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Cypress Semiconductor Corporation (CY)

Q4 2006 Earnings Call

January 25, 2007 11:30 am ET

Executives

T.J. Rodgers - President and CEO

Brad Buss - CFO

Chris Seams - VP Marketing, Sales and Manufacturing

Ahmad Chatila - VP Memory and Imaging Division

Dinesh Ramanathan - Executive VP of DCD

Tom Werner - CEO of SunPower

Paul Keswick - VP of Human Resources

Analysts

Craig Hettenbach - Wachovia Securities

Srini Pajjuri - Merrill Lynch

John Barton - Cowen and Company

Michael Masdea - Credit Suisse

Sandy Harrison - Signal Hill

Tim Luke - Lehman Brothers

Fayad Abbasi - Neuberger

Louis Gerhardy - Morgan Stanley

Chris Danely - J.P. Morgan

Robert Chapman - Chapman Capital

Peter Trigarszky - Citigroup

Adam Benjamin - Jefferies

John Kenneth - Piney Reach

Gene Wendy - SCC Capital

Brett James - Woodyglen

Michael Frank - Gateway Capital Management

Alex Guana - UBS

Matt Zan

Presentation

Operator

Good morning and welcome to Cypress Semiconductor Fourth Quarter Earnings Release Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer segment of today's call. This call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T.J. Rodgers

Good morning. We are here to report the fourth quarter and year-end results. I will have Brad Buss talk first and do financial; then Chris Seams to talk about the markets. I will talk about some corporate things and technology and then we will go to questions. Brad?

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Brad Buss

Thanks T.J. Good morning, I just want to thank everyone for attending our call. As usual, I would like to remind you that we will be making certain forward-looking statements and they obviously entail a variety of risks. Please refer to our SEC filings for a more detailed discussion.

So I have got -- quite a bit of stuff I am going to go through, because we have Q4 and the fiscal 2006 results. So starting off with revenue for Q4, we recorded $287 million. It was near the lower end of our guidance, due mainly to weakness in COM based customers, that a lot of our competitors have been seeing as well. Revenue declined 1.1% sequentially, but remember we divested a PC clock product line in October of '06, which contributed $5.4 million to revenue in Q3, which wasn't repeating. If you adjusted Q3 for the divestiture, it would have increased slightly above 0.5% sequentially.

On a year-over-year basis, revenue increased to strong 20.3% and SunPower continues to grow strongly and accounted for 26% of our consolidated revenue, which was a new record.

On an adjusted GAAP basis, operating income dollars increased slightly from Q3 and by a factor of six times year-over-year. On an adjusted GAAP basis, we achieved a net profit of 26.1 million, which resulted in diluted earnings per share of $0.15. This compares with last quarter's diluted earnings per share of $0.16 and there is a substantial improvement on a year-over-year basis of approximately 275%, when we recorded earnings per share of $0.04 in the fourth quarter of '05.

On a GAAP basis, we posted net profits of $15.8 million, which resulted in diluted earnings per share of $0.09. Our GAAP results included approximately $12.5 billion charge for stock-based comp. Non-cash charge related to the amortization of intangibles of 3.7, an impairment of an investment and it was partially offset by an $8.7 million gain on the divestiture of the PC clock business. This compares with last quarter's diluted earnings per share of $0.06, and it was a vast improvement over a dilutive loss per share in the year-ago fourth quarter of $0.02.

Now turning to the year. For 2006, we posted consolidated revenue of $1.09 billion, an increase of 23% from fiscal year revenues of $886 million. And it is only the second time in our history that we surpassed the $1 billion in total revenue. On an adjusted GAAP basis, we had diluted earnings per share of $0.51 compared to a net loss per share of $0.13 in 2005. And remember, in 2006, we also had the diluted impact of the converts triggered in those EPS numbers as well.

On a GAAP basis, which included the 123R stock-based comp charges for the first time in fiscal 2006, we achieved diluted earnings per share of $0.25 compared with a net loss per share of $0.69 in 2005, again, another strong achievement.

Our consolidated adjusted GAAP gross margins for the fourth quarter were 42.5% and they were down from 43.4% in the previous quarter, due to products mix in our semiconductor business, which we'll talk further on, and a larger percentage of revenue from SunPower.

The adjusted GAAP gross margin for our semiconductor business was 48.2%, just down slightly from 48.6% in the third quarter. Again, due to the lower revenue mix provided by our generally higher margin comp business. Our direct margins to our end customers continue to grow, and they remain strong, and our average corporate ASPs increased nicely in Q4 and have really done so throughout the year. Gross margins in MID increased on a sequential basis to 43%, which is a full 13 percentage point improvement from 30% in Q4 2005, due to continued SRAM ASP and gross margin strength and Ahmad will talk on that later.

On a year-over-year basis, the semiconductor margins are up 4.1% from 44.1 in Q4 of '05 and we remain focused on driving our margin and expect to hit our target of 50% in the back half of 2007.

Our adjusted GAAP operating expenses in dollars decreased by $4.2 million compared to last quarter. Our total OpEx is up 33.6% of sales, and it's at the lowest level since the end of 2000. And again, we're extremely focused on OpEx and taking the costs out as we divest [in] some of the businesses.

Now turning to the balance sheet, our net inventory was $119.2 million; it was up about $10.7 million from the previous quarter, really due to increases in the semiconductor business. The majority of the growth was in (inaudible) and WEP, as finished goods actually declined slightly in the quarter. Our fourth quarter days of inventory were 66. We're very focused on maintaining the right inventory profiles and expect to decrease the semiconductor inventory dollars in Q1. Inventory in the channel, with our distribution partners, actually decreased by $7 million in the fourth quarter.

Accounts receivable was $163.2 million, was down $16.8 million from the previous quarter. SunPower actually increased by $4.6 million and the semiconductor business declined by $21.4 million and our consolidated DSO decreased from 56 in Q3 to 52 days in Q4.

CapEx was $87.9 for the quarter and included $43.7 for SunPower and depreciation was $27.1 million, and that again included $4.7 million for SunPower. Our consolidated cash, cash equivalents and investments totaled $642 million. SunPower decreased approximately $92 million due to polysilicon advances, CapEx, and some investments, while our semiconductor business cash balances actually increased by $26 million. On a year-over-year basis, the semiconductor cash balances have increased by $210 million, and I think as most of you have seen, we're quite comfortable with the cash flow that we're driving. A lot of the impacts of our new business model, i.e., No more Moore and our flexible manufacturing strategy that we actually asked the board to approve a share buyback, which they've done, and we just announced the other day for approximately $300 million.

We continue to own 52 million shares of SunPower and our basic ownership of SunPower is approximately 75% and 70% on a fully diluted basis in Q4, and we retain voting control of approximately 96%. For fiscal year 2006, our total shareholder return was 18.4%, which was another strong year after growing 21.5% in 2005. We outpaced the stocks, which have down 2.6, as well as the S&P semi-index, which was down 9.9, and we actually exceeded the returns for a lot of other benchmarks, including the S&P 500, the S&P mid-cap 400, the Dow Jones and Industrial average, etcetera, just to name a couple, and we're very focused on driving further returns in 2007 and beyond.

So, I'm going to now turn into guidance for Q1 on an adjusted GAAP basis. So, I think as you've all seen by now, the SunPower guidance as well as our consolidated guidance will include the impact of the PowerLight acquisition, effective Q1. So, our consolidated revenue is expected to be in the range of $327 million to $341 million, which is up 14% to 19% sequentially, again mainly due to the PowerLight results in Q1.

We expect that revenue from the semiconductor business will be down approximately 3% to 5% due to normal seasonality, as well as some continued weakness in some of the communications market. Consolidated adjusted GAAP gross margins of approximately 40% plus or minus 0.5%, which is lower from Q3 due to the increased revenue mix from SunPower and PowerLight. However, the semiconductor margins are expected to be in the range of 48% to 49% and will vary with product mix and manufacturing absorption. And as I repeated before, we still expect to obtain semiconductor margins of 50% in the back half of the year.

On a consolidated fully diluted adjusted GAAP EPS of $0.14 to $0.15 per share, CapEx for the semiconductor business was approximately $111 million in '06, and I expect that that will be between $70 million and $75 million in 2007, as again we begin to see the benefit of our flexible manufacturing strategy as well as No More Moore. Our consolidated tax rate for Q1 in 2007 is expected to be approximately 13% due to a higher mix of taxable income in North America from SunPower, and I'm sure they'll elaborate on their tax rate later.

Our ownership percentage will decrease due to the PowerLight acquisition and is expected to be approximately 70% on a basic basis or 64% fully diluted. So, please ensure you adjust your models for the minority interest accordingly to reflect those percent. All the above guidance is obviously subject to change. Please refer our SEC filings, and I just want to thank the entire Cypress team for executing. I think we had a very strong '06 versus '05, and I think we're well-positioned to continue that into next year.

Just a quick housekeeping item. We have a lot of people on the call and we want to make sure that everybody has a chance to talk, so we really need to stick to kind of the one question, here's your answer, and move on. So, if you could please support that, we'd appreciate it. Feel free to jump back in the queue, and as time permits, we'll keep going. So, thanks for your support and I'll just turn the call over to Chris.

Chris Seams

Thanks, Brad. Let me cover a few of the usual indices for the fourth quarter. Revenue splits by geography were not changed significantly; Asia remained number one with 38% of sales, followed by North America at 31%, Europe and 23% and Japan at 9% of sales. No single customer was greater than 10% of sales. Units for the quarter were 158 million, down slightly. Mostly from the PC clock divestiture and shipping more high density synchronous static RAMs. APS was a high point for the quarter. We enjoyed a continued strong pricing environment. APS was $1.22, up significantly from the third quarter, ASP of a $1.13. This was due to the SRAM market consolidation and a larger percent of revenue coming from proprietary parts where customers price on value.

On the demand side, the order of patterns have shortened. This is reflecting the fact that memories were now out of allocation, and lead times across the company are less than six weeks. Our book to bill reflects that at 0.96, our backlog remains strong at $275 million, and we enter the first quarter 86% booked, and we're solid on a bookings side three weeks into the quarter. Let me turn the call back to T.J. for details.

T.J. Rodgers

Okay. A couple high-level comments; news and then questions. First of all, 2006 was a billion dollar year for us, about $1.1 billion, first time since 2000 and we've cracked through the billion-dollar mark. In 2001, we had 65% of our revenue directly in the dot com drop zone and we ended up getting cut in half, and in third, it's taken us until 2006 to finally dig back up through $1 billion. We're proud of that.

Structurally, we're built different now and we're built to be more profitable. We have looked at our technologies and products continuously, but about a year ago, we decided that the ongoing profitability having to do with programmable products, in our case, PSoC Programmable System-on-Chip, our Programmable USB slogs, and our programmable clocks, where you can change frequency and output. Those products consistently made more money for us. So, we refocused the company to build new products in those areas and to let go into the legacy mode or even divest product lines that weren't aligned or product lines that weren't profitable.

We've done a lot of that. We have a little bit to go. We also implemented No More Moore; that is, we're no longer going to chase Moore's law beyond the 90 nanometer technology that we have in production of the Fab. We actually have canceled their 65 nanometer technology and we will do that upside. The only thing in the company now that needs to chase line is SRAMs, the programmable products actually don't even need 90 nanometer technology. They have a lowest cost point at 130 nanometers, which they need technology diversification features more than they need line width.

Semiconductor industry is a little soft for us. Nonetheless, we've got 86% of the quarter book going in, which is a very big figure. We don't see a precipitous drop. Certainly one of the leading indicators of the drop is bad pricing environment, and the fact is our ASPs have gone up now three quarters in a row, so we don't see that.

Let me talk a little bit about the divisions and then we'll go to questions. First, CCD, consumer and computation; this is where our programmable products are focused. They did $80 million, that's down 10.9% quarter-on-quarter, primarily due to the divestiture of the PC clock business unit. That was a business that simply didn't align with our programmable strategy. Although it was only about 10% of their total clock business and our programmable clocks, where we have a large and profitable business are still in the company.

We saw record PSoC quarterly revenue. I will talk more about that later. We saw slowing demand for some of our communications products, in particular, all the products from our product license -- the cell phone basestations saw pretty dramatic shutoff for the quarter, balancing out the upside we saw in other areas including PSoC. CCD had 43.8% gross margin and they contributed a penny to earnings. If you look at last quarter and we breakout earnings by quarter to the transparency, you can see what the trends are in our business. That was a drop. The primary reason for it is that given the focus on programmable products, we are putting a lot of corporate resources, shifting them from other divisions into CCD. That includes not just design and process R&D, which is the typical way to spend money, but in the case of programmable products, there's a significant commitment to marketing. As a matter of fact, by the end of this year, we will be spending as much on marketing PSoC, as we will on research and development.

During the quarter, we increased our PSoC customer base to 3371. That number is up 68% year-on-year. I planned on sharing that number with you, because it's extremely important. We believe by the time we get to 15,000 customers, we will appear on the world's radar screen with PSoC as having a product that matters in the world, and that is our first step goal on our way to a 40,000 customer goal.

We introduced five PSoC development kits. I talked earlier about spending money on other than research and development. Being a programmable product, PSoC can apply to many areas. Our first big design win was controlling the motor in the treadmill. Then we went into the thumbnail in MP3 players. So the way we get it, is we actually have to do demonstration kits with PSoC, showing that they can do some function.

We introduced five of them this quarter for flash memory cards, I2C port expanders, etcetera. I would like to focus on two. One is lighting controls, where PSoC controls the [wafer], that turns on and off light emitting diodes. Light emitting diodes are going to be the new wave of producing light efficiently. They can be more efficient than in fluorescent lights. They are solid in state and they last a long time. We've got a kit out there showing how you can create and manage color, using different color light emitting diodes and how you can adjust the brightness.

We also put out a capacitor to touch that interface. This is a spinout of our work we did on the MP3 player, where be touching actually circuit elements, a piece of the copper on a circuit board, by influencing them with a (inaudible) your finger, you can create a solid state button that has no moving parts, and we think we're seeing big penetration in the handheld devices like MP3 players. We're also seeing a new front in white goods, where for example, on a washing machine, it's nice to have completely waterproof buttons that don't corrode. We think that solid state buttons are going to replace mechanical buttons and this kit we put out addresses that issue.

Jumping on to datacom, Data Communications Division; DCD. They did 27.9 million in the quarter; it was down dramatically 22.9%. This is the basestation market. I won't call it collapse. Basestation market, now that we've been through a couple of cycles, it appears to grow in spasms, where they apparently have a rush to market to gain market share, followed by over ordering, followed by a period of burning-off inventory for several quarters. When they do it, they shutoff orders we don't think there's anything fundamental there. Datacom posted 52.6% gross margin and contributed $0.02 earnings, last quarter it was $0.06. The loss of contribution to earnings has [got to do] with the revenue decline. In terms of growth in datacom, and obviously with 60 plus percent gross margin, you want to grow that business as much as you can.

The big new thing we've been working on with a bunch of people for a year is a product we call West Bridge. West Bridge is the name taken from personal computer market. In the PC, there are North Bridge and South Bridge that have existed for over a decade, even two decades in personal computers. One bridge connects to the memory and the other bridge connects to the IOs in a computer. And due to the fact that Intel and AMD are in a Moore's law war, their processes are changing voltages very fast. And it's very difficult to take all of the legacy connections, for example, a USB connection operates at 5.5 volts and keep trying to put high voltage connections in multiple different voltage connections into a technology that has an inherent voltage internally of 1.2 volts. Hence the North and South Bridge have been a stable high volume part of personal computer. We have discovered and named our product West Bridge, to give pretty much the same function in cell phones.

We originally invented it for high-end cell phones which have two processors, one for the radio, and one for applications and storage, and we created this bridge to connect two processors and allow them to communicate. And then as long as we have the connection there, we hung some stuff on it. The ability to use the cheapest DRAM for both processors instead of having two memories; the ability to use cheapest NAND Flash for both processors as opposed to having two different NAND flashes.

We also put an I/O, the Flash I/O and the USB I/O. Well, it turns out when we brought it to market, some of the high volume cell phone folks said, look, you give me a West Bridge that doesn't need to look to anything else in my low end one processor phone, give me the ability to hook up to cheap memory, a USB port and an SCIO and I like that product. And that, that I just described is West Bridge. We launched it on a contractual basis with Motorola. And we expect it to ramp significantly in the fourth quarter. A relatively long story, but West Bridge is going to be a big deal for us, and I wanted to make sure that I communicated what the technology was about.

The Memory and Imaging division did $91.7 million in the quarter; it was up 6.6% quarter-on-quarter. They are 32% of Cypress. We expect them to be flat or slightly down. Their margins were up to 43%, due to good pricing structure in the marketplace and their contributions to EPS was up $0.08 from $0.04. So, the memory market where we are now the number two player and Samsung and we are the dominant part of the market, finally after a bunch of bloody years is settling into a rational market in which we see we can make money. Samsung is even accommodating us a little bit by having obsoleted some of their memories which over the course of this year will bring more share to us, we believe.

We're also asking our memory division, experts in making order to raise and store data to make more of the static RAMS which are more on the commodity side. We've been working on this for a year. We just introduce our first nonvolatile memory, which we call an NVS RAM. And what that means is the memory acts like a static ram, very high performance data in data out. But when you pulse it, all the data that is in the memory is immediately transferred to a shadow flash structure that stores it permanently. It you take a million bit memory, it operates like a memory, it doesn't wear out like flash, it is fast, it is low powered. But in the case of a computer crash or a system crash, by pulsing the memory, you can transfer one million bits in parallel to one million non-volatile bits that are associated bit by bit in the memory.

Therefore, you can think of this as the electronic version of the black box, of an airplane. So, any system that's in jeopardy of losing data when it is turned off would have one of these products in it, and that product will store the information, the critical information if the system crashed. The bit cost of a memory like this is 12 turns (inaudible), completely different from a commodity Static RAM. But the price rather is on the order of magnitude higher than that for commodity static RAM.

On the SunPower, they had $74.5 million in the quarter, up 14% quarter-on-quarter and by factor of 2.5 year-on-year. They were 26% of our business, so they our number three division. Their gross margin was 26.2%, up from 25.3% in the prior quarter. They had a pretax profit of 19.2%, and contributed a nickle to our earnings. There's one major announcement and one important announcement from SunPower.

The major announcement, SunPower has been working almost for a year and finally has acquired PowerLight Corporation. PowerLight Corporation is in Berkeley. There are a lot of stories about how I got Cypress into the solar business by meeting Dick Swanson, the CTO and then President of SunPower. The fact is, I first learned about solar energy and came to believe that it was going to be an important economic industry in the future in 2000 and the company that got me interested in solar energy was PowerLight, not SunPower. It was only later that I discovered SunPower and realized that they could contribute to what I learned from PowerLight.

We've shown pictures in investor conferences of the solar roofs that's on our building. If you just show a picture in an investor conference and say there it is and it produces 400,000 watts; you get the image it's nice, but if you look more to the detail of what's on the roof, it shows why PowerLight is a pretty important company in the solar industry.

If you vision a normal solar panel, you have tempered glass underneath the solar cells and you have an aluminum frame around it. And then attaching that to the roof, you have heavy metal clamps that are hooked on to a rail system, and the rail system penetrates into the roof to get support. So you have to build a structure, and it's not cheap. If you look more carefully at our roof picture the next time I show it, you'll notice that there is no rail system, there are no clamps and there are no aluminum frames. As a matter of fact, the solar tiles just lay on the roof, and they're made with tongue and groove, and there are made of a Styrofoam like material, and are designed by an architect, not by an electrical engineer. The President of PowerLight is an architect. And they're designed to be able to take lateral winds in excess of 100 miles an hour.

In a typical structure, you have two problems you have to deal with, one is the weight. You put a light stuff on your roof, and can your roof support it, and a typical building of Silicon Valley, this does not need the support of lot of roof, because they don't want to spend of money on it. The second problem is when the wind blows over it, and treats it like an airplane wing, is the stuff going to blow up and lift off the roof? The typical way of doing that would be to attach it to the roof with the rail system, I described earlier, and that of course, means you have to puncture your roof, and that means you inevitably will have leaks and you have to pay for it, and the electrician who is earning $40 an hours, expect for over time when he earns $50 an hour, is going to take his time hooking this thing up.

These tiles, you bring in and you lay on the roof and they are aerodynamically designed. They were actually designed using a wind tunnel, they are aerodynamically designed, such that they weight down on the roof a little bit, they press a little bit harder against the roof when the wind blows. The net result of that description is that the product which is called PowerGuard interlocking solar tiles is the hands' down winner in the industry and controls the industry. So, for companies like Cypress that want to put half a million watts on the roof and go green, this is the best product in the world. It's the cheapest. It actually protects roof and insulates the ceiling better than the roof itself does.

Their products is coming, I don’t want to talk about them, with the build we announced, the follow-on products that are even more improved. Second thing that is they have is a product, it is called SunTile, residential roof, I have shown pictures of it. This is a concept which is self taking an existing house and putting frames on it to put solar in it, you actually use solar tiles to roof the house to begin with. Sounds easy enough, but there are some problems which you have to deal with.

First of all, we put the solar tiles directly on the roof, they get a lot hotter, and if they are sitting in frames a few inches off the roof and you have to deal with ventilation. The second point is that the roof in house has to meet a building code that our architect knows about. It is an electrical engineers zone, and for the competing products, which you have to do is, sequentially put down a fireproof roof, and then on top of that fireproof roof, put a second solar roof. The SunTile tiles are actually fireproof and meet all the building codes. So, they are actually a roof which replaces your roof and makes it solar. The importance of that is that in new houses, you can put solar in much more cheaply, make it much more economical and you expand the markets.

Lennar is one of the top five homebuilders in the United States. They have just commissioned a 650 home solar subdivision and its uses SunTile roof tiles. The final product I would like to mention that we've acquired in our portfolio by acquiring PowerLight is a product called PowerTracker. This is the heavy duty megawatt power plant type structure. You can think of it as a structure like a Venetian blind. If you laid a Venetian blind on its side, as you pulled the cord, the movers on the Venetian blind go back and forth. And that motion can, just handled with one cord on the Venetian blind. And it's handled with one motor, a small one, a cheap one in a worm gear, in the system, but it can move megawatts, an entire field full of panels. The idea is to (inaudible) up the panels to follow the sun, and when they follow the sun, they produce more power.

One of the newest installations using PowerTracker is an 11 million water, 11 megawatt installation in central Portugal reasonably commissioned by General Electric.

So, if you look at the structural changes for SunPower here, it's a big deal. SunPower makes the most efficient solar panels in the world, they make the most aesthetically pleasing sun panels in the world, but at the end of the day, the people touching the customers were PowerLight and it competitors. And PowerLight and other companies had an option to buy from SunPower or to buy from SunPower's competitors. We could have and we do have a program that is like Intel Inside, so people work with us to be able to say they are SunPowered and the roof that you've got is a SunPowered roof.

But if you intend to dominate the solar industry, which is the aspiration of SunPower, you would like to directly touch the customers and have the innovative end product that go directly to them. So the thing on your roof just says SunPower. It doesn't say SunPowered or made with SunPower cells.

That's the rationalization for this acquisition. It changes SunPower forever, it makes it more valuable forever. We just got the deal done during the negotiation. Cypress signed its assets to back the deal. So SunPower didn't have to run out immediately to raise money, and we were glad to help them with that.

Final point, SunPower introduced the solar panel, it's a 315 watt solar panel, the best solar panel from our competitors is about 210 watts. So this is by far the most powerful solar panel available in the world. It has got a bigger format and a higher efficiency than competitors and to first order, cuts down on the number of panels you need for a given number of watts in your group by factor 2. So it just says, we have the most efficient cells in the world, and here's a product that will take our competitors literally more than a year to start approaching that product.

Brad already mentioned the buyback. And I'll just comment that with the No more Moore and [flexible] strategy, which is part of the structuring we've been doing for the last year. We now will be cash flow positive with the investments we have made in our Fabs, comes back in the form of cash flow, and we have allocated $300 million for that cash flow to buyback shares and decrease share count.

With that, I'll turn it to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Craig Hettenbach, you may ask your question. Please state your company name.

Craig Hettenbach - Wachovia Securities

Yes it's Wachovia. T.J., at the analyst day, you mentioned some partnership efforts for PSoC within distribution. Can you comment any update there on how traction is going within distribution?

T.J. Rodgers

Chris, why don't you answer that one?

Chris Seams

Yeah, this is Chris Seams. The distribution arena, we have three of the globals that all have PSoC. We're forming a partnership with Future Electronics to drive PSoC harder. Out of the distributors, they are the ones that are most design intensive and have the largest resources that are able to aim at PSoC. We expect to get 5X to 10X the number of customer registrations at Future that we had in 2006. We're going to get that in 2007. That will be led predominantly in the high brightness LED space.

T.J. Rodgers

So on Future, I went to Future and keynoted their field applications engineering conference in January. I told you earlier that we increased the number of customers to over 3,000 and the name of the game is in microcontrollers or in PSoC programmable systems is really to have 10,000 or more small customers as opposed to the SRAM business for example, where you might have a few hundred customers, some of which are very large and concentrated. So, we've got a formal structure with Future, we meet with them every Friday morning. I am able to go to at least half of those meetings personally, and this is one of our initiatives to drive the customer count of PSoC as high as we can, as fast as we can.

Craig Hettenbach - Wachovia Securities

Excellent. And if I can add another question. On the SRAM front, it looks like the competitive dynamics have allowed for some good pricing in there. What do you expect, given some of the industry slowdown here? Do you think that will impact price in the next quarter or two for SRAM?

T.J. Rodgers

Okay. I'm going to let Ahmad answer that question, but can I please ask again, we've got 188 people on this morning, and we would like to get to the bottom brush and have everybody get a question. Please just do one or if you want to try to squeeze in two, do it all in one shot, so we can give one answer and then get on to the next guy.

Ahmad Chatila

The SRAM business will be as good in Q1. We are cutting costs and there are some lower pricing, but we're cutting costs as such.

Craig Hettenbach - Wachovia Securities

Great. Thank you.

Operator

Thank you. Srini Pajjuri, you may ask your question. Please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Brad, a question for you on the gross margin guidance. You were saying that the inventories will come down in Q1, so I'm just trying to understand how you are able to raise your gross margin guidance for Q1? Are you counting on product mix, or is it ASP, or if you could give us any clarity there?

Brad Buss

Well, the guidance was 48 to 49. We were, what, 48.2ish, I think we're in the same range, maybe a little better. And it's purely just going to be mix issues that we see right now.

Srini Pajjuri - Merrill Lynch

And where do you see your inventory going during Q1?

Brad Buss

Down, but I don't think it's going to go down 10%. We're aiming at that kind of level.

T.J. Rodgers

Our corporate model for days of inventory is 65 days. We're currently at 66 days. This is the first time we've enjoyed what we would consider a normal inventory, which allows us to have the opportunity to do turns and post normal lead times. So basically, that's the sort of lock and hold number for us. I think the best way to interpret the comments that inventory was 65 is the decent number and we're not going to shoot past that.

Brad Buss

Right. And we do need to build more profiles in SRAM and PSoC and a few other areas.

Srini Pajjuri - Merrill Lynch

Thank you.

Operator

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

John Barton - Cowen and Company

It's Cowen and Company, thank you. A two part, if I could. T.J., You highlighted the West Bridge at Antioch, from a technological perspective. Could you wrap some thoughts on to how big do you think TAM is, how do you think they can ramp as we get to the back half of the year. And then Brad, if you could, please, from an OpEx perspective, give us some feeling on March and through the year, and obviously that gets impacted from the acquisition, if you could break that out, I'd appreciate it.

T.J. Rodgers

Dinesh Ramanathan runs the division of Datacom that invented West Bridge, comment on the market, and even talk about what you've got and what potential gains you might make from where you are.

Dinesh Ramanathan

Sure. So, the way to look at the time is, it's about 35% of the cell phone market, which will need a part like this. Primarily, the end phone that you might think about is a music phone, devices that would like to have MP3 and other kind of functionality built into them. So the TAM market is about $1.5 billion, and it keeps growing with the number of cell phones that actually move up into that space. We've been working with some of the top tier customers at this point in time, and I think the [ramp] at the second half. This year is actually going to be pretty good.

T.J. Rodgers

Brad, on OpEx.

Brad Buss

Yes John, just on OpEx, it's going to be a little tricky, especially now with PowerLight. I would say obviously the OpEx is going to go up on a consolidated basis. I think once Tom and those guys take you through the PowerLight, it will become clear. If you look at just the semiconductor business, I expect it to be just slightly up due to normal Q1 resets, i.e. payroll taxes kicked back in. The audit and SOX costs go up, etcetera, etcetera.

T.J. Rodgers

Let me -- when I was talking about PowerLight acquisition, I focused on the technology and products that we got, which I think are the main value in the deal. Let me just give a little bit on money. PowerLight is going to add $70 million to revenue in Q1. That's what it looks like. So you can annualize that at a rate of $280 or more would growth. There are expenses during the acquisition, but in the first quarter, the acquisition became financially, started accruing on January 10th, and therefore there are some expenses that will happen in this quarter, but even with that, we expect the acquisition to be mildly accretive in the very first quarter, and as we merge the two companies to get more accretive after that, Tom, you've got comment after that.

Tom Werner

Yes, I do, this is Tom Werner, I just have one quick comment on that when you think of the OpEx model as the new SunPower, you can think of it materially the same as we combine the two companies and that's a 10 to 11 point OpEx.

John Barton - Cowen and Company

Thank you very much.

Operator

Michael Masdea, you may ask your question, please state your company name.

Michael Masdea - Credit Suisse

Credit Suisse, and the question I have is really just on lead time. It came in on the SRAM side and yet we didn't see, what I would say the big correction like we have been used to in the past. Can you just talk through how you managed that, and if there is any risk to your assumptions on that going forward?

Ahmad Chatila

This is Ahmad. One, we have flexible capacity, and that as by this time, we have installing equipment and the market crashed and all of a sudden we have an empty Fab. We did not have to do this time. Second, we are more dominant than before, and three, we have very specialized products, like T.J. talked before, the last couple of calls, on 2-Mbit QDR and 36-Mbit QDR, that we're the only one in the world that can make them in certain speed limits. So overall from a mix, strategic shift in manufacturing and all that is what's getting us not to be cyclical as much anymore.

Michael Masdea - Credit Suisse

Thank you.

Operator

Thank you. Sandy Harrison, you may ask your question. Please state your company name.

Sandy Harrison - Signal Hill

Signal Hill. Just a quick follow-on to that question and two housekeeping of my own, if I could slip it into one. SRAM, if you would characterize it as what you think it is as an overall percentage to your revenues, would be helpful for modeling purposes and then how much was [DST] as a percentage of revenue and then an ASP on your West Bridge.

T.J. Rodgers

Let me do, the SRAM and I'll embed the answer in a global answer about the size of the various divisions. So, Cypress has four divisions plus others summing to 100% of revenue. The SRAM group is 32%, number one, each set its standards. It's flat to declining over time although, we will announce initiatives in the future that might reverse that, but the pure SRAM business will be flat to declining. CCD is number two at 27.8%, it will be growing as a percentage of revenue, because that's where PSoC family is today and we'll have three new PSoC families introduced this year coming out of them. Third largest division is SunPower, 26% growing very rapidly, and that number does not include PowerLight, so obviously there'll be a one-time jump in that number. And fourth division is data-com, 9.7%, smaller but the post profitable of our divisions. ASP and West Bridge, it's listed in excess of $3 for more than 1 million units. And we believe we can get in the mid-to highs 2s, for a while on that product, even in high volume. It's not a $0.50 cell phone chip.

Sandy Harrison - Signal Hill

Greet. As always, thanks for the visibility.

Chris Seams

Sandy, Chris Seams here; distribution as a percent of revenue for the semiconductor business, 43% of our total Cypress revenue came from globals and independents.

Sandy Harrison - Signal Hill

Thanks again.

Operator

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

Tim Luke - Lehman Brothers

Tim Luke from Lehman. For T.J., you sound a bit more constructive, maybe, on the macro given, going into the first quarter. If you could give us some sense of how you see industry conditions that would be helpful. And then just with respect to the SRAM area, how do you see the shape of the year? It seems like you had a very big fourth quarter and the first quarter is going to be similarly robust. How should we think about that profitability level and revenue? Thank you.

T.J. Rodgers

Okay, first of all, a disclaimer on industry conditions. I always remind people that in the second quarter of 2001, I have said that we were continuing to keep our factories running because there was some slight downturn in 2001, which is a minor industry inventory correction and it would turn around. You guys are actually better than us, because you talked to a lot of people like us and put together a more global picture. But I'll add, as Chris to answer the industry conditions as we see them, we do analyze all the services and do talk to a lot of people. We're not totally out of it, but I am just warning everybody, that when things go up or down -- when things go down, we're the last person to know, because they want to keep them us in it, as a component security policy right up until the time they change their mind. We don't see that happening. Chris.

Chris Seams

Hi, Tim. The industry services have the year growing almost 10%, if you follow the big three tracking services to down in the first half, most notably from a negative movement in the first quarter followed by flatness in the second. Everybody is predicting a big second half. I would say we are currently following that given the guidance that Brad gave for our semiconductor business. In terms of end markets the base station market for wireless is the one area of weakness that we've talked about where it's over inventoried right now. The industry we talk about, handsets being slower than everybody was targeting, that's predominantly in the low end of that space, and we really don't play in that space much anymore, we play in the mid to high-end with products like (inaudible) and PSoC as we've talked about. In terms of communications, in terms of networking, all of our major accounts are predicting a fairly healthy first half and an even stronger second half. And in the consumer business, there doesn't seem to be the potential of a post Christmas hangover and first quarter is looking okay there, the usual cyclicality that we see.

Tim Luke - Lehman Brothers

Thank you very much.

T.J. Rodgers

On the SRAM business, let me answer, because it's positive and I don't want modesty to get in the way of saying good things very much. Look at parts of it. Think it as SRAMs, very high performance SRAMs, think of Cisco, Nortel, Alcatel as customers, think of products on the highest end which has an ever soaring pricing of over $100. Gross margins in the 60% plus. So, they actually are like data-com products, to more characterized by that market and they are like SRAMs. We are number two in the world there. We're actively -- we've just introduced our 90 nanometer product and we're in a very good position at a foundry, not internal. We'll produce 65 nanometer products after that. So that's sort of an active data communications like business that makes good money with no excuses as we speak and shouldn't change in the future. Second kind of SRAMs are the asynchronous datagram, and then they have low power versions, these are the older SRAMs that Cypress was launched on in the 80s. They are commodity products, at times they had as many as 20 vendors. They are the ones who are cyclical, especially when we chase them with fab capacity. We're the only one in the company in the world to my knowledge that has moved those legacy products to 90 nanometer technology, so we have a cost edge. We've also worked on below the line expenses. We've moved not just design, but the entire business unit, including management and marketing to Bangalore. So, we have very low below the line expenses. But we expect in the long haul to turn that into a legacy market that makes money for us.

In addition to that market, we've chosen to go into the automobile business. The automobile business has always asked for SRAMs, we've never done it before, but we're now moving into that. It's another new market for us. The automobile group actually is in the SRAM group and that will give us some new sales. So adding those -- and then of course there's the high value-added RAMs like the NOVRAMs that I described in detail a few minutes ago. When you add those components together, they look like a stable business, they look like a business I'll be bragging about and not making excuses about in the future. Certainly in the first quarter, it looks like we're going to have another strong quarter back to back.

Tim Luke - Lehman Brothers

Is it asynchronous, as a percentage of sales? Could you just give us roughly what the mix is in terms of SRAM?

Ahmad Chatila

35%.

Brad Buss

35% asynch of MID, how much was sync?

Ahmad Chatila

That's 35% also.

Brad Buss

Like one-third, one-third, and one-third. One-third being the other memory products they make.

Operator

Thank you. Our next question comes from [Fayad Abbasi]. Please state your company name.

Fayad Abbasi - Neuberger

Neuberger. And I was wondering, could you comment about your moving into another new market of power line communications with your recent announcement regarding being a member of Universal Powerline alliance?

T.J. Rodgers

Dinesh. That initiatives happens in Dinesh's division.

Dinesh Ramanathan

Yes. We joined Universal Powerline and we expect to actually announce products either in the Q2 or Q3 timeframe. So I will just leave it at that for now.

Fayad Abbasi - Neuberger

Thank you.

Operator

Thank you. Louis Gerhardy. You may ask your question. Please state your company name.

Louis Gerhardy - Morgan Stanley

Morgan Stanley. Just a quick clarification, if you could just repeat the Q1 non-GAAP gross margin OpEx and EPS guidance. And then T.J., just a question for you from a high level on the transformation to programmable system solutions, if you expect to sell discreet memory devices in two to three years and then also from an embedded memory perspective, are you satisfied with your current portfolio of embedded memory technologies you can use for this programmability, or do you believe you need to build some more internally or acquire some new technologies?

T.J. Rodgers

First the numbers from Brad.

Brad Buss

Yes, so you wanted to just get the basic guidance, right?

Louis Gerhardy - Morgan Stanley

Correct.

Brad Buss

So the consolidated adjusted GAAP gross margins, I said 40% plus or minus 0.5%. The same thing for the semiconductor margins would be 48% to 49%, and EPS was 14 to 15%. And I didn't do any specific guidance on OpEx, but it will be up slightly in the semi and up on a consolidated basis with SunPower and Powerlight. But as a percentage of revenue, we're trending very nicely.

T.J. Rodgers

Okay, on the question, do we expect to be in the SRAM business three years from now. So let me paint the scenario, we've grown our programmable products significantly three years from now, and we face the option of divesting in the SRAM business or keeping it. First answer is we'd make the decision when we got there and those decisions change real-time. If you wanted me to prognosticate three years out, we will be in the SRAM business that's contributed $0.08 quarter-on-quarter, its future looks good.

There was a period from 2000 to 2003 where we did not use, what we call the R word on investor calls, which is RAM, because the RAM business had been destructive enough to many companies that we just felt that it was a word we didn't want to remind everybody of. But we think going forward that 'R' word is going to be synonymous with Cash Cow. I don't think that the market values that business very highly. So, in a potential transaction, you are looking at a business that can generate a bunch of cash and be healthy for the bottom line versus a one-time transaction where you put some cash in the bank and I'd rather have a business.

Also, if you go back to my comments on the automobile industry, they were really asking, pushing for to us get SRAMs and cards. And the fact is, even though some kinds of SRAMs are commodities, that kind of storage is a very important part of many systems. So, if your company is able to supply it for real, you have a better footprint and more [clog] with your customer. So, we'll do what makes sense for us three years from now, but if I had to guess, I would say that cash cow will be with us for a long time.

Final point, do we have embedded memory technology good enough -- nonvolatile memory technology, good enough for our programmable products? And the answer is, absolutely. We have extraordinarily good nonvolatile technology. In 2000, I realized that our programmable products needed nonvolatile technology when we considered making flash. The problem with flash is that it traces its origin back to [ESO], ECOMs and there's a bunch of companies with a bunch of packages. So, that's one problem.

The second problem is flash technology is the double-poly technology which is highly incompatible with Logic and SRAM. So, we did a study of technology and we concluded that the SONOS technology, Silicon Oxide Nitrite Oxide Silicon, SONOS technology was the right way to go. We bought for about $5 million, the assets of a company called MDM in Colorado Springs, hired three of their technologists, one of whom is still with us to take SONOS and put it in production. We've now been shipping SONOS for five years, and we've just transferred our first SONOS technology to Grace Semiconductor in Shanghai where it is yielding well.

It turns out that about putting the nonvolatility in the dielectric of a Gig as opposed to stacking two Gigs on top of each other, that's a good guess. Because today as NAND Flash gets denser and denser and the transistors get smaller and smaller, the world is likely changing over to SONOS like technology. They have different names. Some of them are called NRAM and other names. But we actually are ahead of the game there and we have -- from an embedded technology point of view, have excellent technology. We even will introduce some specialized memories that have the technology in it as memories. For example, the NOVRAM that I described earlier is actually a standard six transistor RAM cell, and then a six transistor SONOS space storage cell attached to every RAM cell. So, no, we've got -- we're very happy about our nonvolatile technology and we actually have been selling it, licensing it, and will produce license revenues for us in the future.

Louis Gerhardy - Morgan Stanley

Thank you.

Operator

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

Chris Danely - J.P. Morgan

J.P. Morgan. Hey, guys, can you just go through what consolidated CapEx and depreciation was for Cypress for '06 and give your projections for '07? And also give us the book-to-bill by segment.

Brad Buss

Yes. On the CapEx for the year. Let me take my glasses off here.

T.J. Rodgers

It's Cypress plus SunPower for '06.

Chris Seams

It was actually $111 and $110, so $221 million total. And I gave you guidance of $70 to $75 million.

Chris Danely - J.P. Morgan

What about SunPower?

Chris Seams

I don't have that handy.

T.J. Rodgers

You can catch that on the SunPower call.

Chris Danely - J.P. Morgan

Okay. How about depreciation?

Chris Seams

Same thing for the year?

Chris Danely - J.P. Morgan

Yes.

Chris Seams

It was total to $108 million, about 91.5 for the semi business and the balance was SunPower.

Chris Danely - J.P. Morgan

And what about for '07?

Chris Seams

It will be declining in the semiconductor business, probably by $5 to $7 million.

Chris Danely - J.P. Morgan

Great. And the book to bill by segment?

T.J. Rodgers

CCD, 0.97, ECD 1.02 and MID 0.91.

Chris Danely - J.P. Morgan

Thanks.

Operator

Thank you. Robert Chapman. You may ask your question and please state your company name.

Robert Chapman - Chapman Capital

It's Chapman Capital. One of the things that happens when an activist takes a stake in a company like Cypress is, a lot of people come off the woodwork that they have been waiting for someone to call the Emperor for not wearing any clothes. Would be getting call from employees, both existing and past? SunPower executives and employees, and a variety of strategic acquitters for all that are part of Cypress' core semiconductor business. Everyday one of these callers says the impediment to success in these areas is T.J. Rodgers. What is it going to take for the Board of Directors to make T.J. Rodgers resign? And if T.J. will not resign, I would like to know if he'd be willing to check himself into some kind of therapy, given the abuse we hear, has levied upon a variety of Cypress employees on a regular basis, which has led to extraordinary turnover amongst the executive ranks.

T.J. Rodgers

First of all, Tom, why don't you address the topic?

Brad Buss

Yes. Of all the SunPower executives that have talked to Mr. Chapman.

Tom Werner

We have no record, this is Tom Werner, CEO of SunPower. We have no record of talking to Mr. Chapman, and regardless of that, we see great synergy with Cypress as it became more significant as we did the PowerLight transaction. There's a number of key areas in the short-term, so SunPower, it's executive position, the CEO's position is that the relationship with Cypress is important and highly leveraged. As T.J. mentioned, they back the PowerLight transaction, we're using their framework for combining the two companies. We use their HR systems, helping us with tax, ERP and things of that nature. So our position is that we're leveraging Cypress and it's making our company far more productive.

T.J. Rodgers

On the comment, I guess it wasn't a question, about the turnover. Paul Keswick, is our VP of Human Resources, could you comment on that, please.

Paul Keswick

So, we have had some turnover in the executive staff over the last few years. None of it was directly due to T.J's management style. The executives that have left have all gone on to become CEO's of companies and we wish them well in their endeavors.

Tom Werner

The comment on turnovers, with regard to aggregate turnovers in the corporation, our numbers are actually as good as any -- as the average or a little bit better in Silicon Valley. With regard to retention, we're quite a bit better. Cypress has 570 employees, which we think is a record for a company of our size, who have actually left Cypress at one time or another for an opportunity, promotion, startup, or whatever and returned back to Cypress. We don't know of any company that has people coming back. So, we don't know where the rumors about turnover came from. We did turnover last year four VPs. I'll point out that those VPs have been with the company for a decade, for the least tenured one to 21 years plus for the most tenured one. It's difficult to ascribe turnover to people who have been for a decade or two in the corporation as being bad. And the fact is, those four VPs having worked in a company that has got a reputation for tight management all became CEOs of start-ups or young companies and we truly do wish them well in their opportunity, and I think having heard from the executives in this room today, that the team we had one level below them is performing pretty well. I guess I won't comment on the personal stuff. Can we go to the next question, please?

Operator

Thank you. Glen Yeung, you can ask your question. Please state your company name.

Peter Trigarszky - Citigroup

This is [Peter Trigarszky] for Glen Yeung, company's Citigroup. Just to go back to, you talked about some weakness in wireless infrastructure consistent with the rest of the industry inventory work-down as well. Can you give us a sense of how large wireless infrastructure is, kind of the margin versus corporate average, gross margins versus corporate average, and if you can give us a sense of how big that business is today relative to where it has been in the past when you've seen, this type of softness in wireless infrastructure. In other words, is there a further downside from here? Thanks.

Chris Seams

Hi, Peter. This is Chris Seams. We don't tally those numbers specifically, so I'll give you approximations. Across all of our product lines, I'd say probably $15 million plus a quarter revenue source. What we're seeing is that is going down probably in the 20% range for the inventory issues that we've talked about, and we see that continuing through the first quarter at least.

Operator

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

Adam Benjamin - Jefferies

Thanks, Jeffries. On the DCD business, obviously you're seeing some issues with the base station market that's caused the decline in Q4 and you expect to continued decline in the March quarter. T.J., you mentioned to over-ordering and then leading to a burning down of inventory. Can you just give us some more granularity as to where you are in that stage? Is the burning of inventory going to continue in Q1 and then into Q2, and when would you expect that business unit to get some growth? Obviously you have West Bridge coming on in Q4, so is it not until the Q4 time frame? Thanks.

T.J. Rodgers

Okay. I want to make sure that my burning of the inventory comments, everybody understands, I mean that, with regard to base stations which has kind of got a slam-bang, kind of pattern to it. It's not true for general business, Dinesh, on the growth of your division.

Dinesh Ramanathan

Well actually, we expect base station business to be pretty much the same as it was, or no better than it was last quarter. We do see some pickup there, but again it's sporadic. The movement, again our visibility into Q2 and Q3, typically is difficult under the conditions that we are seeing right now. But if you look historically, Q2 and Q3 is where the Japanese and the Asian markets sort of come back in that particular market segment. So that's what I'm looking at the base-station market or the wireless market segment coming back. Growth inside DCD, we're expecting that to kick in the Q3 and Q4 timeframe, primarily on the products that we've announced now and some of the other products that we've also been working on throughout the year.

Operator

Thank you. John Kenneth, you may ask your question. Please state your company name.

John Kenneth - Piney Reach

[Piney Reach]. Cypress [brought] the subject of a reorganization or going private transaction worthy of not one but two press releases in October. Yet, today, despite a very detailed public letter from one of Cypress' largest shareholders. Cypress has been noted to ignore what we believe is the desire of the vast majority of its owners. Do we need to have T.J. Rodgers thrown out of this company in order for Cypress owners and employees to get the respect they deserve?

T.J. Rodgers

Okay. Let me respond to the speech. I'll put a question in it. I don't know who the large shareholder you're talking about, if it's Chapman Capital, like the earlier misrepresentation of SunPower executives wanting to separate is another misrepresentation as of the end of last year, Chapman Capital was a 1% shareholder. They're about -- they're 1% shareholder. They're ranked number 16 with the holdings, considerably less than the number of 10 shareholders in the company. They've asked us to separate SunPower, the tactics of personal attacks and meetings aside, they are shareholder and they do deserve an answer to that. So, I will give that answer right now. The question is, and the one that shareholders do have a good reason -- do have a right to know is should Cypress Semiconductor separate itself from SunPower in order to raise the value of Cypress shareholding to its shareholders. That's a valid question and I will talk about that.

When we first bought SunPower, just a little history first, when we first bought SunPower, we told the world we were buying it to create a division. We told the world that we had been cratered by the dot com crash of 2001 and that we were trying to diversify the businesses that weren't so closely related to data communications and we brought in SunPower, which was a good technical company, but didn't know how to manage this business nor how to manufacture. And we taught them and we built ourselves a division which is a pretty good division. Apparently, we didn't have any of that shareholder turnaround or employee turnover in that division to prevent from getting so big that you care about it so much.

Last January, my Board asked me to look at the possibility of various transactions to see if we could raise the value to Cypress shareholders. So, I agreed to do that, that is changing rules from the two divisions and I don't want to talk about it, we'll talk about different opportunities to increase shareholder value. We employed Wilson Sonsini on the legal side and Credit Suisse First Boston as an Investment Banker. They both still work for us. We still actively are pursuing opportunities with them and I can give you a status of where we are -- I will give you a status in a minute or two. Meeting before last, I was asked what about the various transactions. One of the things we discovered first and our discovery was validated by papers in the public marketplace was that the ordinary way to distribute SunPower value to our shareholders, which would be a spin-out or a split-out, which is a tax free transaction, that ordinary way was blocked by the regulation until November 2009. We still believe that that's true. So we didn't let that get in our way. We started looking at opportunities and mechanisms by which we could do some sort of transaction prior to November 2009. The first mechanism we looked at was in effect a spinout of SunPower, affected by relatively complicated transactions, like the one that was done by Veritas when it spun out -- it spun out of Seagate. So let me call that -- to use a s short hand phrase in this meeting, Veritas transaction.

In the Veritas transaction, basically Cypress would go public as funded by an LBO firm. Cypress' assets plus the money coming from the LBO firm and lenders would be added to SunPower shares and a cash and stock offer would be made to shareholders. The transaction would bring Cypress private, and that's how SunPower plus extra cash would be spun out. We pursued that opportunity, or that structure with some of the biggest names in the LBO world, significantly for quite a while. I think it was two meetings ago I announced that we had terminated that transaction. There were a couple reasons for it, one of which I've already said.

We never got to a final offer from them, but we went through a bunch of diligence and sizing with them, and we were getting close to it when we realized that the offers we were going to get, and those would be the first offers, which would be negotiated down as is customary with that industry. But the first offers we were getting, were a slight discount to market, to a significant discount to market at that time. So point one, I face the proposition of recommending to my board, we have an independent committee that makes this decision that I obviously get to recommend to them recommending to our shareholders to take a slight discount to steep discount offer. We didn't think that was a very good offer.

Now the fact is that at that time, the stock had run up due to an anticipation of some sort of deal. So the pitch would have been, please accept this offer at market or a slight discount to market, and your premium that you're going to get is already in the stock because, as you can see in the last 30 days, stock is going up. This is certainly not a compelling offer, it is an offer which is doable, but we chose not to do it. That was our best business judgment.

As I remember the conversation in the board, I'll give one phrase from the board room. One of the directors on the independent committee said, when he was reviewing the price that we were anticipating from this offer. He said, “why can't we do that ourselves, Uncle?” And my reaction was the truth that we can do it ourselves. We've done the restructuring of changes in the corporation that we've described this morning that are having tangible effects. We believe that the performance that would merit the same stock price that we would have sold ourselves to LBO firms was achievable. And if you think about how LBO firms work, they buy the future of companies by offering a slight premium than the present.

So another way to look at the transaction would have been, to sell a company with a slight premium which even wasn't there in the market. Those guys have been imputed from our history and give away the future of the company to the LBO firms, which make a very nice living in buying the future of companies for a slight premium, as a way of business. So, we felt we could do as well in share price as we were offered. We felt we could keep the future of SunPower. We were already working on the PowerLight acquisition at that time. We could keep the future of SunPower, the new stability in the SRAM group, PSoC, West Bridge, in front of our shareholders and that our shareholders could see not only an equivalent offer, but a bright future for Cypress. So, we decided not to do it.

In the same letter you're referring to my shareholdings have been referred to as less than 1%. The fact is that the letter deliberately, I think, ignores what's called beneficial ownership; it's a well known financial term. My personal holdings in the company, including beneficial ownership that is options in earning money that I have not exercised, but are vested is 2.8%. So, I would be listed if I were an institution, as the fifth largest institution, considerably larger than the Chapman Capital.

So, I also -- my interests are aligned with those of the shareholders, and I believe and I recommend to our Board, who's independent committee made the decision that the offer was not compelling enough to give away the future. So, that was our decision. That was our business judgment. At that time, our bankers came back to us, now this is new ground; I have only explained the decision we've made in the past and why we made it with more detail. By the way, the LBO structure, the Veritas structure is always an option. The world changes, something goes up, something goes down. So, we're not ruling it out. I'm just telling you, those first offers that you saw weren't good enough to -- weren't good enough to give away the future. But they're not off the table and we will always evaluate what's best for shareholders.

At the very same time, our lawyers came back and said, you know there's another way to get this thing done tax efficiently, and I'll use the term, reverse spinout for that. And that isn't said as spinning out SunPower, which we can't do without disastrous tax consequences. We could create a corporate structure, where we would spin-out the semiconductor business of Cypress and leave behind the shell of old Cypress in some part of [stock-end]. So in effect, old Cypress would become SunPower and new Cypress would be a company unto itself. And we've been studying that structure for five months. It is doable, and we are evaluating it. At that point, I am going to stop making comments about spin-outs or about the ability to raise shareholder value with SunPower equity, because of another event. The acquisition of PowerLight, which is structurally important to all Cypress shareholders, carried with it, a breeze of equity transactions like the ones I've been discussing until June of this year. The reason is obvious and fair, the company was being paid with SunPower stock and during the transaction, they didn't want to see SunPower being discussed in the various, sell it this way, package it that way. They wanted a stable environment. So, in order to make the great structural improvement of getting SunPower having end market arm in those new products, we signed a standstill. So that's where we are. We will continue to actively look at the Veritas structure. We are aware of the reverse spin-out structure and agree that it is viable, and at the time we come out of our lockup period, we will give more information on our standing. Next question, please.

Operator

Thank you. [Matt Zan] you may ask your question. Please state your company name.

Matt Zan

Just two power related kind of question. Brad, on the buyback, how accretive do you calculate it is to earnings based on the 2006 numbers? And T.J., based on your more elaborate answer about valuation, I can see how at the time you might have rejected Veritas like transaction with the potential offers at the time. But with the SunPower stock now trading at 41, the core is valued -- of Cypress is valued at $6, while it was let's say, trading at $12 when we're exploring alternatives. And so this means the market isn't giving you credit. So, how do you explain this and then how are you going to unlock value here given what's transpired now?

T.J. Rodgers

Okay. Let me answer the questions since we're on the topic of divestiture. What you said is, you may have made a valid decision, one that I would agree with, at least, when you turned down the first Veritas deal. But world changes and the Veritas deal might be more attractive right now. And the answer to your question is yes, it might be, and that's why I made the comments it wasn't off the table as an option, and that we would continue to evaluate it, one side comment. I have some trouble with the calculation that takes the market cap of Cypress and then takes the value of the 52 million shares of SunPower that we hold, subtracted that value from the market value of Cypress and declares that's all a semiconductor business is worth underneath. One of the underlying assumptions of that calculation is there is no discount for the SunPower shares that we hold, and I don't think that's a valid assumption. I'm aware of companies that held in some extremely large amount of cash, in which even the cash appear to be discounted. So, I agree there is value to be unlocked. I'm not trying to say there isn't and I'm not trying to say that we're not looking at it. I'm just challenging the extreme nature of the calculation that says there is no discount applied to the shares of SunPower that Cypress holds. But we are looking at it, we will continue to look at it, and in June, we will become not locked up and we will be able to take action if that's what we believe makes sense for shareholders.

Brad Buss

Can I just comment on the buyback question, I think obviously it depends on the timing of when we do it, but I think there'll be a slight bit of accretion when we do it.

Operator

Thank you [Gene Wendy]. You may ask your question. Please state your company name.

Gene Wendy - SCC Capital

Hi, it is [Gene Wendy] here with SCC Capital. I just had two housekeeping questions. The first is, for the 300 million buyback, what period is that expected to cover? Is it just 2007, would you expect it to be completed by the end of '07, or is it a longer period? And then the second is, what is the cash on your balance sheet at the semi company at the end of the year, so x SunPower?

Brad Buss

Sure. This is Brad. So, the cash balance was $460 million for the Cypress semi portion of it, and there was no specific timeline given by the Board as far as a deadline, but I think our plan is sooner than later.

Gene Wendy - SCC Capital

Thank you.

Operator

Thank you. Brett James, you may ask your question. Please state your company name.

Brett James - Woodyglen

[Woodyglen]. Just on behalf of the current and former employees of Cypress who have really suffered under T.J. Rodgers volatile personality and abuse. I really wanted to thank Chapman Capital for speaking out and hopefully throwing out this psychopath CEO from the company. The Board of Directors really have a duty to make sure that the right person is leading the company. And trusting when I tell you that any vote taken of Cypress' employee's, they would struggle to find more than 5% who want Mr. Rodgers running this company.

T.J. Rodgers

Do you have a question, or is this another editorial, so you can force a split and hopefully make a quick buck on your investment? Can we go to the next person, please?

Operator

Alex Gauna, you may ask your question. Please state your company name.

Alex Guana - UBS

Yes, UBS. Looking at the SRAM business line, I was kind of surprised. I think you said the wireless infrastructure might be flattish sequentially. Is it -- but you gave SRAM guidance flat to down. Is that basically the commodity SRAM that's dragging things down? And just a follow-up to that, there were some issues on 90 nanometer production, I recall, from the last call. And have we moved all the way through that, or are there more gains to be made in terms of getting 90 nanometer yields and efficiency up?

Ahmad Chatila

Let me just -- this is Ahmad, let me just answer one thing first. We did not say that the wireless segment in SRAM will be flattish. If we did, I apologize. We have a mix and that mix makes us flat. Like for example, networking is very strong for us, but basestation is very soft. In terms of the 90 nanometer, on the high performance SRAM, it's all on 90 nanometer, up to 98%. And yes, we have significant improvement projected throughout '07 for converting the legacy Async business to 90 nanometer. Right now, we're only at 20%, and hopefully we'll be around 80% by Q4 '07.

Operator

Thank you. [Michael Frank], you may ask your question, please state your company name.

Michael Frank - Gateway Capital Management

Hello, Gateway Capital Management. I had a detail question about some of the previous statements where you were referring to the June lockup expiration. Could you give some more detail about that, what is the exact date in June and the amount of shares that are involved in that lockup?

T.J. Rodgers

Okay. First of all, the lockup date in June is not a date, it's a formula, and the end of June figure I gave is the worst possible case, it might be a few weeks earlier than that. With regard to the lockup, it's not a lockup of the given number of shares, it is an agreement which I've called a lockup which says simply that we can engage in a major equity restructuring or divestiture transaction involving SunPower until the market is settled after the acquisition, and that time will be in the end of June worst case timeframe.

Brad Buss

There was an 8-K filed on if you would like to read the specifics.

T.J. Rodgers

Okay. Thank you very much for attending. That's the end of our call. We've had our second good year in a row in terms of beating the SOX index. We reported a good quarter and relatively saw semiconductor times and told you that things do look good for both our semiconductor business and SunPower in the future. Thank you very much for calling.

Operator

This has concluded today's conference call. Thank you and have a nice day.

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