Cypress Semiconductor's (CY) CEO T.J. Rodgers on Q2 2014 Results - Earnings Call Transcript

Jul.17.14 | About: Cypress Semiconductor (CY)

Cypress Semiconductor Corporation (NASDAQ:CY)

Q2 2014 Results Earnings Conference Call

July 17, 2014, 11:30 AM ET

Executives

T.J. Rodgers - President and CEO

Thad Trent - EVP-Finance & Administration and CFO

J. Daniel McCranie - EVP-Sales and Applications

Hassane El-Khoury – EVP-Programmable Systems Division

Analysts

Doug Freedman - RBC Capital Markets, LLC, Research Division

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

Ryan Carver - Credit Suisse Securities, LLC

Blayne Curtis - Barclays Capital, Inc.

Lena Zhang - Blaylock Robert Van, LLC.

Sujeeva De Silva - Topeka Capital Markets Inc.

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

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

Srini Pajjuri - CLSA Limited, Research Division

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

Operator

Good morning and welcome to the Cypress Semiconductor Second 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. Sir, you may begin.

T.J. Rodgers

Good morning. We're here to report the second quarter of 2014. We will start out as usual with our CFO, Thad Trent, for his first report.

Thad Trent

Thanks T.J. Good morning and thank you attending our Q2 conference call. All information discussed in our press release and on this call is based on preliminary unaudited results and we encourage you to review our 10-Q once filed in early August.

I'd like to remind everyone that during the call, management when making statements that should be considered forward-looking and as such they entail (ph) certain risks. Such statements are based on the information available to us as of today. We have no duty to update them and our actual results could differ materially. Please refer to our press release and SEC filing's for a more detail discussion of these risks.

Now on to the results for the quarter. Q2 revenue of $183.6 met our guidance. Overall revenue increased 8% sequentially by division MPD increased 5% from Q1 due mainly to strengthen in the RAM division which is focused on automotive and industrial markets.

PSD increased 8% driven by growth in CapSense and our touch business. DCD increased 15% driven by strong sales in our new USB 3.0 products.

Our Emerging Tech Division increased 33% sequentially and reached another all time high as we continue to ramp new customers. Dan will provide some additional details on Q2 revenue after my section.

Turning to non-GAAP net income, it was $26.7 million and resulted in earnings per share - diluted share of $0.16 exceeding guidance due to higher gross margins in efficient spin in OpEx.

Non-GAAP earnings increased 123% from Q1. As you can see we have very strong fall through leverage in our current operating model.

Non-GAAP gross margins of 54%, is 3.7 percentage points higher than Q1 due to product and customer mix. ASPs of $1.09 were inline with Q1 and utilization on Minnesota stub (ph) based on wafer starts in Q2 with 79%, four percentage point increase from Q1 and we expect Q3 utilization increased in the low 80s.

Non-GAAP operating expenses of $17.3 million decreased 2% sequentially mainly due to savings and labors as we continue to maintain tight control of our OpEx. We expect year-over-year OpEx to decrease even with higher revenue growth in our investments in Emerging Tech.

Non-GAAP OIE was negative $1.5 million due to the interest expense from our revolver. Non-GAAP tax expense in Q2 was $1.1 million inline with our expected cash tax expense.

But turning to the balance sheet, cash and short term investments totaled $113.8 million, an increase of 2% from Q1 approximately 71% of our cash and investments were unsure. We generated $45.3 million in cash from operations, an increase of 80% from Q1 and 49% from a year ago Q2. Free cash flow was $39.5 million, increased 102% sequentially.

In Q2 we entered into our 16th Yield Investment or HYIP in the amount of $9.7 million that will mature in Q3. Recall that we used the HYIP investment as a part of our stock buyback program where we either receive an enhanced return on the invested cash or we receive $1 million share of Cypress stock upon maturity.

Moving on to inventory. Inventory was $89 million inline with Q1 and I expect inventory dollars to remain flat in Q3.

In the disti channel we sort growth and inventory across all geos except Japan. Excluding Japan, disti inventory increased 5% in dollars and 7% in units.

Overall, deferred income decreased slightly from $142 million to $139 million in Q2. Average weeks of inventory in the disti channel decreased slightly to 7.6 within our model of six to eight weeks.

For our net accounts or receivable at the end of the second quarter was $116 million, down $2 million from the prior quarter and DSO decreased six days to 57 days.

Our aging continues to be in excellent shape with no material delinquent balances. We've collected over $38 million of the Q2 delinquent (ph) balances in the first two weeks of July.

Our revolver debt remains flat at $227 million. CapEx totaled $5.8 million primarily driven by deck of purchases and depreciation within the quarter was $10 million.

For share account, weighted basic shares in the quarter came in at $157.9 million and fully diluted shares were $166.7 million. We ended the quarter with $158.3 million shares outstanding.

So, turning to guidance for Q3. We entered Q3 with a book-to-bill ratio of 0.99. We expect revenue to grow sequentially 1% to 4% in the range of $185 million to $191 million consistent with the 2014 revenue plan outlined in our annual report. We expect Emerging Tech in MPD to lead the growth sequentially.

I estimate gross margins to decrease slightly to 53% mainly due to product and customer mix. This will vary with utilization, manufacturing absorption and obviously the foundry mix.

OpEx is estimated to be in the range of $71 million. Net interest expense of approximately $1.5 million and minority interest benefit of approximately 200,000 associated with our subsidiaries.

We expect the tax expense of approximately $1.7 million or 6.5% effective tax rate. On the CapEx side we're expecting $7 million with depreciation in the $10 million range.

I anticipate the fully diluted share account to be around $167 million shares so on a non-GAAP earnings per share the range will be $0.15 to $0.17 for the quarter.

So in summary, we're confident in our new product design wins and are committed to manage your OpEx tightly. We believe the leverage in our business model will continue to generate increasing levels of profit in cash flow.

So with that, I'll turn it over to Dan, to fill the color on the quarter.

J. Daniel McCranie

Hey, thanks Thad, and good morning, everybody. As Thad stated our forecast for Q3 is at the high end of 191. So I'd like to start with the discussion of how the bookings and turns are coming in for this quarter in order to meet or beat that number for our forecast.

So as of the first three weeks of the quarter, we have secured 53% of the turns required for Cypress to meet that guidance. So, over half of the turns required have been booked in the first three weeks and we have the next 10 weeks to secure an additional 47%.

If you did the math, if we would have been booking turns linearly, we only had 23% of the quarter booked by the end of the third week of this quarter instead we have 53%. So, very similar to last quarter, we are once again hyperlinear with respect to turns required which gives us good comfort for our revenue forecast.

Book-to-bill numbers for these three divisions were as follows: MPD was 1.06, DCD 1.1 and PSD 0.9. So, PSD backlog decreased last quarter but with the strong bookings we're seeing and strong turns we're seeing for the first three weeks of this quarter, we're comfortable that the strong new order rate at the first few weeks will result in a much more robust PSD book-to-bill by the end of Q3.

Turning to our activity, last quarter the market in sales organization was energized to promote to our customers the large block of recently announced new product offerings from Cypress including our family of USB 3.0 controllers, PSoC 4 family 4, 4A, and 4000 as well as MBR are just announced nonvolatile F-RAM and VSM products in our newest QDR SRAMs.

All of these products have been announced in the past four quarters or so and I wanted to give you some insight into the first important step which is to secure design-ins.

With regard to claimed design-ins, we saw an 8% increase in our PSD division primarily in PSoC 3, PSoC 4 and mechanical button replacement. We saw a 29% increase in our DCD division confirmed design-ins that was exclusively from USB 3.0 HX and FX families. And we saw a 15% increase in design-in activity in our memory products division confirmed design-ins primarily in the nonvolatile memory area.

Our PSD as you know have this fairly long design-in cycle time between four and eight quarters. So even with the recent introduction of a new PSD family, it's going to take a couple more quarters before I start to see very strong increases.

But, the early activity of those products tell me that we're going to see very strong clean design-ins for PSD in Q3 and in Q4.

Now, revenue from previously claimed design-ins resulted in revenue for platform PSoC increasing 8% quarter-over-quarter as we begin to see initial orders for PSoC platform primarily in the wearables and white goods market.

We continue our aggressive worldwide workshop series, customers and channels partners in the PSoC family. To-date we have trained over 2,000 customers in the first six months of the year and approximately 150 channel partners in PSoC using our IDE to PSoC creator.

A real high point this past quarter was USB revenue. It increased 31% quarter-over-quarter as a previous design-wins in FX3 began to convert to revenue. The new USB 3.0 editions, HX3 and CX3 are gaining rapid attraction with the competition in telecommunications accounts.

We are now launching extensive workshops similar to what we've done with PSD training to both our customers and our channel partners through the second half of 2014.

And then finally MPD revenue increased 6.5% quarter-over-quarter driven largely by the 22% increase in nonvolatile memory sales.

So in summary, we've once again got a great start to the quarter with respect to meeting or beating our Q3 forecast and we're very encouraged by the design-in results occurring from the spade of new products that have been announced over the past year from all divisions. T.J.?

T.J. Rodgers

First, a couple of comments on the finances and then I'll go on to usual events and quickly to questions.

In the board (ph) at the beginning of the report it said, consumer electronics running slow but the industrial and automotive sector remains strong at 43% of revenue.

So, by consumer electronics I mean cellphones primarily and the revenue did flow forth. The form of the slowing was not winning or losing big designs but basically lower unit volume on the designs that we have.

It wasn't dramatic but it did take away upside. We have a plan that I actually took the trouble to put into the annual report and I've been on the road with in my so called rocket pitch where we've laid out the – the next five years of revenue, the 25th and 75th percentile and we're on that plan.

We had some hopes of beating it a quarter ago, right now it looks like we're going to make it but that has been consistently what I've been saying all year long since the annual report was published.

Gross margin, we reported 54%, that was up 3.7 percentage points. I want to point out that that's the gross margin for the corporation and if you look at the chip part of the company which almost all of the revenue right now, all the $5 million bucks, our gross margin is 55.8%.

We lose a couple of points to gross margins in the consolidated report because brand new company's for example DecaTech was a big factory, they have negative gross margins but I just want to point out the chip business is very healthy at 55.8% gross margin.

And all of this came through in terms of free cash flow which was $39.5 million or 21% of revenue and this started putting money back in the coffers which allowed us to startup in a modest way our share buyback program which from a price point of view is attracted to us right now.

ETD revenue, Emerging Technology, so think DecaTech and AgigA Tech was $5.3 million not a huge number but it was up from 2.7% a year ago so double. And this is going to be the primary source of growth in the plan that's in annual report.

So, we've invested $200 million in these two companies. We haven't talked about them much, starting next quarter I will bring in Chris-Seams, the President of DecaTech and we will talk about it because we've got a huge investment of your money in those companies and we're about to start creating revenue for us and I'll be the primary engines of our growth next year.

Right now we're growing slowly and we will finish year with growth but next year the growth will accelerate because of DecaTech and AgigA Tech and we will start making their results more visible.

Events, United Microelectronics Corporation, UMC, the Taiwan foundry has license to SONOS embedded flash technology. So, SONOS or Silicon Oxide Nitride Oxide Silicon is the superior form of nonvolatile memory.

Nonvolatile memory or flash is used to store the program in microcontrollers and also in the PSoC chip. And UMC is going to use that in the 55-nanometer node.

The 55-nanometer node is the half shrink from the 65-nanometer node and the 55-nanometer node will be the high volume node. It's the last one that doesn't use immersion lithography that is pulling away for it's underwater when you expose them. And it will be an economically important node and UMC has bid on our technology.

So, SONOS what we've used and said it's a good technology for years. It's going to find its way into the world. One might argue that if it's so good. why would you let your competitors to have it, and the answer is as long I get a little bit of money from it and enhance our P&L, I'll be glad to proliferate it.

Second point, we introduced the 4000 family, that's our low-end PSoC 4 family. 32-bit ARM M0, its the same that - in effect redoing the entire 8-bit and 16-bit legacy market. We've done everything consistent with that, for example, our dev kit which we're very proud of. Development kit that is the thing engineers take to play with the product and help design it into their product, it's $4.

It looks like USB stick and you can exercise the part which is on it and that means we can give it away or sell it at $4 to the designers of products with Internet of Things.

So, this product which sells for a $1 or less and the kit which sells for $4 are enablers through the Internet of Things. They allow you, which is PSoC is very good at to hook up the sensors and then to process the information and do it with very, very low energy on a battery. So, this is our first big entry into the IoT.

Our Teardown firm, TechInsights found Gen5 surprised us in the - that was a joke - surprised us in the Samsung Gear Live Smartwatch. So that was a big win for us.

Gen5 is a pretty high level controller. Gen5 you'd find in a smartphone. So, that watch has the fairly sophisticated screen capability in it and even though it's sophisticated it can run on a watch battery which means it's very low powered.

We've got a bunch of design wins at Huawei, five models, Honor 3X, Honor 3C, Ascend G716, G730 and G740. We've got some designs of ZTE in their Nubia X6, that's their superphone with a giant 6.44 inch display. So we're doing well with the large Chinese companies in TrueTouch.

Now we've brought out a fourth generation wireless radio, we call it wireless USB. This is the thing that connects mouse, keyboard et cetera to personal computer. Of course it's a saturated market and the question is what you bring to the party. Now the answer is that the radio has a faster 2 megabit per second data rate and what that means is, you can get on the radio, latch out your data and get off in half the time though it is one mega bit and when you're running your radio half the time it cuts your power.

So, the old standard has been for mice and keyboards to have battery life of the year. This product enables the battery life of three years.

There's a company called intelliPaper. They make intelligent business cards and they make product brochures where although they are in paper, they have an embedded chip and the ability to plug into USB socket.

So, for example I could give you business card from intelliPaper and you could plug it in to your computer and get all of my contact information and whatever else I wanted to put on it because you can put a lot of data on it. That's a startup and I wish them a lot of luck.

Oneking Technologies of Shenzhen is a camera company. They did an HD video conferencing camera for us, they put it in there because - how many cameras do we have now?

Thad Trent

At least 50.

T.J. Rodgers

Yeah, it's the 15th camera we have, one of the presentations in my – in my rocket pitch shows six of those wins, bottom-line we're owning HD video camera. So, if you want to take a camera and do high resolution picture, and hook it up to USB, our FX3 chip is winning the day there and we have another called CX3 which hooks up to serial camera interface which is this new standard. So we are pretty much king of the camera, USB camera world right now.

EverPro Technologies makes active cables. One problem with USB is that the - USB-3.0 is that it's 5 gigabits per second. USB 3.0 is only guaranteed to go about 15 inches before it dies.

And if that doesn't work, think about a football game for example where you have somebody with a camera and then they got a long cord to drag along the sideline. So, it turns out in the practical world you've got to run USB 100 meters, 300 feet and we've worked with this company and they’ve made an active cable that is it amplifies the signal on both ends of the cable to get to 100 meters. So that's an important thing that will help USB 3.0 start to take over for USB 2.0.

We've introduced Static RAM and normally we wouldn't talk about the Static RAMs. This one has got a new technology and it called Error-Correcting Code or ECC. And bottom-line is you put in more bits in the RAM then the RAM shows to the public.

If not exactly like this but the point is clear, if I have a byte, 8-bits, even if I add 2-bits to it to make a 10-bit byte and I can take those 10-bits and I can correct 8-bits that is one of the 8-bits can be bad and I can fix it. And with that capability built in as a memory the SRAM is 1,000 times more reliable.

Now, RAMs are very reliable. They're 100 FIT, FIT as failures in time. I will go into the meaning of it but 100 FIT is a reliable product and this technology takes RAM reliability from a 100 FIT to 0.1. So, 1,000 times more reliable.

So if you think about routers in other machines that have to have reliability. If you think about SRAMs that have to hold data for a long time in a system and not lose data, and by the way, all systems are being bombarded continuously with neutron radiation, that's a natural part of the air. And that's the thing where those errors will be fixed by this technology. So, we're going to bring out a bunch of these RAMs, this is the first one.

And finally we signed five new distribution partners in Asia. We keep saying we've got to move resources from North America and Europe to China in particular and we've done it like three times and by the time we get them we see, we still don't have enough coverage in China. So, we signed on in Korea and China five new rep firms - excuse me, distribution partners.

Okay those were my comments. We're ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question is from Doug Freedman, your line is open and state your company, please.

Doug Freedman - RBC Capital Markets, LLC, Research Division

RBC Capital Markets. And thanks for taking my question guys. Congratulations on the strong results, those cost margins are little bit impressive and as a result I'd like to get a little bit more color on what's happening on mix that would pull the gross margins down as materially as you're guiding given the revenue change that you're forecasting?

T.J. Rodgers

The market gives us and the market takes, it's the way, we said we have softness in the cellphone market and therefore our mix shifted toward automotive and industrial. And so while our revenue was on our annual plan but lighter than some of the analyst had scheduled for us.

The revenue we lost was low gross margin revenue and in that bumped up our margins. We expect an uptick in cellphone shipments in the next quarter and we'll probably lose the point from 54% to 53% in the aggregate.

But those are still numbers, well north of 50, which we why we want to be right now.

Thad Trent

And Doug you also have slight drag as the Emerging Tech continues to grow. They're at a lower margin as they're not up to full capacity.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Is there a forecast for us on when we should look at Emerging Tech being possibly accretive to numbers as supposed to the drag, any ideas, are we looking at four quarters, six quarters, can you toss a sort of bogie out there and when we should see that?

T.J. Rodgers

I looked at that this morning and I was trying to decide when I should bring in, - you have a gain with Emerging Tech. So I bring in these young guys, who are losing money and then every guys chop them apart because they're not ready for prime time yet.

So do I expose them so they can talk about their cool ideas and where we're moving, so I decided to bring them in.

The answer to your question financially, it's little more new ones than that. Right now what I want them is to stop making my margin go backwards. So, right now what I want is a negative gross margin to turn positive and so that they will not delude across the chip gross margin and we'll report the numbers going forward.

That will happen by the end of this year and in the first quarter of next year. In terms of profitability we're looking at.

Thad Trent

We'll be breakeven by year end early Q1 in the Emerging Tech Division.

Doug Freedman - RBC Capital Markets, LLC, Research Division

All right, much better than I had expected. So, happy to hear that. I guess one thing for me just a little bit on the balance sheet strategy, encouraged to see you back buying some stock with your yield enhancement program. Thoughts on further potential leverage here I know it sounded like something you might have been looking at in the past, is it something that still is on the table?

Thad Trent

We're not finding on doing anything immediately, we've got - room under revolver if we need it and if there is a use for cash we’d consider going out and making some changes.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Great. Thanks so much.

Hassane El-Khoury

The revolver is $220 million.

Thad Trent

$227 million.

Hassane El-Khoury

$227 million is of course, all cash is fundable and you can't say exactly what we did it for but in effect our choice to buyback stock this quarter, while we owe money and supposed to paying down in the debt says we're in effect ready to buyback stock which means the revolver which is 2.5% interest is cheap money to buyback stocks.

So, that's where we are but we want to keep the revolver comfortable. We don't want to push it too far. So this turn in cash flow which we expect to continue cash profit in effect we're looking at 20% kind of number going forward, it will always depend on capital equipment in the quarter and that kind of staff.

We're going to use the fund buyback rather than pay down debt.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Okay. Thanks for that clarity.

Operator

Thank you. Next question, Vijay Rakesh, your line is open and state your company, please.

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

Sterne, Agee. I was just wondering on the - going back to the consumer handset commentary. How do you see your Gen4, Gen5 pollution as you look at - let's say the next generation of platforms DS6 and how are you positioning that with IDEX late this year or early next year? Thanks.

Hassane El-Khoury

Hi, Vijay this is Hassane. So as far as the product you mentioned Gen3, Gen4 those are four or five. Gen4 and Gen5 will co-exist. We have seen a lot of funnel started to yield. T.J. mentioned a couple and cellphone market with low end ZTE but also Gen5 we talked about our position in the wearables market which Gen5 is starting to penetrate given it's water rejection in the power.

So that increase in our position brought again - we're talking about a lot of new customers that we have and a lot of new customers that we are growing with.

Now take that market position and couple it with the new product that we're working on with IDEX and you get a win-win situation that we're targeting. And that we're starting to – we'll start to talk more about it in the first quarter of 2015 when we'll be having engagement with the product and sampling and so on.

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

Got it. I want to be – wouldn't you have to be engaging with a lot of customers ahead for - because lot of these RAMs actually have been in first half 2015, is that correct?

Hassane El-Khoury

Yeah, 100%. So as far as engagement with the customer of what they want that has been ongoing. We're doing it jointly as well as we are using our sales force to penetrate accounts that we already have designs with for the engagement with the customers and the technical discussions about what they want is already happening.

The good thing with the product we're introducing as you know it's leveraging our programmable fabric that feedstock is based on and of course our TrueTouch is based on which gives us a lot more flexibility to engage faster with customers into their specific custom designs that they would like us to have.

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

Got it. And just going back on the financials, when you look at the 54% gross margin and 53% here, is that - you think that 53% should be a sustainable level as you look out and how much more leverage is there on the OpEx line, where do you think OpEx goes if you look longer term? Thanks.

Hassane El-Khoury

Yeah we stated that our corporate model is at 55% gross margin. I think it's going to fluctuate in there, in the range that we are now 53% to 54% for a few quarter depended on utilization.

As revenue begins to ramp I think we can grow that margin as we absorb the factories across a broader revenue base. And then your second question was –

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

OpEx.

Hassane El-Khoury

OpEx, OpEx is where it is, it's where we want it to be. Now it's a matter of just reallocating OpEx between growth businesses and businesses that are declining.

So I don't think you're going to see a lot of additional cutting than OpEx. I think you're going to see go flat for a period of time and maybe just slightly increase over time with wearable comp coming back on.

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

Got it. Thanks.

Operator

Thank you. Next question, John Pitzer, your line is open and state your company, please.

Ryan Carver - Credit Suisse Securities, LLC

Hi, this is Ryan Carver for John Pitzer, from Credit Suisse. Question about the revenue guide, if I look at the third quarter guidance and your number for the full year 2014, it implies the fourth quarter growth of about 3% against what seasonally kind of flatter, mostly flat and growth rate that we haven't seen in the fourth quarter since probably 2010.

So, I guess what gives you guys confidence that you're going to be able to achieve the sort of buzz seasonal growth rate for the fourth quarter to hit that 735 number for the full year?

J. Daniel McCranie

Hi, this is Dan. The reason Q4 tends to be seasonally down is what percentage of your market goes to the consumer space. If I look at our design-in activity - the design-in and the design-win numbers where they're coming from, there is a much larger increase in industrial, in automotive, in telecommunication, and in high-end competition and less percentage in consumer.

So we've modeled all these design-wins and these revenue projections and my team is pretty comfortable that we're going to have a non standard Q4 that is a Q4 that rips into growth as oppose to a seasonal contraction.

You're still going to see a softening in the consumer space but if your other products are busy enough in the non-consumer space, the net of is two hectors we believe will be positive in Q4.

T.J. Rodgers

And also the downturn of consumer in the fourth quarter, the old model which I believe is no longer valid, is that we have the big bill for Christmas in Q3 and then the first two months of Q4 and then lights go out.

I hate to tell everybody that Christmas isn't the most important holiday in electronics anymore its called got Chinese New Year and we are building all the way through the fourth quarter for that.

And consumption in Asia is not just manufacturing anymore. Consumption in Asia is starting to matter. So the softening of consumer is less and the other markets are going strong.

So we're - we believe - again we were very careful in doing the annual plan and we still believe we can achieve that plan.

Ryan Carver - Credit Suisse Securities, LLC

That's helpful. And then if I can – as a follow-up. I think you guys talked about sort of $294 million level for OpEx for the full year, you guys obviously to better that in the sort of $280 million to $285 million range. So I guess kind of on the previous question, where do you guys think that revenue would need to go to for you to see a material increase in OpEx and I guess specifically the gross margin side as well.

You talked about the lower absorption. What kind of revenue level do you expect the absorption to get you guys back into sort of that 55% level?

T.J. Rodgers

Let me answer that question. We're not going to spend another penny on OpEx until we are north of 200 million in revenue. Once we get north to 200 million in revenue, we will judiciously add R&Ds so we can make more products faster.

Right now, with regard – and some sales again we thinking we've got China covered and every time when we say that by the time the words come out of our mouth we look as they need more people.

So we might add more in the sales side and we surely will add more in the product development side but not toward north of 200 million. We got to lid on until we get back above 200.

Operator

Thank you. Next question, Blayne Curtis, your line is open and state your company, please.

Blayne Curtis – Barclays Capital, Inc.

Hey, thanks, Barclays. If I just follow-up - when you look at the seasonality I know you answered the question and you had more ramps on the upside versus downside and hence the change in seasonality. But are you including any material ramps in the Q4, I'm just trying to figure obviously handsets have more than volume is, it's been a bigger portion so obviously it's hard to offset that seasonality.

So do you have auto side in industrial whether you’re seeing ramping, are there any big material lumps that help you to get that work?

J. Daniel McCranie

There is a couple of them, one of them is the rapid design-ins that occurred in USB in the non-consumer space and that is predominately the competition, and telecommunication space and the third is general auto for platform PSoC as well as nonvolatile. Combination of those two are going to be strong Q4 vectors.

And then finally, I'm not at all sure that T.J. last point that, we're going to have a deep seasonal dip in cellphones. We have expanded our number of cellphone customers dramatically last quarter in terms of early design-ins and they should go into revenue in Q4.

So, more refined answer is the downward vector of consumer cellphone [Audio Gap] industrial, competition, automotive design-wins in both nonvolatile as well as DCD that is going to offset that.

Hassane El-Khoury

To give - this is Hassane. To give a little color on the automotive, if you look at the automotive design-in cycle its pretty long cycle and the product launch really starts in towards the – in Q3 full in Q4. And you see that in your daily life when you go the dealers they have next model years starting in the September timeframe and a lot of those are going to start a lot of the volumes of the designs we've already launched some of which we have talked about and they're on cover of our annual report.

A lot of these are going to start generating full quarters of revenue for us as our end customer proliferate and start launching them broadly into the end markets.

J. Daniel McCranie

Just to pile one more time, we haven't talked about it much but the white goods, the design-ins for CapSense and control in the white goods area is been about at nine, 10 quarter grind but last quarter we saw the first beginning of revenue, out of the white goods houses and I expect that to pop-up further in Q4.

T.J. Rodgers

We have an Analyst Day coming up on November 6th, you are all invited. White goods depends upon water proofing and water proofing has now become a buzzword and everybody has the buzzword.

Not everybody has the reality of water proofing and we're scoring big time in white goods and Samsung the watches wearables also because they need to work in the rain and sweaty fingers.

At the analyst conference we will demonstrate direct comparisons of water proofing between us and our competitors and prove to your satisfaction we'll let you to demo yourself, prove to your satisfaction that we've got the best water proofing.

Final point on this and I guess this is pretty good question, got five answers now. Final point, I pointed out and we didn't talk about it, that automotive and industrial is 43% of revenue, we've been working on automotive since 2006.

So young Hassane was the automotive guy who came in, he is now an EVP. And that's longer than we've been working in touch screens and our automotive and industrial business is more than twice as big as our touch screen business.

So while the touch screen market is fun, competitive, fast moving, it can make and break fortunes real quick, fact is, it is more than– less than half of size of our industrial automotive.

So when you ask about fourth quarter, you really have to look at the other stuff and ask if it truck on through the quarter and not have a decline [Audio Gap].

Blayne Curtis – Barclays Capital, Inc.

… the softening that you saw, when did that started, has it concentrated to one customer or was it bit broad and just as a whole do you expect touch to grow in this September?

J. Daniel McCranie

Hi, this is Dan, just to give you - because I track the weak returns. Somewhere around the last third of last quarter, we saw that the softening and order coverage and it was both China and Korea and [indiscernible] as much details as I want to give.

And I would say though that in the first three weeks of this quarter we're seeing a little return.

Hassane El-Khoury

And if you look at the announcement that we have that T.J. talked about earlier, I've always in the past talked about, we had a healthy funnel, the funnel will start yielding, we're going less dependency on – we're going broader, we set up a team in China and so on. And then our portfolio, our ability and our portfolios ability to be able to address the whole segment with good margins as you saw on the results, allowed us really to be able to absorb when you saw that in the final results for Q2.

Blayne Curtis – Barclays Capital, Inc.

That's it. Thanks.

Operator

Thank you. Next question Lena Zhang, you line is open and state your company please.

Lena Zhang - Blaylock Robert Van, LLC.

Blayloc, thank you. To find out the best handsets today end market because you saw - right now your main exposure to China market and you mentioned the lower unit volume from handset OEM. When you commented on that is more towards to demand main issue or something else?

J. Daniel McCranie

Let me try – if I have understood your question, we commented on softening in China and you like to comment whether its demand, is that correct?

Lena Zhang - Blaylock Robert Van, LLC.

Yes. Is it a demand issue?

J. Daniel McCranie

Demand issue. It was demand issue of a selected one, selected Chinese account. In general in China, there are a large, large number of indigenous Chinese handset manufacturers as I'm sure you know, in excess of 300 million units a year which we're participating – currently participating in the small percentage of that.

Hassane and his team are in the process of building robust cost effective products first to go after 360 million units. We currently only have a handful of that TAM with the new products coming out in the second half of the year, we want to be able to address a lot larger portion of that Chinese TAM.

So I think the answer to your question is we did have a demand issue from the Chinese houses we were dealing with in Q2. Our reaction has been to expand our targeting of the entire Chinese market from just a handful of customers to the 20s of customers to go from having addressing a TAM of maybe 30 million units to addressing a TAM of 300 million units, does that help.

Lena Zhang - Blaylock Robert Van, LLC.

Yes. Thank you. Another question about competition, because you are now more exposure to Chinese handset OEMs market. And what do you see the price pressure from FocalTech and Goodix – on mid to high-end have you seen new competitors coming into the market like [indiscernible]?

Hassane El-Khoury

Yes. I'll answer the first question, this is Hassane.

So yeah, we do go had to had with the local Chinese competitors but however like I mentioned earlier, we do have our portfolio set up in order to be able to address that segment with its product. Therefore without putting pressure on our gross margin but we do see that competition and we don't discount it. We are reacting to it. And we have products already in the market that are competing successfully with it.

Your next question is on the high-end, do we see new competitors coming in? The answer is yes. Of course it is to the benefit of our customers to have new competitors come in, and we welcome it and we believe we have the technology and we're going just like we competed with many older competitors before them, we will compete with the new competitors today.

J. Daniel McCranie

This is Dan, I guess the other thing I would say is, I'm sure you have seen you done your channels checks with the Chinese indigenous cellphone manufacturers, that the features of their phones are increasing which means that they are asking for more advanced silicon and more advanced sensors with every passing quarter.

So while we do have aggressive competition, we are encouraged by the fact that the indigenous Chinese cellphone manufacturers are themselves moving up beyond just the base cellphone upper to the more of the future rich phones which we believe pleased very well into Cypress current prior portfolio and shortly developed portfolio.

Lena Zhang - Blaylock Robert Van, LLC.

Thank you. May I ask one more question and then I will get back to the queue.

T.J. on the last call mentioned about non-ITO partnership. One is with Cima Nano SANTE maker and the other one is nanoparticle touch sensor makers. So would you please comment on non ITO [indiscernible] and when you see this though start to ramping up?

Hassane El-Khoury

Hi, this is Hassane. So just to repeat your question, you're asking what is the development on the non-ITO material as far as the screen based on comments we made or releases actually that we made last quarter about partnering with non-ITO vendors with our products. Correct?

Lena Zhang - Blaylock Robert Van, LLC.

Yes.

Hassane El-Khoury

So, the answer to the question is, this is an ongoing effort. We are always looking at working with new technologies to enable our customers to have more degrees of freedom when they are going to choose what back up they will go with. And by back up I mean the sensor layer that will go on top of the LCD.

What we aim to do and we have done it last quarter as you mentioned and we continuously do it is with our programmable TrueTouch product gives that flexibility to the customers so when they do want to change we offer them a platform. So they don't have to change the TrueTouch controller product, they can change whatever supply chain they want go from ITO to non-ITO.

So that's an effort that's always ongoing but at the end of the day seeing it in the market is truly an end customer decision.

Lena Zhang - Blaylock Robert Van, LLC.

Thank you very much.

Operator

Thank you. Next question, Sujeeva De Silva, your line is open and state your company name, please.

Sujeeva De Silva - Topeka Capital Markets Inc.

Hi guys, Topeka Capital Markets. Thanks for taking the questions. Appreciate the end-market color in terms of Auto's and Industrial, would appreciate if you could give us more clarity on what the rest of the revenue comes from and if Auto's and material now and if handset touch is going to grow in the next intermediate term or stay stable?

J. Daniel McCranie

This is Dan. I'm not sure how much numbers I can give but here's what I'd say about both Automotive and Industrial. Automotive has been growing since 2007 but the acceptance of touch in the infotainment part of the auto is causing kind of hockey stick growth. So, you're going to see a much stronger auto revenue in Q3 and Q4 than you saw in Q2.

Likewise in industrial, with industrial/white goods, most of the designs were embryonic up until Q2. Revenue from those designs were embryonic up until Q2 and once again that's another area where we see kind of a need occurring both in China and in Europe in white goods.

So when I mentioned industrial I really kind of referring predominantly to high-end and low-end white goods. The first significant revenue from some of the major houses in white goods occurred in Q2. First of any value and the forecast we're getting for Q3 and Q4 is quite robust.

T.J. Rodgers

And the other segment, we've got automotive and industrial, we've got com, we've forgotten that. That's significant chunk of our business that is ongoing since we entered that market in 2000.

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

Okay. Great, appreciate the color. And then also the licensing revenue you're getting or going to get, what segment does that show up and is that material impact on revenue or margins?

J. Daniel McCranie

Could you repeat the question again please?

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

Our licensing revenue for the UMC of arrangement and any other licensing you have, what segment does it shop in and does it material to revenue and margins?

J. Daniel McCranie

That'll show up in MPD and there'll be a delay until that starts to ramp. So, you won't see much until next year.

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

Would it be material to margins impact on that?

T.J. Rodgers

Not until it's full capacity which would be later in the year.

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

I'm sorry.

T.J. Rodgers

When it gets there it will be what I would call a sweet rather like a new hot product. So you're looking at kind of a any pre-quoted kind of number. When it ramps up and that'll take year and a half.

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

Year and half, that's great. Last quick question, any 10% customers that [indiscernible] Samsung 10%? Thanks.

J. Daniel McCranie

We had one 10% customer also one customer graded in 10%. He was less than last quarter but still over 10%.

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

Okay, great. Thanks guys.

Operator

Thank you. Our next question, Charlie Anderson, your line is open and state your company, please.

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

Yeah, Dougherty and Company, thanks for taking my questions. You guys have done very good traction on the wearable's category. I wonder at this point if you're able to maybe define that market a little bit maybe not so much immediate but maybe more next year in terms of expectations around some of the Smartwatches.

J. Daniel McCranie

Hi, this is Dan. You're looking for numbers or, well, let's do numbers. Our analysis shows that we could be doing in the mid to high 20s to low 30s in 2015 and wearable's up from almost zero in first half of 2014.

It falls into two kinds of categories. One is this low-end devices that measure the number of steps you take and all the way up to the very high-end devices that are actually Bluetooth connect to your cellphone.

So the products that go in that are as low as simple CapSense to as high as touch plus CapSense plus memory. Large amounts of micro powered memory.

In 2015 we anticipate that there’s going to be a non-trivial amount of Bluetooth Low Energy products. Enough of talking about it, BLE products, they're going to be added to all versions of the wearable's, plus the little fitness type devices as well as the feature rich watches.

Cypress's intends to have a strong family of Bluetooth Low Energy PSoC type products that help add that.

So, I think if you look at the back-end of 2015 you ought to see us and CapSense, touch, configuration memory, program memory and Bluetooth Low Energy and maybe power management in the wearable's.

T.J. Rodgers

The wearable's market is wildcard. There is no prediction that's possible, period. You've seen [indiscernible] well, sure.

In terms of how important it's going to be in the world, I don't know. Are they going to develop production with people, find compelling.

We’re in Toq Qualcomm, we're in the Sony Smartwatch too. We kind of have a commanding position because what we anticipated the super low cost screen and we have developed a chip that sell all day long for $0.30, right? They don't - to your watch - low-end watch.

And the Samsung uses one of our high-end cellphone chips to make it really pretty attractive a watch face but we will make money at $0.30, [indiscernible] touch, waterproof touch interface on your phone.

I just don't know who's going to win, I don't know what features they’re going to prevail. I’ll just tell you one thing, this reminds me of 2005 when Apple came in and it said, we want to get rid or buttons on iPods and we want to have capacitive touching and then they created the so called click wheel, which was basically a bunch of buttons and that thing ramped from 0 to 17 million units in one quarter.

Remember that very well because we were scrambling so we wouldn't shutdown iPod shipments. So, I don't know what's going to hit but I do know that with PSoC, with a programmable product, I will be one software development time away from introducing a product and the other guys will be one chip development time away from introducing a product.

So, well I don't know if it's going to be bigger or not. I do know that we will be ready to capitalize on it if it hits and we have a good footprint right now. We're engaged with all of them.

J. Daniel McCranie

One more thing just to add on that, so obviously it was a good question. We currently have design-ins in over 60 discreet parts, almost 57 separate customers and at least one of the four items I told you about previously, whether it be CapSense, TrueTouch, Micropower SRAMs, or Power Management.

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

Great. Thank you so much.

Operator

Thank you. Next question, Rajvindra Gill, your line is open and state your company please.

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

Needham and Company. Thanks for taking my questions and congrats on the progress on the margin front.

Question on the SRAM memory segment, that seems to be doing well and it appears that it will be a primary driver to the growth in the third quarter. Wonder if you could talk a little bit about the dynamics going on in the SRAM industry, I know it's being helped by auto but anything you can talk a bit on the comment for structure space that would be helpful as well.

Thad Trent

Yeah, well I would on the Networking and Telecom, I'd refer to you our last annual report where T.J. outlined quite well what's going on in terms of the trend of that market and we're seeing the projections for that market to be inline with what predicted there.

What's growing in the memory side is again the industrial based that Dan talked about and we get a figure footprint in automotive and as we introduced these new Error-Correcting RAMs that T.J. highlighted at the beginning of the call, we're going to get a larger percentage of that high reliability market.

And then finally the non-volatile part of the market is growing quite well. We're seeing growth in that – in those product lines from a combination of storage customers, automotive customers and industrial and PLC customers.

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

I mean, could you talk about the competitive landscape in Automotive SRAM and nonvolatile and just to see who are the players there and how you expect kind of takes you there?

Thad Trent

Sure, on the SRAM side it’s the same type of characters as the non-automotive segment. So it's Cypress, ISSI and RENESAS are the main SRAM suppliers there. And on the nonvolatile side it’s a little bit different, we compete against companies like Fujitsu and Everspin but we also compete against [indiscernible] and our technology is, we believe a better technology and it's more robust technology than [indiscernible]. So we're starting to win against those competitors right now.

T.J. Rodgers

Let me generalize from that comment, the SRAM market per say, classic SRAMs, fixed transistor sell relatively expensive very high performance, low power. Problem is data goes away when the power goes off and it's lost forever.

The market is growing, it’s not the SRAM market but the nonvolatile SRAM or in the SRAM market we have to have technology like ferroelectric which we have SONOS, which we have that allows the power to go off and data to be stored.

That market is growing pretty fast and a disproportion at number of our new product developments are nonvolatile SRAMs rather than SRAM.

So we're still doing some new SRAMs but in the SRAM – and the margins are much better in that market as well.

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

So the FRAM business that you bought from Ramtron is helping you or has given you kind of the building blocks to capitalize on the nvSRAM business?

Thad Trent

It's energetic in that regard because the FRAM is the lowest energy nonvolatile that you can get and nvSRAM is the fastest nonvolatile memory that you can get. And that combination gives the customer one stop shop for both.

We just hit our record quarter for FRAM revenue, so we believe we've not only maintained the customer base that Ramtron had but we're starting to augment it with our broader tentacles in our sales capability.

T. J. Rodgers

I want to make one more comment about FRAM, he said it and engineer would kind of pick up on it but I want to emphasis it. There is one amount of energy required to read-and-write a bit of memory, there's another higher level of energy required to store a bit of memory permanently so when the power goes off it'll come back.

With regard to that second parameter FRAM is by far the lowest energy memory technology in the world. And therefore it's the only technology that would allow you to put a relatively large SRAM into a wearable.

And of course to carry over to the Internet of Things, where again they would have talk and all these things running on watch batteries. So FRAM, as memories are needed in these things and we're finding surprisingly FRAM's being needed in wearable's. This technology I think has an opportunity to be a big growth, source of growth for us.

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

And this last question T.J., moving over to the touch side. Your biggest competitor has acquired other technologies in the markets such as the display driver from RENESAS and they have a fingerprint business.

Just wondering kind of what your view on their strategy is in touch or just on the controlling the display motherboard and how do you look at it vis-à-vis that those recent actions by the competitor?

T. J. Rodgers

Well, they have great financial results. They've got good market share and therefore you’ve got to give credit to strategic choices that worked out. We have our fingerprint thing going as well. You'll be hearing about that later in the year.

With regard to the integration of – with regard to new types of displays that are integrated into the LCDs so called the in-cell and out-cell displays, that's really not under the control of the semiconductor industry, it's under the control of the display and sensor industry and that's happening and we're supporting that right now.

With regard to the third point, which is having an integrated chip that drives both the display and the sensor, I'm still not a believer in that technology. Two different technologies are required to make the chip, the margin – there's a reason RENESAS sold their division and financially troubled company getting rid of the division isn't really where there's whole lot of sex appeal as far as I can tell, I might be wrong.

But we have agreed on the finger print thing. We have our own new technologies we're working on and I’ll give credit to the competition they've done a great job.

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

Thank you. Appreciate it.

Operator

Thank you. Next question Srini Pajjuri, your line is open and state your company, please.

Srini Pajjuri - CLSA Limited, Research Division

Thank you. CLSA. Hey Dan, just going back to your comment on the turns business being strong in the first three weeks of the quarter. If that's the case, what's giving you pause about the driving and why not be more aggressive?

J. Daniel McCranie

I was talked down by my CEO but besides that we started last quarter, this quarter I have 53% made in the first three weeks, last quarter I had 60%. So I was hyperlinear last quarter and I'm – I was hyperlinear this quarter.

We were surprised, I was surprised by the slowdown in cellphone stuff in the last third of the quarter. So I think a reasonable number of our 4% growth is I think probably accessible from a risk litigation point of view.

Srini Pajjuri - CLSA Limited, Research Division

Okay. Got it. .And then on the IDEX relationship, can you regenerate the goal or is this a foundry relationship that you have or are you licensing the ITeX from IDEX and if so, when should we expect the products to be out in the market and when do you expect the revenue ramps from this relationship? Thank you.

Hassane El-Khoury

Sure, this is Hassane, I'll take that. The relationship is we are leveraging the IP that we have from IDEX. We are developing our own product to go into the market. We are obviously specifically focusing on the mobile market and I talked about mobile as far as cellphones, smartphones, tablets, even wearable's.

So that is the relationship as far as Cypress product out into the market leveraging the IDEX fingerprint. We do have of course the capability to take that product and give IDEX access to that product themselves and that's part of the partnership.

So I call that as a partnership because our goal both of our companies goal is to go to market and own the fingerprint sensing in the market because I do believe the technology that they have, both the technology and the IP that enables is at very strong position and that's the reason we decided to partner together.

As far as products, I talk about products available out and we’ll talk about it in the first half of next year at the first early in 2015. As far as going that into end-products and the market that's really going to depend on the phones and when they're launch will start occurring.

So I can't give you an exact day on those obviously a lot of it is going to be customer dependent but I can tell the engagement's have begun, the design, the product designs have begun and those have begun since early agreement.

Srini Pajjuri - CLSA Limited, Research Division

Okay, great. And then maybe for Thad. Thad you said the Emerging Tech you would expect them to breakeven or turn to profits sometime into first quarter. Did you say what the EPS loss was for the quarter from Emerging Tech? Thank you.

Thad Trent

Well the Emerging Tech, this is about $0.02 per quarter right now. We think early 2015 it’ll be breakeven.

T.J. Rodgers

Yeah, and during middle of last year they were waiting us down by $0.03 to $0.04 a quarter. So, that was a burden, we put directly into the P&O and eaten it but we now have $200 million invested in these new products they are revolutionary for both companies and that will start giving us when we pay for it and earned it. Not a tailwind really.

Srini Pajjuri - CLSA Limited, Research Division

Great. Thank you.

Operator

Thank you. Our last question comes from Jeff Schreiner, your line is open and state your company, please.

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

Yes, Feltl and Company. Gentlemen thank you for taking my questions. There's been a lot of talk today about our Industrial and Automotive. And I'd like to come back T.J. to the statement that you made in the earnings press release talking about the size of the industrial and automotive business relative to the TrueTouch business.

How should investors interpret the statements we're hearing today on the call and the statement you made in the earnings release in regards to how strategic anymore TrueTouch is for Cypress?

T. J. Rodgers

TrueTouch is very important to Cypress. We plan it being a long term winner in that market. As I said it's sexy, fast growing and fortunes can be made [indiscernible] planning and being on the main side.

I just wanted to point to everybody that we've got a backstop which is the less sexy, slower growing market. I mean in automotive it's takes three years from the design-win to get money.

Okay, well that means that we got a pipeline and I’ve been filling for three years in automotive and this during times when the consumer market gets a little soft or you screw up the design-win which we didn't happen to do this quarter. But the unit line was little soft that you got this backstop and I just wanted to point out the backstop is big, substantial.

So, no. We are going to win in TrueTouch. Plain and simple. That's our goal and I've been saying that all along and we plan on being after the nuclear war is over we plan on being a little crawly creatures that crawl up and conquer the world. That's what's going to happen in TrueTouch. We're going to win.

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

Thank you.

T. J. Rodgers

And with that one, I am going to close this conference before I say something. Thank you very much for joining us.

Operator

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.

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