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Cypress Semiconductor Corporation (NASDAQ:CY)

Q1 2014 Earnings Conference Call

April 17, 2014 11:30 AM ET

Executives

T.J. Rodgers – President and CEO

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

J. Daniel McCranie – EVP-Sales and Applications

Dana C. Nazarian – EVP-Memory Products Division

Hassane El-Khoury – EVP-Programmable Systems Division

Badri Kothandaraman – EVP-Data Communications Division, Executive Director-Cypress India

Analysts

John W. Pitzer – Credit Suisse Securities LLC

Doug Freedman – RBC Capital Markets LLC

Blayne Curtis – Barclays Capital, Inc.

Vijay R. Rakesh – Sterne, Agee & Leach, Inc.

Chris B. Danely – JPMorgan Securities LLC

Charles L. Anderson – Dougherty & Company LLC

Rajvindra S. Gill – Needham & Company, LLC

Betsy Van Hees – Wedbush Securities Inc.

Sujeeva De Silva – Topeka Capital Markets Inc.

Srini Pajjuri – CLSA Limited

Jeffrey A. Schreiner – Feltl and Company, Inc.

John N. Vinh – Pacific Crest Securities LLC

Operator

Good morning and welcome to Cypress Semiconductor First Quarter 2014 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. Thank you. You may begin.

T. J. Rodgers

Good morning. We’re here to report first quarter 2014. We will start with our CFO, Brad Buss; move on to Dan McCranie, who is the VP of Sales for Cypress; and then I will make short comments before we go to Q&A. Brad?

Brad W. Buss

Great. Thanks, T.J. Thanks everybody. Thanks for attending. As usual, everything in the press release is preliminary and unaudited. Our 10-K should be out in the first few days. Our 10-Q, I should say, will be out in the first few days of May. Please take a look at that. Lot of forward-looking statements and obviously please take a look at our risk factors. We have full GAAP to non-GAAP recons in our press release and on our website.

So I think, as most of you know, Thad will transition and Thad is actually here with us today into this lovely CFO seat on June 1. I’ll be around throughout the summer helping through the Q2 earnings and Thad, T.J. and I will also be on the road in Q2 introducing Thad and given you guys an update on the company. So it’s going to be a lot of fun. We got 100% confidence and I know Thad is going to carry on our Cypress tradition of openness and accessibility with all the shareholders.

So I was actually real pleased with where Q1 ended up. We’re going to have some nice guidance as well and let me take you through Q1 first. So we ended up at $170.3 million. We well exceeded our original guidance in January and we came in at the higher end of our revise guidance that we gave you in early April.

Overall revenue increased 1.5% sequentially, which was a very strong showing because we’re normally down in Q1. In the press release you can see kind of the divisions and what changed there. Basically we saw MPD up, we saw PSD up and we saw DCD slightly down. Our Emerging Tech Group grew 10% sequentially. They’ve reached an all-time high on revenue and their new customers and designs are finally beginning to ramp nicely. Dan is going to give you a bunch of additional data on Q1 sales trends after my section.

On a GAAP basis we had a net loss of $7.9 million or $0.05 a share. That was a substantial improvement compared to the net loss of $0.09 in the prior quarter and $0.19 in the year-ago quarter. A lot of the standard adjustments that are in there, we also had an adjustment in our sub-cons that we took in, have got out of the way and then we also crossed the 20% ownership threshold for our little stealth battery venture that we’ve talked about.

So we had to move to equity accounting that you’ll see in our GAAP results for Q1 and that was approximately $900,000. We don’t anticipate needing to consolidate that venture until 2015 and we’ll give you more specifics on the company and where we plan to go later in the year, but it’s pretty exciting.

On a non-GAAP basis our net income was $12 million. We had earnings per share of $0.07. That was at the top range of our guidance. The non-GAAP earnings actually increased to 133% from Q1 2013 and that’s been extremely strong growth compared to revenue being slightly down in that same period.

Gross margins were 50.3%, slightly down in Q4, really only due to product and mix. ASPs were in line with where we expected at $1.08. Our core semiconductor gross margin, if you x-out Emerging Tech, was almost 52%. Our utilization in our fab in Minnesota was 74% and that was an increase from the low 60s in Q4 and we expect to see utilization stay relatively flat based on our product mix and actual better cycle times. Our fabs are running quite well.

Non-GAAP operating expenses were $71.5 million. They were up from Q4 due to the normal seasonal increases in fringe benefits and taxes as everything resets for the year. We’re expecting to keep OpEx flat to slightly down in the current quarter. So as we’ve talked about for a while you’re going to see strong earnings leverage as we keep adding to revenue throughout the year.

The non-GAAP OIE was a loss of $1.7 million. That was basically the interest expense on the revolver offset by a little bit of interest income. Non-GAAP tax expense was $900,000. The balance sheet is in very good shape. We had cash of $111.5 million. That was an increase of 7% from Q4. Most of our cash is onshore. We had a nice generation of cash from ops. We had $25.2 million and that is over a 200% increase from the year-ago Q1. And the dividend, as you all know, is very sacred and key to our return to capital strategy. And that payout ratio is continuing to come online as we grow the earnings and cash flow.

Great job in inventory. We dropped it 11% from Q4, while at the same time the ops team has made stellar quality and service metrics. Finished goods dropped 18% sequentially and I think inventory can stay flat in Q2 even with the higher revenue that we’ll expect to see. The inventory increased about 18%, pretty consistent across most geographies other than Japan. As such you saw a good jump in deferred income. It increased to $141.7 million from $122.6 million, and remember, we don’t recognize any revenue until the disti sell through.

Receivables were up to $118.2 million, really just due to the timing of the disti purchases and the increase in the inventory that I just talked about. So you see the DSO popped up about 20 days to 63 days. That’s just really from timing. The aging is great. We have no delinquent balances. And just as an FYI we collected over $41 million of that $118 million since the end of the quarter.

The revolver stayed flat at $227 million. We’re in compliance with all the covenants, no issues there. CapEx was down, came in at $5.6 million. Depreciation was $9.5 million and I do expect to see CapEx to be roughly flat in Q2. The weighted shares in the quarter were $154.6 million, fully diluted. We’re $165.9 million and we ended the quarter at $157 million outstanding.

So now into the guidance, which is on a non-GAAP basis. So we had a very good book-to-bill of 1.08. We expect to see revenue in the range of $181 million to $186 million and that’s a nice increase of 6% to 9% sequentially. We expect all divisions to grow with PSD leading the charge. Gross margins will be up, we expect to be in the 51% range give or take a smidge. The core business will run higher than that and ETD will continue to be a slight drag.

OpEx will be in the range of about $71 million, net interest expense of about $1.5 million, a minority interest benefit of approximately $200,000 due to our subs, tax expense of about $1.5 million. Depreciation will be consistent around $9.5 million and I would look at shares being around 167 million to 168 million.

GAAP earnings on a non-GAAP basis if you mush everything together, is about $0.11 to $0.13 and that’s up sequentially by 60% to 85%, which is obviously about a 10x greater rate than our revenue growth. So, overall we’re very pleased where things ended up, very pleased and very confident on where we’re going. And now I’ll turn it over to Dan.

J. Daniel McCranie

Hey, thanks Brad, and good morning, everybody. As Brad just mentioned, we posted a very respectable 1.08 to 1 book-to-bill. In fact, six-month bookings increased over 20% from last quarter with growth in all of our divisions; memory products, data communications, but particularly in programmable solutions. So we’re entering this quarter, quarter two with a six-month backlog increase of almost 11%, which of course gives us all great comfort relative to meeting or beating our forecasted Q2 revenue.

In fact, for the first two weeks of this quarter, the turns required for us to meet the guidance we just gave you, have been hyperlinear. That is to say that we’re posting shippable bookings at significantly greater levels than regular linearity. To give you a little more color, the first two weeks of this quarter, we have booked 60% of the turns required for the whole quarter. So we’ve got 11 weeks to do the remaining 40%. So we are very encouraged by what we’re seeing in the first two weeks of the quarter.

The cumulative new products now available for sales and marketing organizations to promote to our customer base is at a wonderful level right now for all that’s in sales. The recent addition in the past quarter of the mechanical button replacement chips, the HX3 USB 3.0 controller, the 72 megabits and 144 megabits TDR4 sync RAM coupled with the recent product availability of the low cost PSoC 4 offering, the USB 3.0 FX controller is leading to lots of activity. We need to accelerate these design wins and we need actually more resources. And what we’ve done, we’ve expanded our distribution presence particularly in China, particularly in Asia, where there is an awful lot of activity going on right now.

To that end, this past quarter we franchised five new distributor organizations, which gives us a cumulative additional branch account of over 60 branches in Asia on top of our regular organization. And in this particular case, we have dozens of Cypress, sole Cypress sales people and application people in these five new organizations.

We’re going to need that with always these new products to continue expand the demand creation. So in summary, the Sales and Application organization see an strong interest to these products from a broad spectrum of the market in addition to our normal customer base. We’re particularly excited about what we’re seeing now in the industrial, white goods, the wearables, in the automotive marketplace. That’s it T.J.

T.J. Rodgers

Okay, a couple of comments and then on to questions. Dan mentioned the, what we call MBR, mechanical button replacements and we’ve already replaced something like 5 billion buttons, which is maybe a fraction of a percent of the buttons on the earth. In the future, buttons are going to be such buttons more and more as a percentage. The MBR device is characterized two ways. One is, you can replace mechanical button for $0.03, I defy you to find a mechanical button at that price unless it’s a membrane button on a calculator.

Second point is Cypress continues to have the best performance buttons of any company. We will soon and actually be on the road and demonstrate that claim. So I’ll just leave it as an assertion now.

Now Qualcomm brought out the Toq Smartwatch, there is a bunch of Smartwatches coming out. Sony has got the Smartwatch 2. It’s the first wave of the wearables revolution. Cypress is in both of those watches. The displays are characterized by needing to run on watch battery. Meaning they run on microampere of current, so they don’t drain during the watch battery. Our button controllers and our touch screen controllers are small ones for small screen, they have always been that way.

ZTE, the Chinese telecom manufacturer has put our TrueTouch Gen4X in their newest phones, which are called Z5S and Z5S Mini. There is a company called Yota that makes the new phone that’s getting lot of noise, it’s a premium android phone. The new gimmick there is that in addition to having a normal touch screen, it’s the same game as putting cameras on the front and on the back, the new one is putting touch screens on the front and the back.

On the front, you have a normal touchscreen, then on the back you have an always on electric paper display. So your touch phone is always on and you can always look down and see what's going on. Those displays the reason you can do that is those displays don’t draw any power except for small amount of power when you’re changing what's there.

Idea may or may not take off, but it’s interesting. We have a program to work with touch sensor suppliers. There is a trend in the industry for companies not who want to buy a sensor from one company and a touch chip from another company, they want to buy a sensors solution from either company.

So we are working one, several companies a quarter to create a solution for touchscreen controller companies. The two new ones this quarter are a company called Carestream Advanced Materials and you probably haven't heard of them. We recently are working with them if they have nano wire sensors which is the potential for our new sensors to replace the ITO sensors that are dominant now, and there is another one company called Cima NanoTech it has silver nanoparticle touch sensors. So in addition to working with mainline companies, which we always do – we are also working on with the newer technology companies and sensors.

A year ago, in the annual report I put PSoC 4 on the cover of the annual report and I talked about having an arm in zero, which really is free and then a bunch of analog and digital circuitry all for $1. And that was our big announcement a little over year ago. It turns out our average price is just right around that level, and slightly below and we just introduced a dev kit for that product which has commenced certain prices to support all the dev kits. So it looks like the Board that would fit inside a USB stick and it's got PSoC 4, so now for $4 you can get a PSoC, when you are going production for less than a $1 you can run the PSoC 4. The PSoC 4, FYI has been the strongest product launch in the history of PSoC which we started in 2000 and brought to market in 2002. And we introduced a product, the USB 3.0 hub, before you yawn, we all know what hubs are, you plug, it’s an extension cord, you plug in one into the upside link and then you downside, you get 4 hub.

The interesting thing for the corporation is that that's a big market because there a lot of hubs out there. Our hub has got some advantages which relate to normal operations that what you think of. First of all charging through USB is becoming more and more important and that trend will continue for the next two or three years. It started putting some advanced charging features in the HX3 controller. There is a standard USB charging feature which is got more current and power than it used to be with the USB 3.0.

We’ve also put in the Chinese standards charging protocol and the Apple protocol. So this hub will be comparable with other than just USB standard products. We also have another feature, which no one else has and that is the splitting of ports, we call it shared link. A USB 3.0 port is 5 gigabits per second,, it’s about 10, a little over 10 times faster than USB 2.0. However, most of the USB you use today is the USB 2.0 it’s 480 megabits per second.

And if you look at the inside of the plug of the USB 3.0, you find in effect both of them. You’ll see Lithium 3.0 USB 2.0 and the transfer USB 3.0. So it’s really not compatible in that sense, it’s an adder, USB 3.0 adds on the USB 2.0, but you can transmit over the USB 2.0 part of the port and the USB 3.0 part of the port in the same time. We will ask them to be separated so from one perspective your 4 port hub is an 8 port hub, where you can come into it, with the USB 3.0 and go out of it with 4 USB 2.0’s and 4 USB 3.0’s.

Why do you care, well let’s suppose, that you had a device with a card reader on it, your card reader doesn’t need the performance of USB 3.0. Please put off the USB 2.0 port sticking on a card reader. What you do with the USB 3.0 port that would be a great thing, to use for your internal camera et cetera. So basically, it is really an advantage today to have 8 ports with the price of 4 in a footprint that is the 4 port hub not a bigger hub.

We just introduced QDR-IV SRAM. Quad Data Rate, is our patented is our registered trademark. It’s the fastest SRAM in the world for routers, yet I’ll give you a game fact that it does 20132 mega transactions per second. A transaction is 72 bits being written or read, and that boils down to 150 gigabits per second. So we are talking about cartons full of books going through this RAM per second in terms of characters. And this is the kind of performance that is required as the routers move to 400 gigabit line card. And where there is 1 RAM is 150 gigabits per second and it’s a significant fraction of the total capacity of the entire line card.

Deca Technologies is starting to move forward and ramp revenue. We haven’t talked much about them, but they shipped their 100 million component. Normally I don’t talk about awards we get for serving organic honey in our cafeteria and having free cappuccino that kind of junk. This award I decided to mention there is an employee relation services in software company is called Achievers and Cypress has listed as on the annual list of the 50 most Engaged Work Places in the U.S.

The award closely award recognizes companies that display leadership in innovation and engaging within their employee. So not really about do you have free bicycles right around the campus, do you have massage therapist in here, cafeteria for the lunch. It’s really about do your workers give a damn and are they tied in, and the fact is that has always been the case with Cypress.

Brad W. Buss

Okay, I am done.

Question-and-Answer Session

Operator

Thank you, Sir. (Operator Instructions) John Pitzer, you may ask your question and please state your company name.

John W. Pitzer – Credit Suisse Securities LLC

Yes, guys. It’s Credit Suisse, congratulations on the strong results and thanks for letting me ask the questions. Guys, I am just kind of curious as you look at the profile of sequential growth into the June quarter. If you can give us kind of a little detail of by division, how you think growth will trend that will be helpful?

T.J. Rodgers

So like I was – I think I said upfront we expect everyone to grow and PSD will grow more, which is pretty consistent with what we talked about in the increase in the touch as well as the PSoC. And then we do expect obviously that the Emerging Tech guys to grow as well.

John W. Pitzer – Credit Suisse Securities LLC

And Brad clearly on the TrueTouch side of things you guys are kind of regaining some market share. I am just kind of curious can you talk a little bit about where your share is today and kind of how you see that trending through the balance of the year. And I’d be curious to kind of the pricing trends you are seeing specifically in the touch business as well.

Hassane El-Khoury

Sure, this is Hassane I run PSD. So it’s in line with our expectations as far as where we are winning. We are winning more share at the customers we are already engaged with or have been engaged with throughout 2013. But we have also been adding a lot of new customers and as well the mix inside each customer count is going more into the standard phones that we have been engaging as well moving more into the flagship.

As far as your ASP question, we see ASP flattish because of the mix that I talked about as we get into more and more of the flagship product that T.J mentioned earlier. We started seeing the ASP stabilizing, so the mix overall for PSD is flattish.

John W. Pitzer – Credit Suisse Securities LLC

And then guys my last question T.J. in your prepared comments you talked about the wearables revolution and to-date kind of your touch business on the consumer side has been more about smartphones. I am kind of curious as you start looking at these smart watches and other wearables what kind of dollar content should we think about for Cypress? And what other functionality might you be able to bring into those devices. Besides just a kind of touch functionality?

T.J. Rodgers

Okay, I’m prepared for that question, my first reaction is you eventually are looking at the cellphone’s form factor going into your wrist. There, I believe that there, there won’t be a price decline because of the premium for all the work required to make it fit into the small space. And, all the work required to make it run on microamperes rather than milliamperes.

How much it will take-off, to me is the big question mark. There are more wrist watches then cellphones and if everybody decides they want a smart watch, it could be the next big thing.

Brad W. Buss

We’ll very happy if that happens.

T.J. Rodgers

The other thing, and if you want to look at it the other way and I it could [inaudible] so I can have it either way. I can look at them and say, geez, they’re kind of thick and geez, they are kind of ugly and maybe they are not going to take off. And I really don’t know.

Maybe you know – maybe Hassane could give you guys a little color because we are having very good progress in all the wearables and the watches so, you want to give a little…

Hassane El-Khoury

Yes, I can tell you exactly from the Cypress perspective and specifically with PSD where we see the wearables. So as T.J. mentioned earlier we’re very heavily engaged with a lot of key customers that have and are also planning on introducing watches whether in the first half of this year that we’ve seen already, and more to come in the second half of the year.

As far as, products offering obviously we talked about the TrueTouch offering, which is the screen, but we also see PSoC given the analog and digital that we have and given that the play in the smart watches has a lot of sensors whether for health or just pedometer functionality. So that’s PSoC play for us; CapSense clearly when you have buttons on the side, to replace mechanical buttons at the price points that T.J. is talking about we have a play there.

But we can’t also forget about USB to connect it, but also BLE to transmit back to your phone, which is the name of the game today. A lot of customers we’ve seen have added [inaudible] to it, so what I just mentioned to you is overall the architecture of the wearables market and just by discussing the products we have from Cypress that map on to it it’s pretty much a fit, so we have a strong play there, we will ramp when they ramp and we are very heavily engaged.

Thanks for your question about ASPs, I also have no concerns about ASP and that play because the feature set required is exactly the feature set that everybody else requires whether it’s mobile or industrial. I’ll give you an example, the name of the game for wearables, specifically for touch is the low power that T.J. mentioned, but also superior water-proofing, because there is more access to water and more access to if you think about sweat on the watch and that’s where Cypress today has gained majority of the market.

John W. Pitzer – Credit Suisse Securities LLC

That’s good, great answer thank you, and Brad, I want to thank you and congratulate you and best of lucks moving forward.

Brad W. Buss

Thank you John, we’ll see you on the road, don’t you worry.

Operator

(Operator Instructions) Doug Freedman, you may ask your question and please state your company name.

Doug Freedman – RBC Capital Markets LLC

RBC Capital Markets, thanks for taking my question guys. I guess Brad, if you could start us off with a little discussion on the puts and takes to gross margin and just update us on where you think you guys can drive those gross margins to?

Brad W. Buss

Sure, I mean the big thing, you saw on Q1 and you’ll see at this quarter really is just mix. Right, the mix of the products of the divisions, to a lesser degree some of it’s customer specific. And then really the fab end of it, our utilizations moving up, but it’s still not at 90%, so I think, the next move more into some of the higher ASP products, we talked about, a lot of the new designs that we’re doing.

I think you’ll see upward movement on the gross margin, throughout the rest of the year and the fabs will continue to execute; we’re doing very well operationally and I think that combined with the growth that we’ll have whether it’s margin or the OpEx, we’re going to continue to be able to drive the leverage going forward.

Doug Freedman – RBC Capital Markets LLC

What impact you recently announced gaining it looks like a foundry customer - what impact is that having on your margin mix?

Brad W. Buss

So the foundry business is again an area where we have some excess capacity, and we have excellent technology and excellent IP that we’re able to allow these other smaller guys take advantage of in being a trusted fab in the U.S. So we have a little business unit there. And we continue to really grow that so. The net impact on that is revenue obviously but it is very good gross margin revenue; it’s well north of the company average. But that will be margin accretive and we’ll continue to grow that business as our IP business will continue to grow that we’ve talked about.

Doug Freedman – RBC Capital Markets LLC

I guess for my last question, I’m interested in learning more about the growth you are seeing in the Deca Tech division, you guys had set in the past about $10 million per quarter target. Do you want to give us an update on where you stand on achieving that?

Brad W. Buss

It’s definitely not happening this year. We’re going to have a pretty big focus on them as – we’re just trying to nail down the exact date for any analyst day. And Deca the battery venture that we’ve talked about as well as some of the key products in our main groups are going to be the main event there. So I’d ask you to kind of wait till then and we’ll put Chris on the spot together.

Doug Freedman – RBC Capital Markets LLC

All right, I’ll jump back in the queue if, I have any further questions, thank you guys.

Brad W. Buss

All right.

T.J. Rodgers

The way our start-up work. This is true of SunPower, this is true of Cypress Microsystems, which in fact is, we invest in them as venture capitalist. We have to report the losses because we in fact own, the employees own a fraction of the stock, think about a number like 15%.

And then the trigger is either to spin in or spin out typically it triggers to spin in. And then we buy out the employees. And the trigger financial trigger for considering that event is when the Group gets $10 million a quarter, $40 million therefore they show up matter for the company. We make 20% pretax profit. So we don’t expect Deca Tech by the fourth quarter, but we do expect in the next year.

Doug Freedman – RBC Capital Markets LLC

Great, thank you.

Operator

Thank you. Blayne Curtis, you may ask your question and please state your company name.

Blayne Curtis – Barclays Capital, Inc.

Thanks, Barclays and thanks for, let me ask question. Brad, I just want to follow-up on the gross margin, when you look year-over-year, the guidance at a lower revenue level is still 200 basis points below and you don’t have the headwinds for Emerging Tech, so may be you can just, I know you stated mix but there is something functionally that they you won’t back to the kind of the 53 level that you enjoyed last year?

Brad W. Buss

That’s very doable, it’s just a matter of the revenue going up the utilization going up and remember what the Emerging Tech go to your right and their margins currently are negative, and even as they transition into less negative and then slightly positive, they are going to continue to be a bigger chunk of the business. Right, so that’s why I like to give guys the gross margins on the core business, because you’ll definitely see both of them improving. And I think that target is very doable.

Blayne Curtis – Barclays Capital, Inc.

Got you. And then maybe a question for T.J. or Dana, you had talked about SRAM finding the bottom in the next two, three years last year. You’re looking at your annual report, it looks like you’re still modeling that business down for the next five years a little moderating decline, so have you changed your kind of outlook on the trajectory of that kind of bottoming of the SRAM business?

T.J. Rodgers

Okay, you are referring I think figure kind of in the annual report I would conclude differently from looking at that figures than what you just said. The SRAM revenue is modeled at – and this is a model again that forecast I got to be clear about that because putting on a lot of forward data there, and then I do that so you guys have some visibility, but I have to be careful from a disclosure point of view.

The number is a single point number $200 million for 2014, and we’ve given two cases the 25th or 75th percentile. The 75th percentile case is flat to up, and the 25th percentile case drops for two more years from $200 million to $166 million, and then I would say flat and it already goes from $166 million to $150 million after that, so basically it shows flattening, I’d say 2015 or 2017, that’s our worst case number.

And we believe as the numbers 25th and 75th percentile imply that’s the case. And that is the classic we gets our end business. I want to point out and I’ll let Dana, answer the second half of the question. That’s a very good business unit for us, we’re very confident and they make profit, so we are in the profit putting more businesses around SRAM classic, SRAMs in order to bolster this and have the SRAM memory product division as a whole, not show just the SRAM declines, Dana why don’t you discuss the falling price of FPD?

Dana C. Nazarian

Okay, so we got a full portfolio of SRAMs from the low – super low power, micro power SRAM’s with a perfect part for where the industrial markets going and where the consumers markets are going, and what connected devices and super low power applications. And we’ve got the traditional fab basic and SRAM’s. And we use this kind of an ubiquity this kind of SRAM it’s in literally thousands of difference of applications, and we got kind of the flagship performance parts with the high end routers and switches with synchronous business units.

That one is actually has probably the most volatility in the biggest upside as we’re now generating our next generation products on advance technology, and moving couple of all that with the FRAM acquisition and get the whole memory portfolio to play with.

Operator

Would you like to go to the next question?

T.J. Rodgers

Yes.

Operator

Sir, would you like to go the next question.

Brad W. Buss

Yes, we would.

Operator

Vijay Rakesh, you may ask your question, please state your company name.

Vijay R. Rakesh – Sterne, Agee & Leach, Inc.

Sterne, Agee. Hi, guys, just on the automotive side. Can you give us some color – obviously you have some good design wins, when do you see that get to 10% of your mix looking out?

Brad W. Buss

Yes, I’ll give you a little bit of where we are in automotive search. Since 2013 we’ve been talking about growing the automotive the funnel has been growing, and as you know the state of the business takes about 3 years for revenue to come in, just due to cycle. This is heading actually in towards end of 2013 and right now we’re seeing more strength in the 2014 year first half and it will continue to the second half. Where we are playing its across the board, if you look at the annual report we diversified our automotive penetration started with SRAM. Right now we’re the leaders in Human Machine Interface. So touch screens that we took our TrueTouch technology into automotive and we have very strong penetration worldwide and that’s a focus regionally.

And beyond that, we’re now penetrating with our platform with PSoC going more into the body electronics, same play as PSoC in industrial where we have a lot of integration and the sensor conditioning which is a very strong play for us in automotive. But as well, when we talk about Human Machine Interface, we have a very strong play with the USB and clocks.

So it’s a broad play for us, broad customer base for us. All customers are growing and that’s where really the growth is for auto. So we’re going to see a strong in 2014 and it will continue through the next few years. And that’s the beauty of automotive we have very clear visibility for a long design cycle.

T.J. Rodgers

Yes. I think Vijay, we’ve been underpenetrated in auto as a percent of our business for a while, the nice thing is we’ll be growing at 2x to 3x the auto rate, I think for quite a few years now. And we should start seeing that become more in the 10% to 15% of our mix. But you’re not going to see that this year, but rest assured the foundation is laid to make that happen and it is a one of the top priorities within the company.

J. Daniel McCranie

Vijay this is Dan McCranie, just to amplifying this. This year because of all the design wins done in programmable logic – programmable USBs in the last two years over half of our revenue is going to be PSD where as a couple of years ago it was almost all SRAM. Again design wins now on the entire rest of the product portfolio from SRAMs, micropower SRAMs, all the way up to ferro-electric memories as well as USB products.

Vijay R. Rakesh – Sterne, Agee & Leach, Inc.

Got it, great. Just going back of the handset side, I’ve asked this obviously good traction at Huawei. How do you feel about your big customers out there, your largest OEM customer there?

Brad W. Buss

I feel very good. I think we’ve achieved our goals that we have set out to achieve that I’ve always talked about as far as I mentioning the funnels and even Q4 2013 we’re on track and very happy with the progress.

Vijay R. Rakesh – Sterne, Agee & Leach, Inc.

Great. Thanks a lot and Brad best of luck, we’ll miss you. Thanks.

Brad W. Buss

Thank you.

Operator

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

Chris B. Danely – JPMorgan Securities LLC

Thanks JPMorgan. You guys have questions or really for anybody out there. Can you just maybe take a step back it sounds like bookings are picking up pretty sharply and just about the overall semiconductor environment in the overall business and how it’s going so far this year. And then maybe talk about which segment or segments you’re expected to grow the most for the year versus just the quarter?

J. Daniel McCranie

So this is Dan. So general semi growth, I think you probably have the same data I have that WSTS has it 14 calculated about a 6% growth year-over-year everything I see and everything we see is consistent with that. In terms of the segments that are popping for us right now. Once again we’re seeing very strong growth in automotive, very strong growth in industrial and the white goods. And we continue to capture increase share in the handset space.

So I don’t think this is anyone compelling market segment that’s outgoing all the rest of them. So it just seems like it’s a proper growth across the wide spectrum?

Brad Buss

Yes, I do add some consumer in there Chris, as well, I mean if you look at where we are at right now and our industrial automotive is the biggest for us, followed by handsets. And those of the areas where we obviously have the design win momentum and the consumer really tackle some of this variable stuff, that’s why we are classification it. So, I’m kind of with T.J., we’ve got – we have probably got the number one design position I think in the variables for the touch screens.

But what’s the uptake going to be, I think, it’s a question out there. I’m going to buy one just for know-how, so we’ll see, so I can keep track of the Gulf Coast.

Chris B. Danely – JPMorgan Securities LLC

Here you go.

Brad Buss

Yes.

Chris B. Danely – JPMorgan Securities LLC

And then do you think if there is any risk of lead times stretching out as the last two weeks, is there any indication and this continued into the summer?

T.J. Rodgers

We hope so. Our lead times are going to stretch our manufacturing. We have talked about it, because it hasn’t been a stress for a while, but our manufacturing is the best shape it's ever been both from a cost and cycle time point of view. Just to give you a couple of metrics, I do track these on a weekly basis, our lead time – our actual lead time that on to quarterly lead times down 4.4 weeks and we have to beat that obviously.

We had technology for manufacturing the Mr. Plan for on-time delivery last quarter, they were 99.4% versus the plan of 99.6% on delivery. And we don’t look at it that way, we look at the 0.6% effective versus 0.4% effective and we care about that.

And our on-time delivery customer request is now over 95%. So if there is a tightening in the marketplace, we’re ready for that. I mean, we are always ready for manufacturing challenging, like I said, we’re in best shape we’ve ever been.

Brad W. Buss

Yes, we are not anticipating our lead times, pushing out at all, but we would welcome it, Chris.

Chris B. Danely – JPMorgan Securities LLC

Yes, me too. And just one last quick question, just on the Geo, so Europe was up pretty substantially for you guys and China a little weaker. Maybe just provide some color commentary on the Geo assets and how things are looking for this quarter?

T.J. Rodgers

I think, you’re going to see China pop back up in Q2. Europe is going to stay strong. So I think the most significant delta that we’ll show you post to Q2, you’ll see strong regrowth in top line in China.

Brad W. Buss

Yes.

Chris B. Danely – JPMorgan Securities LLC

Great. Thanks guys and brought up beyond on the ranch.

Brad W. Buss

We got it Dave. See you in Boston in May.

Operator

Thank you Charlie Anderson, you may ask your question and please state your company name.

Charles L. Anderson – Dougherty & Company LLC

Yes, Dougherty & Company, thanks for taking my question. I want to reference the shareholder letter again T.J. you talked about $25 million of PSoC growth year-over-year. I wonder if you could unpack that for us a little bit in terms of the elements of where – mostly TrueTouch or is that even distribution of TrueTouch, CapSense platform PSoC, and then also in terms of where we see that growth, is that occurring here in the first half, or is more of a back-half way that we see that absolute dollar growth?

T.J. Rodgers

It’s a mix between touchscreen and classic or the platform PSoC is growing. For the rest of your question, let me turn it over to Hassane.

Hassane El-Khoury

Hey, guys, this is Hassane. So across the board for a platform specifically like T.J. said, we see the growth across the year, so there is no specific strength from the beginning of the year or the end of the year. It is really lined-up with the customer releases of their platform. And you see that, we saw a lot of the releases happening in between mobile world, embedded world, and CES, that’s really the big portion of the beginning of 2014. But towards the end of the year, we still have a lot of releases from mobile as well as platform. Platform PSoC is growing for us in volume and that’s really driven by PSoC 4 for this year. And we are going to already see the MBR, the mechanical button replacement generating revenue for us within this year.

And just to remind you that was announced in work week nine at embedded world in Germany. So we are actually turning new opportunities where we’re leasing new products and those products are starting to contribute to the top line within the year that we leased in which is a very good time for us and a very good time for the types of products that we have been releasing.

Charles L. Anderson – Dougherty & Company LLC

Great. And then just as a follow-up, I was wondering if you could talk maybe about some of the wild cards that are out there to drive the growth even higher throughout the year. Do you guys feel like you’re in a good position to make cost where you could outperform the rest of the year?

T.J. Rodgers

I can't give you a specific example obviously of where the engagements are and where we are with it. But I can tell you that I have not been disappointed as far as the engagements we are in. We talked about Gen5 been available Gen5-L if you recall we released in the second half of the year and we’ve already seen revenue on it, and that’s what T.J. mentioned earlier with the Europe on, for example, that has two products in it. The reason I give you that example is the product is very competitive, the product fits in these high end phones, and the product is considered in every challenge that we have, which was not the case historically. So I’m very satisfied with the impact we are making in the market.

Brad W. Buss

Yes, from a design perspective Charlie we’ve done better than we’ve expected. And like we said we cracked in as a very key Tier I guys that don’t see coming out in. So, the challenge is just how well they are accepted, right, but they take off great, we’ll have even more upside. And I would say the variable began, where we’re trying to keep our expectations low. But that scenario that could go each shift. And if it does, we’re ready to support it, because we do have very high design penetration in that area. So, we do expect all of you to be buy and multiples for Christmas.

Charles L. Anderson – Dougherty & Company LLC

Thanks so much.

Operator

Raj Gill, you may ask your question and please state your company name?

Rajvindra S. Gill – Needham & Company, LLC

Needham & Company, thank you. Just if I look at the 10-K and I kind of look at the income from operation before income taxes, it shows kind of a PSD division had a loss of about $20 million on revenue of $293 million. Just wondering if you could kind of elaborate on why is that specific division lost, why did it lost, lose money last year was just mainly, because revenue declined or there is something more going on in terms of the cost structure?

T.J. Rodgers

Well, I’m applauding you for actually reading the 10-K, that’s very impressive. And now remember now that’s all on the gap stuff right, so there is a lot of the stock-based comp charge stuff is in that area. But yes, I mean, even without that the profitability has been down with the revenue down, and we’ve had very high R&D investment bringing out to PSoC 4, and then we brought out the next gen of the touch.

So from an OpEx end of it, that OpEx level is down quite substantially and you are seeing the revenue move up. So I think you’ll see those trends reverse going into the year.

Rajvindra S. Gill – Needham & Company, LLC

Okay, thanks. And then for the market share gains Hassane, you talked about, you see that you are gaining some share. Could you kind of elaborate that – elaborate further, is that – are you gaining share from some of the top competitors in the U.S. or is it from the Chinese competitors or across the board maybe you can discuss that a little bit.

Hassane El-Khoury

It’s that, the simplest answer is across the board. It depends on the account that we are targeting showing the obviously the top manufacturers. We are competing with very specified competitors, North American competitors but also we talked about it in previous call as far as penetrating the China market and that’s a different set of competitors and we are competing with those because we have a broad portfolio and we still do. So we talked about Gen5 ramping up, Gen4 is very good for us, but we also have Gen3 servicing still the smaller screen high volume China market, and we see a different set of competitors there, most of them are local to the market. So I guess it’s across the board and I’m not worried about not being competitive in certain segments versus the others just because of the broad width of our portfolio.

Rajvindra S. Gill – Needham & Company, LLC

All right, great. And last question Brad just on the OpEx $71.5 million and then $71 million in Q2 roughly, if you kind of extrapolate that OpEx will be down another 6% or so year-over-year, I know it was down about 7% year-over-year in 2013. We come at the right OpEx levels going forward or is there kind of more OpEx restructuring that could be under way?

Brad W. Buss

Let me answer that question, First of all, we were restructuring to characterize our OpEx improvements over the last several years, I would use continuous improvement of (indiscernible). We have consistently worked on driving down our OpEx. We have a program I didn’t mention the issues annual report I did in prior too, for world-class cost, but we have senior executives, his name is Peter Mitchell and he actually ran our wafer fab force at one time. So the guys knows how to run complex things and he is running 500 line items across reduction and so for example the cafeterias in San Jose and Bloomington Minnesota are now run by the same company, and the fact we gave them more than one cafeteria got us a break. The kind of slurry we used to polish wafers has changed a couple of times, if they cost a lot of work, in order to get multiple sources and drive down our cost.

500 line items so, we’ve been hammering on OpEx for long time and as we reduced OpEx, that OpEx changed, doesn’t go to the bottom line unless somebody goes away and we’ve had small pockets let us but in general we used attrition to reduce their headcount in corporation and the way we do that is something called the rack option where, when somebody quits somewhere in the company usually not have the automatic right to get a replacement requisition.

When somebody quits in the corporation the next Wednesday in the executive staff meeting, staff rack is put to auction among the executive vice presidents and if someone says, I need a guy to work on this touchscreen and the factoring guy say I got to replace this guy and we have a debate and then the 6 or 7 people to be even on a weekly basis pick the most leveraged staff.

And we have actually turned over almost the thousand people where we enter in a continuous restructuring in corporation and there I will agree with the word restructuring. To answer your question, we’ve bottomed up, we’ve shown dramatic cost reductions, for every bottomed up, the answer is no. The interesting thing is as you think at some point it’s got in and you’ve got another big program it’s here and Peter Mitchell keep still finding line items, we are continuously driving down our operating expense and it’s no longer an event, it’s a way less and said that this year takes off in revenue towards the end of the year, then that decline is going to stop, we’ll be able to hold the line, we won’t hire into that but we won’t be able to (indiscernible) because it’s higher and we will do we’ll offset the decline that we are doing at the same time.

The big answer continuous restructuring, continuous cost reduction part of the fabric of the corporation and no, it hasn’t ended.

Rajvindra S. Gill – Needham & Company, LLC

Great, then Brad, best of luck on the season.

Brad W. Buss

Yes, thank you.

Operator

Thank you.

Brad W. Buss

Mine has been the part to have the OpEx too.

T.J. Rodgers

Which mine?

Rajvindra S. Gill – Needham & Company, LLC

Got it.

Operator

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

Betsy Van Hees – Wedbush Securities Inc.

Wedbush Securities. First of all Brad, still in shock that you are leaving, congratulations definitely. It definitely is an end to an iconic era at Cypress, you are going to be significantly messed and that congratulations on your promotion….

Brad W. Buss

Well, thank you. Well the main icon is still here, so don’t worry.

Betsy Van Hees – Wedbush Securities Inc.

Well, yes absolutely T. J. is an icon in himself but we definitely had era with you and we are missing all your fun things that you have been saying on the call. Those are priceless comments. So anyway getting to my question, I apologize if it has been asked before, but I did some phone issues on our side. The 18% I think you said is what distribution inventory grew quarter-over-quarter, and I was wondering if that was a broad-based across multiple geographies or geographies specific and if there is any products that you saw a greater interest from distribution because if we look at the historical part and distribution inventory has been dropping on a quarter-by-quarter basis, and your lead times, I believe you said were basically flat quarter-on-quarter?

T.J. Rodgers

Yes, so I would say it was pretty much across the board other than Japan. Japan was not at the same rate. And I think like Dan said right, I mean if you look at where we are expecting the customers to grow, and the geographies to grow, it’s very much inline. Lead terms are short, so trust me these guys are not taken inventory, unless they know the can turn it. So we’ll see that moving pretty nicely.

Betsy Van Hees – Wedbush Securities Inc.

Okay, and T.J. thank you so much for – I’m sorry…

J. Daniel McCranie

It’s all going to relate to sales reduce distribution inventory, I mean that we’ll have a channel shift away from distribution. The answer is no, the mechanism is what Brad said. We have even though quarter-on-quarterly things that will change over the last two years, the lead times have gone from 6 to 10 weeks down the quarter. And distribution takes just of their need with on-time delivery of over 99%, they now are comfortable that they can order with short lead time and get it and that would be delinquent there in customer. Our channels split is a bigger number 68% plus or minus 4%, you can consider to be point constant, it’s not going to change.

T.J. Rodgers

Yes like Dan said we’re off to a very strong start from a booking and shipment perspective and a lot of that is coming through that channel that took the inventory going in for the last month of the quarter to begin shipping it out early into this quarter.

Betsy Van Hees – Wedbush Securities Inc.

Thanks that was really, really helpful and T.J. thank you for the detailed explanation on the OpEx leverage. I wanted to ask about gross margin, you guys guided 51% and I was wondering in terms of leverage in the gross margin when can we start to see you guys get back to the mid 50’s and what needs to happen to get to that level?

T.J. Rodgers

Yeah, I mean I think, you’re going to see mid-50 anytime soon right, we need to start seeing that revenue go up into the low-200 range and the utilization that’s out to be more in that 90% range.

Betsy Van Hees – Wedbush Securities Inc.

Okay. so it’s more a revenue base versus significant change in product mix. so if you could guys talk about that?

T.J. Rodgers

Yes, totally, totally. and again, like I said, I think we’ll start marching up throughout the year, but it’s going to be a gradual versus – there’s no step quarter out there where I think you’re going to see things change. But more importantly, whether it’s a leverage in the margin going up and us keeping the OpEx, the key is that operating leverage is going to come from both areas, as well as that incremental revenue, I mean will be dropping virtually 100% of it through to the bottom line, as we guided this quarter that was even greater.

Betsy Van Hees – Wedbush Securities Inc.

Okay, all right, thanks. thanks everybody and once again, congratulations to Brad and Thad, you will be in this broad very much.

T.J. Rodgers

All right, we’ll see you in New York soon.

Betsy Van Hees – Wedbush Securities Inc.

Looking forward to it, thanks.

T.J. Rodgers

You’re welcome.

Operator

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

Sujeeva De Silva – Topeka Capital Markets Inc.

Hi guys, Topeka. first, if you talk about the 10% customer in the quarter?

T.J. Rodgers

The usual suspect.

Sujeeva De Silva – Topeka Capital Markets Inc.

Okay. and then second of all, in terms of the gross margin, maybe you’re sticking with the gross margin decline, if you talk about mixed shift. if I look at the segment percent revenues, is there consistent 4Q to 1Q, what was the movement within the sub-segments that you attribute mix to for the margin declined?

Brad W. Buss

Well, we don’t go into every sub-segment, but it was just customers and business within really in USB, and even in the memory group right, the FRAM is at a lower margin than the SRAM for instance, right.

T.J. Rodgers

True fact is they’re at a lower margin than platform, PSoC chips even on many cases, say, there’s companies having that same technologies. so if somebody takes off, we’ve talked about our 10% customer, obviously they have the leverage of lower price, and they have taken off that will bring gross margin et cetera. we had a lot of questions on gross margins, so it must be important to you. Consider where we are, we have 50...

Brad W. Buss

50.3%.

T.J. Rodgers

We have 50.3% gross margin. We’re at only $170 million in sales, which is down. we’re up in the over $250 million range a couple of years ago. We’ve managed to maintain 50% gross margin, including under-loaded fab et cetera. Gross margin obviously not has leveraged this as operating income, because you don’t have OpEx to be amortized, the gross margin has all the manufacturing overhead been amortized and rolling it above 50%, we are going to go on to next quarter, we’re fully going onto next quarter by what I would call a significant amount. Brad’s point is right; the company is running, we had that discussion before. If you see our revenue pass from $170 million to $200 million, we won’t be talking about product, we won’t be talking about gross margins moving more. I mean we are looking gross margins is, we stayed about 50% in the bottom quarter and we’re moving up from that.

Sujeeva De Silva – Topeka Capital Markets Inc.

Thanks, T.J. very helpful and last question is the Gen5 product, the TrueTouch going to be a full family across premium phones, the China phones and variables that Gen4 carry kind of that lower half of that end-market product?

T.J. Rodgers

We kind of see both Gen5 and itself as a broad product offering. we talked about Gen5 M which is the lower IOCON, and we also have Gen5 L, which goes to tablet size. And between those, we cover a lot of the markets, but Gen4 still has a play, a lot of the new products that we introduced with our end customers are still Gen4, so that’s still kicking and its very competitive, as far as the wearables, your wearables question we do see Gen5M specifically and stay there and that’s really based on what features do they want and customers want and we position the right product for it, it doesn’t necessarily have to be the right generation.

Sujeeva De Silva – Topeka Capital Markets Inc.

Great. Thanks. Hey Brad stay out of trouble.

Brad W. Buss

Always, I will see at CES though.

Operator

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

Srini Pajjuri – CLSA Limited

Thank you, CLSA. Brad looking at to your Q2 guidance, I’m just curious to what extent the TrueTouch growth is coming from new ones versus existing seasonality at the existing customers.

Hassane El-Khoury

Hey, this is Hassane, it’s both, we have some designs that ramped up towards the end of Q1 and those will obviously see a full quarter in Q2, but we also have new designs that will start production in Q2. So it’s a mix of both depending on when it will hit in the quarter and that’s obviously depended on the end customer, when they decide to launch your product but as far as the growth, it is across both of these categories I mentioned.

Srini Pajjuri – CLSA Limited

Okay, great and then Brad maybe for you again, looking out to the second half, could you remind us what your normal seasonality for Q3 and Q4 is, and given them that you are still ramping TrueTouch, into the some of your designs. Why shouldn’t we assume that it’s going to be a little bit better this year versus what we saw last year?

Brad W. Buss

You are always assuming good touch screen, obviously we go down in Q1 and we are up in Q2 and we are up in Q3 and we tend to be flat down in Q4, depending on how strong Q3 was I think the last few years you’ve seen Q3 some more of it shift in Q2s, our Q2s are defending to be stronger than Q3 but at this point in time, I think based on the designs in the funnel the seasonality is definitely into play, so I wouldn’t much difference from that right now, and that again it just depends on the economy to wearable, how some of these we are in some big new flagship phones that they take off where they don’t that’s going to be the variable that’s hard to predict now.

Srini Pajjuri – CLSA Limited

Okay, Great and then finally Brad, one more for you again, on the gross margins lot of questions but you did say that the ASP for the wearables is pretty much similar to the existing businesses, I am suspecting that the cost maybe actually lower so as a wearables ramp, will that help the margin mix. Thank you?

Brad W. Buss

It will yes.

Srini Pajjuri – CLSA Limited

Okay great thanks.

Operator

Thank you and our last question comes from Jeff Schreiner you go ahead ask your question and please state your company name.

Jeffrey A. Schreiner – Feltl and Company, Inc.

Yes, Feltl and Company thank you very much for taking my question, I guess kind of just following up on the last question little bit after what we saw in calendar year 2012 and calendar year 2013, in terms of high expectations, high feelings of strength for the second half for the smartphone market only to have them kind of deflate due to the various reasons, kind of wondering what visibility Cypress has regarding the second half, is it still waiting on some design wins or all the second half design wins done. And again you’ve talked about kind of customer demand being the variable. Is that the real variable going forward whether or not you continue to see growth trends into the second half?

Hassane El-Khoury

Hey this is Hassane, I will answer, yes, pretty I would over 95% to 100% is already in play, is already defined and already awarded. So the big variable here is really the end market penetration. If you look at it in our daily life, as the phone gets a promotion with a carrier, it takes off. We have a very broad penetration with our customers. So with the mix I don’t see a lot of that changing. So it’s really dependent on the end OEM and how the phone or the platform itself does in the market.

Brad W. Buss

I think Jeff, like he said, this time last year we were probably 80% designed. Now we’re virtually 100% and we have higher-end phones that we didn’t have last year. We have more in the China with existing. So we have so many more new programs and we’re much more designed. So I think from that end of it we definitely feel better, but trust me, we share the same concerns. In the end it’s the uptake that’s going to drive things and that’s pretty much out of our control, but we’re in a much better design position than we were the last two years for sure.

J. Daniel McCranie

Jeff, this is Dan McCranie. Just to pile on a little bit in a non-PSD area, particularly in USB and in the new memory products, particularly the SRAM products, I’d say we’re in neither late-stage design-in or full design wins. From the products we’re expecting to have revenue in Q3 and Q4 and it looks much stronger than it did this time last year for those product lines in addition to Programmable Systems.

Jeffrey A. Schreiner – Feltl and Company, Inc.

Okay. And then wanted to just ask a question here about DCD. We’re taking about $110 million business in fiscal year 2011. Who knows what it’s going to be in calendar year 2014, something I think probably dramatically low than that still. What turns this business around? Has it become maybe a non-core segment within Cypress, could you help us understand if it’s not an on core segment, what you see that that’s going to really drive some growth in this segment?

T.J. Rodgers

Let me answer high level. Then I’ll turn it over to Badri to talk about business. We had a declining business and it is smaller than we like it to be as we pointed out. However, take a look at our portfolio. We talk about DecaTech. We’re very proud of it. We brag about the fact that each quarter loses less money than it used to lose the quarter before and eventually will be $40million trigger point and come into the company.

So in USB, we suffered a decline. It was the decline of neglect really. I didn’t manage it well enough. But on the other hand we’ve got the number position in the world in USB. We’ve got a super portfolio of products and we’re widely known as being kind of the face of USB. So it's kind of like if you looked at it as a start up. It’s kind of like a more successful start up and then the other ones we’ve got. So that’s what we’re not. It’s not non-core. It’s one of the things we’ve done well. It’s one of the things we shift over 1 billion units cumulatively ad we’re looking for this to be a big part of our success. Badri?

Badri Kothandaraman

Hi. So as T.J. said, we are rebuilding the business in the last two or three years. Yes, we’ve had a lot of declines in our legacy products and our new products are ramping slower, define in time. But we have a very strong USB 3.0 portfolio right now. We got FX3, which is the industry’s only peripheral controller that basically connect anything to USB 3.0 at 5 Gigabits per second. We've got FX3 with storage it’s basically a three terminal device, which helps connecting the SD cards to the two FX3.

Then we got CX3 which is a camera to USB 3.0, it basically takes a camera serial interface that connects the image sensor which are greater than 5 mega pixels or more to USB 3.0. Now this quarter, we introduced HX3, which is a 4 Port USB 3.0 Hub with a lot of advanced charging and shared link features like what they did talk about earlier. And in the last year, we’ve also reinvigorated the low speed product line by introducing USB to serial bridges. We think that’s a very nice market and that’s going to grow strongly for us.

In addition, I want to say that we are working on USB power delivery, a power delivery alone would be bigger than the USB. Normal USB delivers a power of 7.5 watts, USB power delivery it does actually 100 watts. You imagine your wall sockets to have the normal three pin sockets. In addition to that they will have a USB socket as well.

Then it will virtually standardize all charging. And also the concept of provider and consumer can be switched. Now and on in standard USB, the PC was the host and any other peripheral is basically a device, while here the in terms of power delivery the rules of the provider and consumer can be strict. For example, a monitor can provide power to a PC. So it’s a very interesting technology, we are working with all the leading players there. And but basically, I think we will be introducing some products there towards the end of the year or early next year that’s an area to watch out for.

In addition, I want to talk about Trackpad a little bit, so DCD also contains Trackpads. In 2013, we tripled the Trackpad business compared to 2012. We got some nice things going for us there. We own the Chromebook market. We have a strong market share in the wireless peripherals, which is the keyboard plus Trackpad and we are working on the PC Trackpad segment with the Windows 8.1 PTP. There lies the big opportunity for us, it’s a very nice time over $200 million, $300 million. And we expect to take come of that share with that product which is closely aligned with the touch technology. But basically, with USB 3.0, with Trackpads, with power delivery, you will get back to a very strong position in USB.

Jeffrey A. Schreiner – Feltl and Company, Inc.

If I might opine, is that the Trackpad business and the Chromebook going to be down year due to losses to other Asian competitors?

Badri Kothandaraman

Not really. And we’ve got – last year we had two or three OEMs went after Chromebook, Trackpad. This year we’ve got seven OEMs already. So we expect double-digit growth this year in 2014 compared to 2013.

T.J. Rodgers

Will resume back to the original question, Datacom is an important division for us. We’ve got some extremely exciting products there. USB 3.0 and USB power delivery are going to reinvigorate the entire USB market and it’s going to be a part of our growth in the future for sure.

Jeffrey A. Schreiner – Feltl and Company, Inc.

Oaky. And just one last for me since I’m the last guy here. What was the units during the quarter?

Brad W. Buss

Okay. Let me get my graph. Revenue units, 151.1 million, up from 146.5 million and we are looking at a trend that is left going back to 2006. So we basically making shift 150 million units a quarter and the revenue is that number times ASP.

Jeffrey A. Schreiner – Feltl and Company, Inc.

Okay, well thank you and Brad…

T.J. Rodgers

One more positive we had John had an issue getting in so we are going to take John’s call too.

Jeffrey A. Schreiner – Feltl and Company, Inc.

Yes, I’m jumping off, best of luck Brad and everything, miss dropping the f bombs with you in the conversation but hopefully sometime on the other side.

Brad W. Buss

I don’t recall any of them. Thanks Jeff.

Operator

Thank you. And the last question does come from John Vinh, you may ask your question, please state your company name.

John N. Vinh – Pacific Crest Securities LLC

Yes Pacific Crest Securities, and thanks for squeezing me in there. My question is, I noticed that a lot of your new design wins at Huawei seem to be on Gen4. What seems to be driving kind of the resurgence instant demand for your Gen4 solution? Can you clarify what is your mix of Gen4 to Gen5 today and given some of your new design wins, in Gen5 or certain ramps for the year? How do we think about that mix at the end of the year?

Hassane El-Khoury

Hi John, this is Hassane. So the reason Gen4 obviously strong is – it’s a great part. We have a great solution around Gen4, obviously that is a no way shape perform being obsolete in the market and our customers obviously are introducing very aggressive and their high end flagships with it.

So that I would, see that will remain a part active partner of portfolio. As far as the mix change, obviously we’ll start shifting to Gen5, whether Gen5 M or Gen 5 L, based on the introduction of these two parts that we had last year.

So if you recall, lot of the Gen4 that is ramping on now, started being designed in towards the first half of last year, when Gen 5 L which is the high IO contact services of the market was not out yet. Having that part out in the second half of 2013, we are going to start seeing the new designs that you will start seeing in the market towards the second half of the year, start adopting Gen 5 L. So that’s really how the mix is going to start changing.

Brad W. Buss

Yes, John it’s about year and a half to two years and so the current Gen becomes a main part of the mix and like Hassane said, I mean there is still Gen3 shipping as well right. I mean there are all very robust part and it depends on the application, and new markets that will come up for all of those still even outside of cellphones, we’d expect to see all those generations for the next few years.

John N. Vinh – Pacific Crest Securities LLC

Unless you could share more wins this year maybe on Gen4 or Gen5 do you expect?

T.J. Rodgers

The Q1 wins I would say the revenue as lot of it is driven by Gen4 as far as the revenue we accomplish in the quarter, there is Gen5 M already which is the lower I/O count, as far as if you look at the funnel that we have engaged, we have one that you will not see the revenue or the announcement until the second half the year, a lot of those are on Gen5, family.

John N. Vinh – Pacific Crest Securities LLC

Great, well thanks a lot and best of luck to you Brad.

T.J. Rodgers

Thanks John. Okay, that wraps it up our first quarter 2014 results. We reported $170 million, 50.3% gross margin and $0.07 EPS. We said we were happy with that and projected that each of those numbers are going north in Q2. Thank you very much.

Operator

Thank you. You may go ahead and disconnect at this time. Thank you for your participation. And you may go ahead and disconnect at this time. Thank you.

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