlogs at a multiyear high, and grew 42% sequentially, and again all divisions are growing backlog double digits led by CCD and MID.

We had strong sequential growth every quarter since Q2 '09, and even with the better Q1 than we expected we are looking for a better Q2 as well. So we expect the Q2 revenue to be in the range of $212 million to $222 million, that’s 5% to 10%, and we expect every division to grow sequentially, including the emerging technologies group. I look for gross margins around 55.5% to 56%, which obvious can vary with the mix manufacturing constrains, inventory charges etc, and that’s assuming our internal fact utilization of about 85% and no major capacity issues.

OpEx of about 77 to 79, and again that will vary with revenue level, any R&D project time, and in our variable comp plan. The net OIE was about 400k, minority interest benefit of about 300k, even Q tax of 10% all throughout the year. CapEx of about $10 million to $12 million and depreciation is around $11.8 million. In the share count I do not see any kind of movement there either, other than where the stock price can be, and I would assume around $199 million, plus or minus a million on a fully diluted basis.

So if you roll it out altogether you are going to get non-GAAP EPS of about $0.19 to $0.21 and that’s about 27% to 40% above where the street was entering this fall, and it is obviously well above our internal plans. Again, a very strong quarter, great guidance. We are operating on all cylinders and the thing I am most encouraged about is, we still have tremendous amounts of new products, new end customers, and new penetrations to end markets, including handsets to come.

I’ll turn that over to Chris now.

Chris Seams

Thanks Brad. Let me give some of the usual indices for the first quarter and then some market details. Revenue split, the profile remained the same with Asia Pacific being our number one shift in geography. 52% followed by North America 21. Both Europe and Japan grew slightly with some growth in the handsets at 15% and 12%.

Our units were relatively flat at 137 million units for the quarter, down 3 million from the prior quarter. Brad talked about the ASP rise up to $1.48 in the first quarter, from $1. 39 prior. Really driven by a richer mix of higher ASP products and a very stable pricing environment that we are in right now, with supply being the way it is.

In terms of end markets, our Q1 growth was driven mostly by wireless and wireline infrastructure and segments. Industrial grew well. The Q2 growth is going to see a change in that profile. Handset is going to lead the pact for growth in Q2. Wireline infrastructure will grow again as well as consumer in the computation segments as well, as it’s broad-based in the second quarter.

In terms of our lead times, we remain in the four to 12 week range for most of our products. In this environment we are tracking very closely the inventory levels, and the usage at our top accounts, both at our distribution partners and at the end customer. Brad noted the change in the channel inventories as we see as necessary to be able to serve us the larger demand that is coming our way, and it remains relatively low, relative to our historical levels.

Our top customers again confirmed that the increased business is to reflect the real end business as well, and it reflects our true demand. The increased backlog on our books really indicate the customers are moving ahead, again because of the prevalence of dry conditions in the industry, but also perhaps because we have many new product ramps, both at our end customers, and for us supplying into those end customers. For those new product ramps we are requiring a slightly longer lead-time to be able to get those products in the pipeline.

Brad noted book-to-bill of 1.34. I will get a question later, so I will get a question later, so I’ll you the three divisional numbers; CCD is 1.27; MIDs is 1.41; and Data Com 1.12, so all well north of the unity mark.

We entered the second quarter at 83% book, which is a very strong number that’s up from last quarter. So again, the booking and backlogs are very stable right now. Customers know they have to get orders on the books, and three weeks into the quarter the booking patterns continue to look very, very strong for this quarter relative to the guidance.

I will turn it over to T. J. now for details on the quarter.

T. J. Rodgers

We’ve got a bunch of indices on it. I picked out a few of them last night. A couple of them will be redundant, but I’ll the following points. Booking $283 million; that’s a high water mark. I will go back to 2000, which I thought was the much superlative finding now. Peak bookings in 2000, three quarters back-to-back were around $400 million, we were $283 million this quarter.

Book-to-bill was 134, so this quarter was a pretty hot quarter. We have been running in the 1.1 range. I don’t think it relates to the next quarter being up. It’s partly due to the fact that our customers are now starting to believe to book out six months as opposed to taking exactly when they needed. All the divisions were above not one and book-to-bill. Data Com was the least with a book-to-bill of 1.12, which obviously is a very good number.

The quarter was 87% booked on the first day. Our backlog is $334 million; that is a six month backlog. Again, that’s a very good number as of 2000, but during the period of 2000, which is different from where we are now, our backlog is $550 million at one point, and we added a lot to your products.

On the ASP I want to give a little bit of color. Our ASP was $1.48, and that’s the best we’ve done also since 2001. The fact is it’s a mix [Inaudible] If you look at our products line by line, we are still going downwards in prices. We have 1% or 2% per quarter erosion of prices, and although we’ve been able to raise prices from a commodity, the fact is we are still seeing what we call normal levels in price erosion and line it our of basis, so our prices are up if you take total dollars divided by our total units. The prices are down if you look at products one to products 500 and ask what happened to that exactly in the original products, and that is a normal condition.

Gross margin was 55.6%. The prices are slightly down on a line-by-line basis. That 55% is going the old fashion way; it is by cutting cost. Brad mentioned this; our head count was 3509 at the end of Q1, and Q4 ‘06 it was 4386. So that’s part of what we have done to create that gross margin as to become more efficient.

We have $296.8 million in cash at the end of the quarter. Due to some derivatives we used our old stock, to increase the yield on our cash. We ended up converting some of those derivatives to stock, buying so that $30 million bucks, and our cash was little bit up. In a flat weather $296 million, but we’ve earned $30 million in cash buying stocks, so that we were cash flow positive.

[Inaudible] is having its effects. Our depreciation peaked back in the 2001 timeframe of $38 million a quarter. This last quarter it was $11.4 million and we expect that to continue going down and so giving us the long-term tail wind as the five to seven year depreciation windows on our products dropped.

A couple of other points in the press release that relate to questions; the driver going forward is going to be handsets. Last quarter we had some nice business, but the next quarter is when our touch screen products are really taking off some volume. We are currently engaged with every major handset OEM with our product and we believe our product is technically the best in the market.

We got design wins at NEC and we just gave both of them for [Inaudible]. The handset was a water resistant handset. We have been picked, we call our touch screen solution TrueTouch. TrueTouch has been picked for the windows phone 7 series. So that is another platform that we are in.

One of the reasons we have the industry leading solution is we have some added features in our TrueTouch that our competitors do not have. One of them is stylus support. Asian characters are intricate and they require a very fine line of control. Our typical stylus support in the market with a three to four millimeter stylus. Our stylus is 1 mm, so it’s a very fine stylus. There are two kinds; there’s an active stylus that costs lots of money. The passive stylus is just a piece of metal. We support a 1 mm piece of metal. It sounds like engineering gibberish, but it gives you a huge advantage in the Asian market for touch screen.

We also have another thing called hover detection. This comes because we have a PSoC based solution in the program it to do stuff. So on the move, when your fingers are not near the phone, instead of treating the phone like an array of pixel you can or can’t touch, you can treat the entire phone like a big antenna. When your hand gets near the antenna, lets say that you can program that, but lets say it’s certainly your away, the phone then can switch into a hover mode.

In the hover mode, it detects where your finger is generally; even if a centimeter away from the phone, and it enlarges the icon that’s under your fingers. So if you can think about these little tiny icons on the cell phone and there is more and more of them all they all pile up. As you put your finger down near the phone, it will blow up, pop up the sides of the icon, nearly the size of your finger there that works like a pop-up menu, that’s called hover. We think that’s going to cost us to be aware against the competitors who pledges the generic touch screen feature.

We introduced the PSoC based programable powerline control solution, powerline control means, you basically can inject and receive data off from a powerline. We all know about smart hearing and how that will inject data into the house. Another application that we’re closer to is diode lighting.

This would be for example lets, say in the board room I’m in right now and there is a thousand lights above me, instead of having wires going to switches for effective lightening that we have in here, every light would simply have an address. The powerline controler will control the lighting in code form and then for the lights to turn on and off, you don’t have to have electricians wiring bank of lights back down to some switch. The simply can be attached to powerline controller. Powerline controller injects light number seven, turn onto 41% onto the powerline and the light does that for itself, rather than having a hardwire running around.

We also brought out an AC to DC that plug in and it turns on lights which run direct current and achieved a high performance high efficiency AC to DC LED controller. This sits in the neck of the new wiring of light bulbs you probably have seen pictures of a 25 watts, it’s something like 100 watts – 125 watts, equivalent in lighting power.

We’ve got into a bunch of LED light bulbs. We made a replacement of light bulbs with LED’s that lasts about 10,000 hours, about 10 times longer that an ordinary light. The biggest line is a company called the MSi and they make a part through the light emitting, that’s a big win for us. If you are not familiar with the lighting market, that may not be much to you, but that’s a big one for us.

PSoC 3, the product that we just brought out, FirstTouch™ the Starter Kit that’s been the kit for a lot of engineers to play with PSoC 3 the first time. Its been selected for the robotics competition by FIRST, For Inspiration and Recognition of Science and Technology. So they have a robot competition every year where they have to learn about how to the touch interface LCD-display, motor-control, battery-management etc and PSoC has been put through on that. Along with our theory there is a young age, young enough to catch your PSoC.

We are ready for questions please.

Question-and-Answer-Session

Operator

(Operator Instructions) John Pitzer you may go ahead. Please state your company name.

John Pitzer - Credit Suisse

Yes, it’s Credit Suisse. Congratulations guys. Just quickly as you look into the June quarter with the expected change in mix, how do you think that $1.48 ASP is going to trend and how will it continue to trend as TrueTouch grows?

Chris Seams

This is Chris, John, good question. I don’t think you will see the rise that you are seeing quarter on quarter from fourth to first, but Italy will be flat to slightly up again in TrueTouch will provide a positive point to that.

John Pitzer - Credit Suisse

And then Brad, on the commodity ram business can you remind me again where you guys are on the cost done and where you think margins could go in that business as you move ahead with the cost down there?

Brad Buss

I’ll let the king of cash flow, Dana take that one.

Dana Nazarian

Thanks Brad. I assume that you are talking about the true edition to 65 nanometers. Roughly we are shipping about 10% of our rams on 65 nanometer. By mid next year we’ll be roughly in the 50% range. So that will represent a 100% of my high speed rams being a 100 convertive. So it will be pretty linear between now and then.

John Pitzer - Credit Suisse

And what kind of margin expense do you see of the cost down, or is it just too hard to gauge relative to pricing.

Dana Nazarian

It’s a little bit hard to gadget but it will be roughly between 10 and 20 points R at a given point in time, but of course you have to balance that against price erosion which TJ discussed earlier.

John Pitzer - Credit Suisse

And then guys, my last question is, given that your lead times are only four to twelve weeks, I’m kind of curious, T.J. I think you made a comment in the prepared remarks that customers feel it necessary to be booking six months out, hence to strengthen the book-to-bill. Given where your lead times are, why do you think customers are doing that, and I guess, help me get comfort levels that that doesn’t end ugly.

T. J. Rodgers

Comforts at what?

John Pitzer - Credit Suisse

That, that won’t end abruptly.

T. J. Rodgers

I can give you no comfort that that won’t end abruptly. All that things that ever happened, only happened abruptly and I didn’t know they were going to happen before they happened. In the four to twelve weeks, we keep that lead-time of four to six weeks because of the proprietary products and you absolutely never ever can check on a customers mind. Twelve weeks are a synchronous brand, which are our older commodity rams not the high performance rams with routers. That is the only product line that we are allocating.

So based on that there is a radic picture where you get the piece off, but maybe, maybe not your rams. Some of our customers have just booked out across into the next quarter. Also customers book when they think they can get the best price. So following a recession and prices are banging down, it’s no surprise to say by tomorrow, because it will be cheaper tomorrow.

If you think prices are going to be stable or possibly even go up, then you want to get your orders in right now and lock in your current price. So it’s a little bit of that dynamic. Right now our booking are great and we love it, but this not the land rush that we saw in 2000.

Dana Nazarian

Yes, I think John that Chris talked about things being very measured. I mean we are spending a tremendous amount of time, between his guys with direct guys, with the ops guys with the supply chain guys, monitoring inventories in the lead times across the board and we don’t see anything crazy.

Then the other thing like Chris touched on, we have a lot of new customers and a lot of new end markets that we are getting booking on that we kind of never had before. So regardless of the paranoia that some of you may have out there. Whether it’s touch screen, whether it’s the optical navigation center.

We are doing more in automotive than we have and it goes on and on and on. Those are incremental booking and backlog, but it’s not like they are up 200% and it’s crazy, they are literally new stuff and we have many of our product lines that are still aren’t even here, the Q3 ’08 revenue levels yet. So there is plenty of room to move and we think it’s been going pretty measured, and we are looking at it very tightly, trust me.

John Pitzer - Credit Suisse

Okay. Thank for the color guys.

Operator

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

Uche Orji – UBS

Sure, thank you very much, its UBS. Let me just ask you, starting with TrueTouch. Obviously you are doing very well in Japan, but is there any expectation for any kind of success within top three with TrueTouch?

T. J. Rodgers

Being the top three handset makers?

Uche Orji – UBS

That’s right.

T. J. Rodgers

I’ll let Norm take that one.

Norm Taffe

Hi, Uche. Relative to the top three, I think we have already demonstrated success at two of them and we expect to be successful at all the main guys. You mentioned Japan, we did have early strength in Japan, but without naming all the contents we are having quite a bit of strength in Korea, North America, and Europe too, so I don’t think its limited in any way. I think there was good strong adoption in early options in Japan its kind of led the way, but we are having broad success.

Uche Orji – UBS

Can I just ask you about CCD? I think you guided flat when you guided last quarter, but it came in down 9% there. Did I get my understanding of the guidance wrong on CCD?

T. J. Rodgers

I think we expected it to be down still seasonally.

Uche Orji – UBS

And seasonally it’s usually around 9% down?

T. J. Rodgers

I mean for CCD it can normally be much higher than that.

Uche Orji – UBS

Okay.

T. J. Rodgers

It depends on the mix of the product that goes on there.

Uche Orji – UBS

Okay, alright.

T. J. Rodgers

CCDs big quarters are Q3 followed by Q2, followed by Q4, followed by Q1 is the bad quarters, Q4 are the weaker ones. So, this quarter is going to be very strong and the quarter after that will be strong as well.

Norm Taffe

I mean the key is the context I tried to put, and maybe it didn’t come across there, but that was the highest Q1 revenue by a wide margin that he’s ever had because of seasonality.

So even in a year that’s still not back to peak revenue, he was able to do a pretty big step up and I think you will continue to see not only the TrueTouch, which Norm talked about is doing very well there, but clocks and USB are all coming in nicely into Q2 as well. So, we are real pleased with where that ended up.

Sequential comparison in a consumer market, Christmas is over and the market goes way, it’s not at good as year-on-year comparison, so year on year what was CCD's percentage.

T. J. Rodgers

Last year we were up over 50%

Norm Taffe

Quite frankly it was not a bad quarter, but year-on-year CCD is doing great.

T. J. Rodgers

Well again, even I think the Q1 record there was 30% higher.

Norm Taffe

The Q1 record is actually the key factor was 35% higher that we have never done before in any Q1.

Uche Orji – UBS

Just one question, Brad. On taxes, I'm still a little bit confused by a couple of things on taxes. One is, how much NOL do you have, and when do you think you will start to pay taxes?

Brad Buss

NOLs we have plenty, we’ll have more updates for queue. I haven’t fully been through with the final numbers for the quarter yet, so I don’t want to misguide but there are a couple of $100 million. So the 10% rate, I thin you can model all though 2011 at this point on a non-GAAP basis.

Uche Orji – UBS

Okay.

T. J. Rodgers

And the only caviar what are friendly administration has up there sleeves, unless something changes now and then, I am fine and comfortable with that.

Uche Orji – UBS

Okay, that’s helpful. Just one last question, this is for T.J. I mean if I look at the $14 million or so in Sync SRAM business in 1Q, I’m still trying to understand how this reconciles with the end markets and whether we should be worried about double ordering within that business.

T. J. Rodgers

The SRAM has got two parts. 60% of SRAM is taken like performance RAMS to companies like Cisco to differ with Alcatel-Lucent. Both companies, we have very tight relationships with them. We know about their consumptions. Most times we are actually doing a consignment program. Asynchronous go a lot through distribution, we have less visibility and inter possibility of several orderings. There was always a possibility of that, but the way that we gauge that is by push outs in cancellations and inventory levels and none of those were fab right.

Uche Orji – UBS

Okay, that’s great. Thank you very much.

Operator

Thank you, Tim Luke you may ask your question and please tell your company name.

Frank Keller – Barclays Capital

This is Frank Keller on for Tim Luke with Barclay’s capital. Congratulations on a great quarter guys. Just had a question on seasonality in the back half of 2010 after a very strong first half; what might we be thinking as we look out in that time frame.

T. J. Rodgers

The sales guy and the CFO are each pointing at each other. I think I kind of alluded in the call; I think we feel at this point obviously with the backlog, the booking and the new products, we still expected a very nice seasonal growth in Q3, and Q4 it is a little too far away.

Frank Keller – Barclays Capital

Okay that’s pretty helpful. So over the same timeframes then the inventory levels to sustain that kind of revenue. How are you thinking of that on hand and at distributors?

T. J. Rodgers

Like I said for this quarter, we expected our inventory level to be flat again. I would expect that this needs to go up in Q2, because Q3 is a big consumer quarter and a big chunk of our consumer business is fulfilled through distributors, especially internationally, but I don’t see it going crazier or out of line.

The big thing that we look at is kind of the weeks or days and those have been managed very well, and quite frankly I still think his employees combined are still to well for us.

So we’d like to see him go up a little bit in the back half, but I don’t think you are going to see any monster growth if that’s what you are concerned on. Everything we are shipping is pretty much going right out of the door.

Frank Keller – Barclays Capital

Thanks so much guys, best of luck.

T. J. Rodgers

Thank you. Happy earth day by the way.

Operator

Thank you and Doug Freedman you may ask your question. Please state your company name

Doug Freedman - Broadpoint AmTech

Yes Broadpoint, thanks for taking my question. Brad can you give us some color on what made the OpEx come in underneath your expectations there?

Brad Buss

Two things right, like I told you guys we have a very big, big focus on the OpEx right across the board. I mean it’s deployed through all the variable comp plans. We have a world class profit effort that we all fit in very regularly, so we are turning over every rock, so we continue offshore people, we continue to centerline certain functions.

The spending and the emerging tech guys, all these start-ups, big plans, but can you hire enough people who are a little better, and then the normal thing I’m just finding of R&D project, its everything going on, just the math. When you do the math this quarter with the next are you using the consultant or not, so nothing earth shattering just a lot of goodness and a lots of areas that have added up. Again I’ve got it going up slightly just rally because of the project and a little bit of higher variables sales expense.

T. J. Rodgers

There is one dynamics we have growing in the company. We call it the hiring auction. This is a technical we turned on a year and a half ago that when recession started. It goes like this. Every 35,000 people, we lose about 10 people a week and every week in my staff meeting is the only time you can hire anybody and when 10 people leave there salaries are dollarised, then 20% of that money is put in the bank and 80% of that money is then auctioned, we use it to auction off amount the Vice Presidents.

So they all come in with the number one choice. I got to have A, B, C or D and then we have a lively discussion about which VP is number one choice, is more important than another one.

Brad has lost a lot of those battles in SG&A. So we just really have to live on hiring. Now it turns out that the gain is less than our annual plan. If you look at our annual plan in our projections a lot to consult and right now I haven’t turned most of the hiring option as we call it yet, because I am still a little bit worried about the macro economy.

Doug Freedman - Broadpoint AmTech

Great, thanks for that color, very helpful.

T. J. Rodgers

Another point is one, VP’s who come in four weeks in a row, don’t get to a number one person. In spite of a lot dynamics that we turn on if they can come in and cut a wheel with the HRVP.

So they can come in and say “I am never going to get my person in the auction. We are going to hire this keepers and that keepers and I am always going to be short on that. So I want to do a deal” and there is a form we fill out where they list people who go away, and typically they might be closing a site or low productivity or whatever, and on the bottom they are let’s say $200,000 which is salary equivalent and on the top they can write in whatever they want.

As long as they are moving money from less to more productive use within their own group, they are not subject to the option and that. So we call it as a pre planned deal and those were allowed. So they become like three quarters of hiring. The VP is opposed to saying, “I have only got 500 people working for me, and the company can survive without one more person of ex type.” They will again say “Usually it’s five people, and I found these two key people that I need” and we’ve been doing that for a year-and-a-half and it really does work.

Doug Freedman - Broadpoint AmTech

Terrific. If I could move over and focus on gross margins, there were a lot of really good gross margin performances in the quarter. Some I think you alluded to as related to mix. Is there any concern over any of the business units running at sort of gross margins that seasonally could come down as we start shipping products that are into more competitive end markets as consumer comes back imputing more seasonal; any of those things.

If you could highlight where you think we maybe should temper our outlooks on gross margins or has something really changed that makes some of these businesses inherently higher margin than they historically ran.

T. J. Rodgers

I think Dough, no. I mean there is nothing you should be concerned on. A lot of the focus that will be passed on is really the world class profit and looking at all our costs and all of our lead areas, our fixed overhead have been there and a lot it -- the fixed over head, we did amortize it as the sales grow up, and there’s nothing that is really concerning. I mean we have very few real low margin stuff right now, and we got a few of the emerging tech guys as they grow the RAM as begin part of your system, but no, we are very pleased with where things are at.

I mean don’t expect it to go to 71% or anything crazy overnight, but there is still probably a little bit of upside, and then we will work out and try to refine the model later in the year, but we are very, very pleased with where that’s gone and the fab and the foundry partners like I mentioned before. I couldn’t be more pleased with how they are executing.

We believe that the mid 50s to a mid sustainable level for a company now is 81% proprietary products and no longer a commodity RAM company.

Doug Freedman - Broadpoint AmTech

Great, I will jump back in the queue with further follow-ups, and give somebody else a chance here. Thanks guys. Congratulations on a strong quarter.

T. J. Rodgers

Thank you.

Operator

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

Adam Benjamin - Jefferies & Co.

Jefferies. Thanks guys. Just a couple questions and a follow up on the CCD front. The group was down 9%, you indicated maybe down slightly, but I think you also indicated that TrueTouch you expected seasonal growth, just given your design RAMs. Can you just give some better color Brad as to what was down the most in terms of like order magnitude within that segment between the timing USB and PsoC, as well as TrueTouch.

Brad Buss

I will let Norm talk on a couple of things.

Norm Taffe

Hi, I’ll talk to TrueTouch specifically. Relative to TrueTouch the revenues were actually very slightly down, and could be driven really by a large miss of one American customer. Absent that miss and based on that RAMs from new customers, which just began to ramp in Q1, we would have set another quarterly record, and we expect to do that in Q2, because we are starting to see a broader array of customers driving the TrueTouch revenue. So that was really driven by one major customer change.

Brad Buss

Yes, but I think if you look at it, the USB, the PSoC which encompasses the TrueTouch and then the top business kind of in that order, and again more importantly, most of them are seasonal in nature anyway. Nothing I’d be worried about. I think like Norm said, the TrueTouch, other than the one customer who was inspiring quite well and all of them are growing up nicely in Q2 as you would expect. Probably a little better than we normally do in Q2, and I would expect to continue to see that ramp, especially PSoC all throughout every quarter, and PSoC will be starting new quarterly and annual records this year.

Adam Benjamin - Jefferies & Co.

Norm, this is a follow-up, but for the one customer TrueTouch would have been up sequentially?

Brad Buss

Yes absolutely.

Norm Taffe

Yes significantly up. It would have been up ahead of our plan. I mean guys you got in prevention up?

Brad Buss

Yes sure, so we got over 25 customers and well over 40 different models ramping to production. It’s dominated by few courses at this point, but that too is starting to grow in terms of the number contributing.

The non handset stuff is getting very good traction as well and that will start layering some revenue in the back half of the year, as well as the bigger screen stuff. I actually think in Q2 we actually have a meaningful contribution from non-handsets for the first time in TrueTouch, and quite a few other markets GPS, digital cameras starting to really adopt in ship volume in TrueTouch.

T. J. Rodgers

Again just so you are all clear; remember when we talk touchscreen, we are truly talking touchscreen controllers and we are not talking our CapSense business, which I think some other people like to combine together. Then again our CapSense business remains very strong as well and want a new adoption and a lot of consumer electronics, but if you look at user interface in total, I mean its really on fire and CapSense customers are kind of like the formed team that move up into touchscreen down the road as well. So I think the penetration in both of those markets is well ahead of our expectations.

Adam Benjamin - Jefferies & Co.

Great, and just moving on to gross margin, Brad you previously talked about kind of getting to 55 in the second half. You thought you were above that. You care to kind of post a new targets that we should be thinking about. I mean you do have some tailwinds as it relates to SRAM and some of it is driven by mix with some good pricing. I mean should we be thinking about a level of 56, 57, 58 in the back half, is that possible?

Brad Buss

Let me get through this quarter, and like I said we will find something in the back half. I think 56 is probably the right area to think about and model right now. I think you need to look at the mix of the products, look at our second half standards and everything else, and then I can kind of come out and give you a better feel.

I think getting expectations and that’s why it’s trying to tamper into it. I want people running to the high 50s right away. I think we should all be very happy that we are at the 55 much quicker than we think its sustainable. I think that’s the right method to get across.

Adam Benjamin - Jefferies & Co.

Got you. Then this one last question on two emerging businesses, the optical NAV. You have one big platform that you're designed into that ramps, kind of mid year into the second half. I'm assuming you have other designs with that product. I was wondering if you can talk a little bit about that product line; how material the revenue could be this year and into next, and then just a follow-up on TJ's comments on the LED side. Is that really a revenue opportunity for next year and how should we be thinking about that too, for materiality?

Dinesh Ramanathan

Hi Adam, this is Dinesh. So, the optical navigation solution that we are offering is actually getting designed in, like you said at one of the customers which is a big design win for us, and then the second, we have other customers that are getting the same hard design win as well, so we are going to see our North American customers and Asian customers actually pick that design up for us as well.

On the LED front, I think that’s a huge opportunity for us, given that you are going to see a lot of LED based actually bug shop, and market places. In fact today being earth day, a whole bunch of other people are actually stocking up their shelf with LED-based bulbs to mark this day and a lot of those are actually coming from designs that we have actually given those customers. So, I think there is a huge opportunity there and we are sort of at the cusp of that business.

Brad Buss

So, on the optical navigation system, we gave it that name. You should realize that the optical navigation system is exactly a krypton PSoC exactly, and with an optical sensory. Its really a PSoC chip which has all the flexibility and capability, touchscreen capability, the CapSense’s capability, PSoC will then add an optical sensor on it. We expect to do our first $1 million quarter this quarter, and we will ramp to a multimillion-dollar quarter by the end of the year. So that one is another PSoC win and the chip doesn’t sound like it because of the name.

T. J. Rodgers

Adam, I think on the LED stuff, I think we will start to see some nice ramp this year, but from a material end of it, I think we are going to need to wait till next year. I don’t want you guys running around thinking there is $10 million of LED lighting. So that’s a lot of customers attractions and looks very good, but I think the ramps are really unknown at this time. So you guys get out there and buy some bulbs and say hi to [Inaudible].

I saw the new product this morning which is AC to DC converters, so you can plug into a wall and your car can [Inaudible]. We have been selling car keys in which an AC to DC converter works. In fact it take the DC power supply in, turned the factories light bulbs and try to control the LED. Between those two, we will get our first million dollar quarter next quarter and growth is in there.

Brad is right, don’t put in $10 million, but to me it’s a kind of a milestone when you got to brand your business to get that $1 million quarter and your growing as you go through it. So we got the PowerPSoC family having a $1 million quarter, this quarter and next.

Brad Buss

And like T.J. said, the ONS, that’s going to ramp pretty steeply in comparison to the LED. The PowerPSoC is one of the massive kinds of products that would take a long time to ramp up and its 50% gross margin is a lot like -- you think of the models like a linear integrated circuit. The ONS product, the optical PsoC, now that’s a cellophone chip and that’s going to take off.

Adam Benjamin - Jefferies & Co.

Right. No, we're seeing that across all these new handsets that are coming out, that's why I asked. I mean you're seeing the optical nav at the high end across all smartphones so that TAM is significantly increasing. I'm assuming with your touch products it obviously is a good combo way to pair those. So that's why I was looking at that business as a $100 million business at some point, which it sounds like that's realistic over time

T. J. Rodgers

If you guys are using your time frame as absolutely effect, that optical NAV is getting more and more popular, and I believe with a major interest parameter based system, we are by far with this optical navigation system technically in the market place. You’ve got guys that have been around for a long time. The psychology that they are using is not as advanced as ours and we believe that we will take share over it over time.

Dinesh Ramanathan

Just one other thing; in addition to handset market, we are seeing penetration into the non-handset space as well. So, I mean there is a much larger market than just the handset market production.

Adam Benjamin - Jefferies & Co.

Alright guys great. That’s all I have, thanks.

Operator

Thank you. Glen Yeung you may ask your question and please state your company name.

Glen Yeung – Citigroup

Can I just clarify that the statement on TrueTouch for the quarter, is it because you missed a win that you expected to get of a customer or a customer missed its shipment numbers?

T. J. Rodgers

What I was saying is the customer missed, but we had expected to ship to that customer. I was a fairly high profile customer and it was purely just missing expectations of normal demand that would have came through that. Other than that we have done better than we expected in design and revenue with the panel for the customer base.

Glen Yeung – Citigroup

Okay. The second thing I wanted to go back to is something TJ you said about your hiring practices, and still a suggestion that you have got some concerns about the economy. I wonder if that's something that you see reflected in your customers, particularly given the order activity that you've seen. Do you sense that at this point it's pedal to a metal type of thing in terms of orders, or is there still that degree of hesitancy that people have because they're uncertain about the economy?

T. J. Rodgers

I think Corporate America, we saw the customers that will make the biggest statement, but they are still very conservative. But that’s what I am telling you, it doesn’t feel like 2000 you know.

In our position Glen those are good things. You have the right to get in line and then we’ll say how much you have to pay when you get the front of the line. Today they are ordering it, they are negotiating prices, they are still taking at it on a line by line basis trying to get a percent or two per quarter, and they are ordering only what they need.

Its like the job situation. If you look at it, this is a corporate wide statement. The economy is better than the stock markets, but near California you got like 12.4% on employment. So thinking of the burden of the employee is right now something corporate America is not doing. So I think that conservatism is just country wide right now.

Brad Buss

Right. Which gives us a lot of comfort right. You don’t see an end market, a bunch of customers going crazy, increasing 200%, and the other thing like Dean had touched on right, the other thing to look at is the cancellations and the reschedule. There isn’t any muddy activity going on there. We are more positive than not and with GM paying back their debt; it’s got to be good right.

Glen Yeung – Citigroup

Can I ask another question about linearity in the quarter, and only as much as this. I'm just trying to understand if you were running above plan the entire quarter or was there some point in the quarter at which it seemed like things started to get better relative to your expectations? As part of that, I'm wondering if at any point your customers sort of became more concerned about relative supply availability over the course of the quarter.

T. J. Rodgers

Glen I’ll let our VP of manufacturing show us today into that question.

Shahin Sharifzadeh

Hello there. The order patterns and shipments are quiet linear off the quarter and we are going to see a big pop just in terms of the quarter and we should expect the same thing in Q2.

Chris Seams

Hey Glen this is Chris; let me add just a little bit to that. What we have seen is in addition to the linear order patterns that people are placing in the shorter term, they are just placing more orders further out as well. They are getting their position in-line if you will, but it’s not a land rush, but I’d give a little bit more favor.

I would say, throughout the quarter there was a consistent level of request for expedited; increased business that customers didn’t anticipate they had on their end. So it’s another sign of conservatism on their part and needing to rush at the end at the last minute I’ll say, and those last minutes occurred every week in the quarter.

Glen Yeung – Citigroup

Are there any differences in terms of contractual arrangements on longer term bookings, i.e., are there any restrictions that they have in terms of having to take it or pay penalty, for example if they don't?

Chris Seams

Chris again. Most of our customers are adhering to our standard terms and conditions which are industry standard for standard part and for some part they are about the same as well, but for some parts we require a longer period of commitment. They do have to cover for a standard part. I think 60 days is their commitment where they have to take the parts.

T. J. Rodgers

Yes, I would say the terms are 30 days and there’s a lot when you send me a 30 day window that is not cancelable for standard products which is almost all of our business. When you have a special product, marked especially for you, programmed for you, within the window of 60 days and we have not either changed or tried to change those terms.

Chris Seams

And again Glen, don’t forget my comment on the new products. A lot of the ONM stuff for instant, the guys are coming in any new products and any new customer ramp. So better we lay in a good six months of backlog, because you got it built into a pretty nice nut right.

You need the visibility and you have to start the way for them, and like we’ve been saying over and over, we have a lot of new products and a lot of new designs at new end markets, and that is a decent portion of the backlog which you don’t have to worry about it overheated, and its going to evaporate overnight, right?

Glen Yeung – Citigroup

I actually want to quantify that; what the portion of your business is sort of new business relative to new business capacity and up ticks in cycles?

Chris Seams

Not off the top of my head. Let me look and see if we can slice it that way.

Glen Yeung – Citigroup

Okay, all right. Thanks.

Operator

Thank you. Christopher Danley you may ask your question, and please state your company name?

Christopher Danley – JPMorgan

Thanks. It’s JPMorgan. Can you give us a recap on what SRAM pricing did during the quarter, and how much of that helped gross margins and how you expect pricing to trend for the rest of the year?

Dana Nazarian

Yes, hi Chris. This is Dana. Pricing is relatively flat. As T.J. said it was generally speaking just a tick down on part by the part basis, but its flattened out and as we said earlier, we have improvements still to make on our cost structure, so we are more than offsetting quite declines with our cost improvements.

Christopher Danley – JPMorgan

And so you expect pricing to get better the year goes on?

Dana Nazarian

I wouldn’t expect significant changes. Since 2007, pricing in general on memories has been a slow, but small decline and its just flattening out now, but I wouldn’t suggest that there would significant increases for that. The statement that I make as much as for cypress is for all the SRAM suppliers. They are all behaving about the same.

Christopher Danley – JPMorgan

Got it. And then Brad for gross margins and OpEx in the second half of the year, are you assuming seasonality/above normal seasonality. How much leverage is less in gross margin and how about anything popping up in terms of OpEx that would take it one way or the other?

Dana Nazarian

The same question is going to continue. [Multiple Speakers] I mean we got to look at it a little deeper, but I think pumping up to 56 and keeping there as a smidge is the appropriate thing right now, and I think OpEx again. I am hoping not to see it go above 80.

Like I said before, the bills grow up stronger, the variable stuff with that might move, but I don’t see any major big tick up right. We are very vigilant on where we want to go about that, so $1 million, $2 million maybe really is and that’s just really going to follow up sales. There is no big programs or anything else outside the norm that we are expecting right now.

Christopher Danley – JPMorgan

Okay. And then last question is…

Dana Nazarian

How do you like those GAAP running Chris?

Christopher Danley – JPMorgan

Very nice, very nice. The only thing I got going for me. Last question on lead times; a lot has been made about lead times. You guys sound like you're actually doing a pretty good job, but perhaps some of your competitors are seeing their lead times stretch out. The first question is, how do you compare your lead times versus your competitors, and are there any share gain opportunities for you guys versus your competitors since your lead times are relatively stable?

T. J. Rodgers

Let me take that question, because it cuts across divisions. There’s two reasons; one is, we now have our own tab which is all we have and we see having long lead times right now, and we have got foundries. The foundries are moving on our book fax and we are really starting up 85% of our wafer starts. So we can ramp 2000 parallel; that would itself keeper our lead times down.

We have actually been held back sometimes when companies can order to the entire box and some of the other makers of the chips on the bong are pushing up lead times. Is there an opportunity? There is. We believe we are not number one SRAM maker in the world. It’s something on the order of 30% market share, and one of the reasons we are not taking opportunities is the new ramp price is in excess, higher than it use to be.

In that provision we are trying to maintain lead times, provide a stable business, capture share and hold it. So yes, there is an opportunity and we are taking shares as other suppliers push out and where they are able to buy RAMs.

Christopher Danley – JPMorgan

And as far as your ability to get wafers from foundries, you feel pretty good about that for the rest of the year, like their lead times aren’t stretching out?

T. J. Rodgers

Lead times are stretching up. Being a fab guy myself, process guy. Our two major foundries which are great semi conductors for 130 nanometers and less in UMC for 55 nanometers, I have gone out of my way to establish a very strong relationship with the CEOs of both of those companies, and work with them in a partnership way; help them out, offer technology, and offer yield and also stuff like that. So we feel that we are going to get the wafers we need from our foundries.

Christopher Danley – JPMorgan

Thanks a lot guys.

Operator

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

Suji De Silva - Kaufman Bros.

Hi, Kaufman Brothers. Nice job in the quarter guys. So for touch as you guided for the second quarter, did you assume a continued head win from that large customer or just conversely what’s the linearity? Are you seeing more customers starting to ramp up through the rest of the year? Is it lumpy or steady?

Norm Taffe

Hi Suji, this is Norm again. Relative to the one specific customer, they are not expected to impact. As far as from a growth prospective, Q2 will grow elsewhere, and so they won’t have a large impact on growth as to the growth versus Q1. It is still fairly lumpy business, because you tend to have models and various models picking up and adding. I do think there will be an acceleration in the back half of the year even though we have grown to a nice number; we certainly expect the back have to grow even more substantially into touch.

Suji De Silva - Kaufman Bros.

Is the doubling of revenue for the year still on the table, even with the one customer having challenges?

Norm Taffe

For two charts, yes.

Suji De Silva - Kaufman Bros.

Okay, and then the other question is really a little broader. It sounds like you have a number of key components for the handsets that you can start offering together; the PSoC Touch, West Bridge the ONS. I think if I got the press release it is some value of the bundling of that that becomes the competitive advantage for you guys and if so, what’s the content opportunity of those all going together versus individual parts, just give us an idea there?

Chris Seams

Suji, this is Chris. I don’t think our customers would ever let us bundles, but if they look at a supplier they can offer multiple solutions into their end product, they won’t let suppliers today, and that makes us a prime target for them, and we are seeing that on the other end as we continue to get more and more intimate with them in understanding what they need. We will be designing the next versus of PSoC for that third, fourth, fifth, sixth solution in their handset.

Norm Taffe

Yes, I mean the real big thing that we are proud of was three years ago we were MIA at handset guide, and I think now between the three big offerings right we’re looked at as a strategic require, but also an innovator, and they are really loving the programmability.

I mean that’s probably the biggest innovation a lot of these guys have seen, and we got onto the table on many, many things now, and that’s a big deal improve to happen in two years and the revenue we’ve had is pretty good. I mean we could be well north of 20%, 25% of our revenue in handsets in over a two year period, which is unheard of.

Suji De Silva - Kaufman Bros.

Okay. And last, a quick question on West Bridge; can you give us a quick update on that business, whether it’s still tracking to expectations or whether it’s may be up ticked again here. Thanks.

Chris Seams

Right now, it’s still tracking the expectation. It did better in Q1 and contrary of profitable, I do believe that’s not going to go to zero in the back half of the year. I won’t name any particular analyst.

Suji De Silva - Kaufman Bros.

Thanks guys.

Operator

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

Srini Pajjuri – CLSA

Thank you. CLSA. Two quick ones, one on the SRAM you said you were gaining some share. Can you give us an idea of where your market share is, and that how much more opportunity you have to gain further share from hereon; and for Brad, quickly on the uses of cash, give us some idea. Thank you.

Dana Nazarian

Hi Srini, this is Dan. Its always hard to tell exactly what our number is but we feel we are in the 30% range, there’s still room to grow. If you can be greater than 40% in a market size of 10 and 12 players, that is an extremely big accomplishment. So that probably is the cap, and its not something you can do overnight. It’s slow and steady progress like we’ve been doing for the last 25 years.

Brad W. Buss

Srini, just did you say the use of cash?

Srini Pajjuri – CLSA

Yes, use of cash. I mean I know you have been trying to buyback shares, but should we think about any potential M&A or dividends or anything else?

Brad W. Buss

Yes. Let me give you as a low down. Obviously we have a lot of cash and we are generating nice cash, so putting that to work is something we want to do. We would be buy in the crap out of the stock right now. If we could we are constrained with the sun power, the spin off really until September, October of this year, and when we could do more.

On the M&A front we are always looking at stuff and we have a pretty active group. We are not hurting for organic growth I think as you can tell. We’ll be very selective if and when we do anything in those areas. Then as far as dividend, it’s definitely something we’re talking about more internally.

Personally I think us repurchasing stock has a bigger bang for the buck. We’ve been pretty adept at buying at an opportunity time. So I probably waited more towards future by backs as being the biggest return to shareholders, and then the other two will evolve overtime.

Srini Pajjuri – CLSA

Thanks Brad.

Operator

Thank you. Betsy Van Hees you may ask your question and please state your company name.

Betsy Van Hees - Wedbush Securities

Wedbush Securities, thank you. A couple of questions, the first one for Dana. Dana you’ve had some pretty good growth in SRAM over the last couple of quarters. As I’m normally not in the business is it fair to say that we are going to see that kind of that range quarter to quarter?

Dana Nazarian

Hi Betsy. I would say that the growth is a combination of market share gain in the general market. So I can only comment on market share gain. On the market share gain, like I said slow, steady progress. You can gain two or three percentage points a year or maybe more than that, assuming nobody else exits the market, and if somebody else does, then you can go higher than that.

In terms of just the broad market, I can only see out three months or so. Its still continuing to climb. The book to bill ratio as mentioned earlier is very high right now. I would expect that to start slowing down in the second half of the year.

Betsy Van Hees - Wedbush Securities

All right. Thanks, that’s very helpful. T.J. you mentioned that the mix of SRAM, you got 60% synchronous and 40% async. Do you see that changing in the near future or is it going to continue to stay the same?

Dana Nazarian

Asynchronous is a slightly declining market, synchronous is slightly increasing. So the net of the two leads a pretty stable market. The networking cagers are high single digits and that’s where our high speed networking RAMs go. So I think the mix will continue to go higher on synchronous and lower on async; and again it won’t be dramatic quarter to quarter.

Betsy Van Hees - Wedbush Securities

Thanks Dana, I really appreciate that. T.J. I have a question for you. Of the things that you can control in your business, what are the concerns that you have; what you are watching closely that would cause you not to be able to execute in the back half of the year on your internal growth strategy?

T. J. Rodgers

Internally we were on a tight shift. I’ve got the best staff we have ever in the company and we can execute, so we are pretty much dependant on the market overall. I think to Dana’s statement, things look great for 90 days, and then the disappear over the edge of the year. I’ll tell you when I get to that horizon, what it looks like after that. That’s where my picture is for the company.

We’ve got a nice tight organization right now, and if things gets tough, so be it, where we will hold our cost and check and we will knock on wood to remain profitable all the way down if there is another bottom, and if the market gives some cheap stock and we get pass that October window this year when we can buy back we got a lot of cash. We’ll go make few shares and we have few shares for the next time going up.

Betsy Van Hees - Wedbush Securities

Thanks T.J. I appreciate it. Once again, congratulations on a fantastic quarter and great guidance.

Operator

Thank you. Jeff Schreiner you may ask your question please state your company name.

Jeff Schreiner - Capstone Investments

Capstone Investments. Thanks for taking my questions guys. The first question I would like to ask is may be towards Norm, but what percentage of true tax units are likely going to be from the third generation products in calendar year 2010. Should we still be expecting there might be a 50-50 representation from second generation and third generation?

Norm Taffe

That’s a good question. Yes, I think that’s actually still a pretty good number in terms of units. I think the third generation has a bit higher value, and we are ramping that well. I would like to point out that the third generation product didn’t just get introduce, but got introduced and should ramp to over a million units in it’s very first quarter, which is a very fact ramp.

By the end of the year, going out of the year, our third generation probably will be the highest volume product, but our second generation took a leadership role aswell. So I think the 50-50 on the year is probably very meaning and the third generation is going out of the year.

Jeff Schreiner - Capstone Investments

Okay. Also just wondering on this, maybe you can talk about, we’ve heard about the positive visibility that you guys are seeing and a lot of it incoming from new products. So one might assume that that’s the TrueTouch market and maybe some touchscreen handset units. Can you comment about where you think the overall market in the marketplace cypress will likely end up in 2010 in terms of maybe share gains versus incumbents.

Norm Taffe

I could tell you kind of what we see from our own internal numbers what we think we are going to be. So to your first part of the question I would say it’s two ways. We see a lot of visibility in terms of programs we are in. The only lumpiness we get is not necessarily knowing when those programs are really get a ramp first expectations. So we are very confident in our design position at many of the major OEMs, sometimes the model slip out, so we can or can’t predict exactly when they grow, because you know the general direction is up.

And I guess to your second part of your question, we are pretty confident that we are going to be a number one unit supplier of touch screen solution this year; and based on internal numbers we think we may already be in that position, and certainly expect to be there for the full year.

Brad Buss

Okay. And I think on top of that Jeff is, you guys will know that the markets growing. The debt financially in the handsets and the non handsets and we’ve got very good coverage in that, and we’ll probably most likely growth faster than that market overall. So its on fire.

Jeff Schreiner - Capstone Investments

Okay. One last question just coming back to you Brad, if I may. Just back of the inroad, it looks like you guys capped around 88% of the incremental revenue into the gross profit line in the March quarter. It seems to be that you are talking up the margin possibly overtime down the road after you get back to us, but is this a peak level or is there a lot of more room in this number, and what are some of the key drivers for that?

Brad Buss

Well, you guys are talking about the margin and I hope to follow you. No, I think the big thing like I told you guys right, I would like to see 80% plus of the incremental GP though the bottom line. I think we are delivering on that, and I think its going to be a combination of whether the margins are steady at this new record levels or creped up slightly and managing the OpEx, but we should be able to continue to do that throughout the year.

I think we have a tremendous amount of leverage this year and well into next year as well. A lot of these new growth drivers that are coming in are second half right. So you are not even going to see a full year until next year, and again its our focus internally to have that drop through. We plan on being well north of 20% PBT company, and will probably be there next quarter as well. So expect strong leverage to continue with the message.

Jeff Schreiner - Capstone Investments

Okay. Thank you very much, and I appreciate your time.

Operator

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

John Barton – Cowen

Thank you. Its Cowen. T.J. you touched on the competitive advantages of TrueTouch, could you elaborate a little bit more may be Norm whoever, but as far as how far behind you think the competition is. How price competitive is it getting or is the functionality keeping you from having to deal with that new entries here in the short term, longer term etc?

T.J. Rodgers

Let me give that one to Norm. Now correct with every [Inaudible].

Norm Taffe

Hey John. You know relative to how far behind competitive are, I guess I don’t want to overstate and kind of make up where we think our competitors are entirely, but very tough competition.

We are being very aggressive in this market. We feel like we were the first to introduce multi-touch on capability, and being first with that, it’s not only a good position with customers, but also allowed us to continue to develop software features off of that base which keeps us ahead of our competition as new devices come into the market.

We continue to have, and you cant under estimate the long term benefit of just a much more flexible solution. So now we can make changes to adjust to new feature capabilities much quicker than our competition, and I think that’s virtually a permanent feature until somebody else decides to come in with this flexible solution. So that, along with facets we are very, very good in noise immunity performance and are going to operate into the complex handset model. Still we think we are ahead on those parameters.

Relative to other people jumping in the market etc…honestly we don’t see that much of that. We see the top guys who are top competitors along with us or particularly in TrueTouch which is a more difficult technology than even cap sense was. We find that the varied entry is actually reasonably higher for brand new guys. People with lot of experience in capacity sensing and all the noise associated are there fighting at every account, but we think mostly it’s those same other two guys, not a broad player on the touch screen side in particular.

John Barton – Cowen

As you look forward, and still staying on TrueTouch here, what do you think the extent of featured future growth is. Meaning, can you highlight the fact that multi touch has kept you in the lead and get you design when, if you get a load of the fact of your touch prices etc you’ve now got hover detection, you’ve got the stylus. What is the rise and do you think new feature enhancements are going to be available to you to exploit that trendmill so to speak.

Norm Taffe

Well, yes I won’t really call it a treadmill as much, because I really think we talk about this. It’s exciting, its brand new, but really we only penetrated the higher end of this cell phone market and even still resistant is not even gone out of the market. I think there is a lot of up swing if just people moved capacity.

I think having these new features is really what allowed it to be the application provider right, and other capabilities to their phone, but we are still just at the front end of the option period. I think well through 2010, 2011 and beyond we are going to see growth just in a raw adoption with what I have today. I don’t know that far of the way ‘12 and ‘13 whether we start to stabilize, but I think there is very strong growth in ’10 and ’11, just from what we are doing right now.

John Barton – Cowen

Well, in the non-handset stuff, that’s the other area that’s you are just seeing everyone and their mother want to go Norm. Is that a multi year cycle?

Norm Taffe

Well I’m glad you brought that up to, because we’ve only been talking about the small form factor in the non handset, which is starting to contribute meaningfully, particularly in the next quarter, but not even really started is obviously the larger form factor opportunities both in terms of local notebooks, laptops at the higher hand or ebook and tablets that are driven really by the ITECH.

I’m glad there’s going to be another growth driver that will meaningfully impact 2011, ‘12 and ‘13 and those are very front end designs right now. We have good technology that obviously reports that as well. That’s another growth driver which I think will build into the growth we are seeing on the handsets and the smaller compact of designs today.

John Barton – Cowen

So I understand your statements with respect to adoption, driving unit demand. My question is more along the lines of, are the features sets going to continue to expand such that you can have a significant competitive differentiation relative to the other players and enhance and protect ASPs, margins, etc. as compared to just a rapidly growing market where the competitive landscape is a little bit different at the future level and maybe becomes more price competitive?

T.J. Rodgers

Let me answer that question. Right now we don’t have any competitors that are using TrueTouch other than this touch screen controller in the market.

John Barton – Cowen

In volume?

T.J. Rodgers

No. So everybody is scrambling to get touch screen out there. We have interest and we have opportunities in our funnel, where the one millimeter style matters. We have interest where the pop up and the enlargement of icons, because you put your near the phone will matter. We have never gotten presumptions yet, where the other features of PSoC cap partners for example and your control screen have got some other functions on the phone. We never gotten that other route in the ground.

Typically PsoC, when a new market comes, we program PSoC to do an assumption like the adjustments came around, and then the way we stay sticky is we educate the customers and all the other stuff they can do, and as soon as we get that second route in the ground, as soon as it does Cap sense for you and does some other functions, the pulse of modulation and control or something like that. Then all of a sudden, if you want to get rid of us, you got to go by two chips from two and vendors to make it work together.

So we are in the very, we are just in the basic function mode and we have to really get the benefit of PSoC in this market, and that will roll over the next year period as people say “Don’t say I got to get to market with my touch screen, and they say what you going to do for me now?” There’s only two answers. Let me tell you what else we can do or let me tell you what you need over prices and we are hoping for answer A.

John Barton – Cowen

Got it. One last quick question on the SRAM front if I could. I mean Dana, I think I heard your statements sitting at about 30% market share, reasonable to assume you could get the 40%, a little bit of a tail wind today, because the end market that’s rich in SRAM is rebounding. Once we get past the economic recovery period, where do you believe the term for SRM goes over the next several years?

Dana Nazarian

Relatively flat. As I said, the high speed RAMs that are going to routers and switches is increasing at about the same rate as the full legacy asynchronies that are decreasing. So its about a $1.1 billion and $1.2 billion market that will be in that range for a while.

John Barton – Cowen

Thank you.

Operator

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

Sandy Harrison - Signal Hill

Yes, Signal Hill. Thanks for squeaking me in her guys. Real quickly, you guys have done some work in the environmental systems. I see in your prepared remarks or in your press release you talk about them winning the Gold Gas Award; could you talk about how that’s continuing to move forward, and we have seen some of those products in the markets and they seem to be really addressing some of the top issues going on out there. So how is that going; and sort of how do we expect to see that fall going forward?

Dana Nazarian

So in Envirosystems, their mission is advanced technologies like Psoc, they sell radios etc, and apply them to legacy systems to save energy, which we think is going to be a big thing going forward. We expect them to have their first $1 million quarter perhaps in the third quarter of year and be growing as they go through it.

The first time we have ever won the Golden Gas Award, and [Inaudible] the corporation. That by the way is, there is a magazine, there is a industrial associations and lot of companies have workers running around and calling for us, running through get things which we say we are in the process of shutting down; doing daily logs of gas tanks, and specifically a tabloid of thousands to hundreds of them, and we sell those things for 500 bucks and you got a very good argument on the table for themselves in one quarter.

The biggest thing in Envirosystems is the thermostat. 95% of that thermostat in the US are air controlled, therefore you can’t control them electrically. Therefore the most simple thing that we do in our houses, which is failed to turn down the heat of the air conditioning at night when we go to bed, you cannot do that within the corporate buildings and almost all corporate buildings today, and the thermostat basically makes a radio controlled thermostat that you can run through the internet in the wire of the building that you can control it.

Not only just turning down the power at night, but also you can hook up with PG&E and you can have an on demand change in power which PG&E is willing to pay for if they can turn down your air-conditioning when they are not there. It’s a huge amount of money to them.

So we remain very bullish. One of the problems with growth of the Envirosystems which isn’t exactly what I want is that we sell typically to the facilities groups of corporation, and the first thing every company shuts down when they get in the hard times, before they lay off people, the first thing they shut down is the facility’s budget. They don’t add anything, don’t do anything new, keep the wheels from falling off and we’ll talk to you next quarter, and I think we are just starting a little bit to come out of that.

So we have a market headwind, strongly selling into the facilities right now, but in this $1 million quarter, I believe the third quarter this year, that will be the third [Inaudible].

And Sandy I think you know very well, because you spend a lot of time there right. The big focus is on all these fragmented channels that enter these groups, and Harry has done a very good job of nailing that piece down, and he’s got some very more key names you know that are doing pilots across the board, from big companies, to the power plants, to university, so steady Edie.

Sandy Harrison - Signal Hill

Thanks for answering that question about Q3 sort of coming through with the numbers, and to that the line item you are carrying on these businesses. I mean it’s a pretty diminimus number right now, but that’s where I am figuring most of this will be driven through.

Dana Nazarian

Its all in there and I think like I talked at the beginning of the year, the DT Group did just under $10 million last year and that number could be $20 million to $30 million in total this year. So starting to become a meaningful ramp and we’ll only get bigger into next year, and that’s where the other line item is too right, don’t forget.

Sandy Harrison - Signal Hill

Yes. Okay, thanks again for taking my question.

Operator

Thank you and our last question comes from Charlie Anderson; you may go ahead and please state your company name.

Charlie Anderson - Doherty & Company

Thanks for sticking me in also and taking my question. Just actually, just a real quick question on PSoC’s 3 and 5. I wonder if you get kind of address sort of non handset opportunities there, and where you are getting traction, what kind of end markets and the progress down what you are sort of assuming in your guidance for Q2 on them? Some of those new PSoC opportunities?

Norm Taffe

Hey Charlie, this is Norm. Yes, let me give you a comment up to where we are at with PSoC screen touch. PSoC 3 has been sampling for about six months to our lead customers and to broad customers actually to PSoC 3. We are seeing a lot of pick ups in some of the target markets we have right at the beginning.

One on the server space, the large and both communication and computation servers, also importable medicals, and more recently in made for iPod, which is the new interface to the Apple Gold iPhone and iPad and iPod which allows you make peripherals connected to them, and we just introduced next year kits that’ll allow PSoC 3 to be the interface to that.

So those three markets, there are significant design activity in all three of those which were target markets for us, and on a broader scale, it’s much more in the traditional I’ll call it sort of mike controller/program logic market space; communication, industrial application and may be the PSoC we’ve had in the past which has been more towards the consumer.

PSoC 5 which we sampled to lead customers in Q4 beginning of November, will actually go out to worldwide sampling this quarter. Beginning of June, we are going to sample it everywhere as we move onto the next phase and the roll out of that family, and that will we think drive significant design wins in the back half of the year for steady entry.

Relative to revenue contributions, etc, it’s the same as we have been saying. It’s really not meaningful this year. There will be some revenue for PSoC3 at the back half of this year that starts to be reasonably significant but yes, nothing meaningful really until 2011, 2012 when we eventually think this would be the base of revenue for PSoC years out.

Charlie Anderson - Doherty & Company

And then Norm you mentioned the DPS and the DSC contribution in Q2; how do you feel about tabloid contribution in 2010; do you see some design wins there?

Norm Taffe

You see, design wins, we’ll get some potentially at the end of this year. I don’t think it will be meaningful like this year. It will be in meaningful in 2011 we expect, because we are seeing a lot of designs hold in that space, but it is still development stage not production stage broadly.

Charlie Anderson - Doherty & Company

Got it. All right, thanks very much.

T.J. Rodgers

Apple is trying to create an eco system with applications. We are one of two companies that I’m aware of, that have introduced their design kit, for the major iPod which is also made for iPad within the same systems. So you take a basic development kit and you throw in a daughter board. The daughter board has got a little light heptron connection against that and a standard jack because into an iPod or an iPad. You plug that in and you then plug the PSoC development kit directly into those two apple products.

So the demonstration, we are going through opportunities right now, so we’ve got 20 opportunities back, to back to back, and I saw demonstration in the Sea City yesterday where we are connecting sound too, and in this case it was an iPad. So I saw the ability to create a programmable system where somebody wants to make for example a zoom box that wants an iPad. You can take PSoC and rapidly do a design. So moving the success of iPad equipment to that of iPod, that I think could be an important non handset market for us.

Charlie Anderson - Doherty & Company

Thanks.

T.J. Rodgers

Michelle, I think we’re done.

Operator

Thank you. This concludes today’s conference call. Have a nice day.

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