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Cypress Semiconductor (NASDAQ:CY)

Q1 2011 Earnings Call

April 21, 2011 11:30 am ET

Executives

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

T. Rodgers - Co-Founder, Chief Executive Officer, President, Director, Director of Cypress Envirosystems, Director of Agiga Tech, Director of Bloom Energy and Member of Board of Trustees at Dartmouth College

Dana Nazarian - Executive Vice President of Memory and Imaging Division

Norman Taffe - Executive Vice President of Consumer & Computation Division

Shahin Sharifzadeh - Executive Vice President of Worldwide Manufacturing and Operations and President of China Operations

Dinesh Ramanathan - Executive Vice President of Data Communications Division

Christopher Seams - Executive Vice President of Sales & Marketing

Analysts

Rajvindra Gill - Needham & Company, LLC

Jeffrey Schreiner - Capstone Investments

Stephanie Sun - Crédit Suisse AG

Delos Elder

Steven Eliscu - UBS Investment Bank

Sujeeva De Silva - ThinkEquity LLC

Vijay Rakesh - Sterne Agee & Leach Inc.

Charlie Anderson - Dougherty & Company LLC

Christopher Danely - JP Morgan Chase & Co

Betsy Van Hees - Wedbush Securities Inc.

John Vinh - Collins Stewart LLC

Ruben Roy - Pacific Crest Securities, Inc.

John Barton - Cowen and Company, LLC

Timothy Luke - Barclays Capital

Doug Freedman - Gleacher & Company, Inc.

Operator

Good morning, and welcome to the Cypress Semiconductor First Quarter 2011 Earnings Release Conference Call. Today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. TJ Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. Rodgers

Good morning. We're here to report the first quarter of 2011. We'll do it in a standard way with our CFO, Brad Buss, leading off.

Brad Buss

Thanks, TJ. Thanks, everyone. Thanks for joining. It should be a fun report as usual. We had a great quarter and I think you'll be pleased with the guidance.

And just a reminder, a lot of forward-looking language take a look at our risk factors and our nice big 10-K that's out there. The 10-Q will get filed in early May. And just a couple of housekeeping things, I think you probably noticed the press release is a little different. We tried to make it more concise, shorter and informative. We hope you like it, we'd like to get any feedback you have on it.

Another item, the deferred comp plan was always bobbing around in the non-GAAP. We've actually moved it to GAAP only since it's non-cash and there's no impact on the business. We've restated all the historical numbers. In that way, it won't be confusing for everybody and their models.

MID is no longer. Image Sensors rest in peace. We renamed it to MPD, Memory Products division. So again, you'll see that acronym throughout the report. And I just want to hit the Japan questions kind of upfront. We don't do any direct manufacturing in Japan. We don't have any subcons that do direct manufacturing in Japan. Japan's about 12% of our revenue. We have a good-sized sales office in Tokyo, a little smaller sales office in Osaka and those people have been working their butts off taking care of the customers. They've done an extraordinary job in a very tough time for the people over there. And we want to thank them for what's going on.

As far as all the raw material stuff, the DT res and the mold compound wafers, we see no issues for the next couple of quarters. I think one of the benefits of being a satellite company is that we do keep inventory, we do have second sources. So we feel pretty comfortable all the way through Q3 and we don't expect any big disruption. We haven't heard of any major disruptions with our customer base. We're keeping an extremely close eye on that. In fact, I think in the end, we're actually going to be a net gainer of business due to the fact that some of our Japanese competitors are obviously pretty impacted, and we're helping to support their customer base as best we can.

And then the 1 last final note, we've got a proxy out there. This year, we're looking for a measly 15 million shares to add to the pool. I think we performed pretty well for you guys, we're very focused on shareholder value and we'd like to get your support on that as best you can. So we appreciate that.

So if you look at Q1, we came in at $233 million, higher than guidance. It was up 3% sequentially, 15% year-on-year. And again, in that we only had 2 months of the Image Sensor business. So if you strip that out and looked at the continuing business, we actually grew 4% sequentially, the same 15% year-on-year. We saw a very good revenue growth in Handsets, which grew 62% sequentially for us. And we saw declines as we expected in all the other major segments: Wireless, Wireline, Industrial, NPC and Chris will give you some more color on that.

If you look at the divisions, our Memory Products division decreased 5% as expected as we saw some of the comp markets adjusting with the lower lead times. Again if you adjust Image Sensor out of that equation, they really only dropped about 3% which is actually better than normal seasonality.

We saw DCD increase 8% driven by higher West Bridge revenue for the handset market and that was offset by some slightly lower con revenue, again as expected. CCD had a record revenue in Q4. They increased 7%, which is actually quite phenomenal because normally CCDs can go down 5% to 12% just due to the standard seasonality in consumer.

The TrueTouch revenue hit another record. It grew almost 40%, sequentially, was up north of 200% year-on-year and you can expect it with very strong growth in handsets. And we also had starting to see some nice contribution in our large screen formats, which we kind of include the e-readers and tablets. And we saw some normal seasonal declines in clocks and USB. CCD is the biggest division by revenue. They accounted for 46% of revenue and I expect that to increase throughout the year. They should be north of 50% of our revenue in fiscal '11 and as a comparison, they were only 39% in 2010. So we're seeing a very good movement there.

TrueTouch actually became our largest individual product family in Q1. It was bigger than our synchronous SRAM business which has been the big daddy for quite a few years. Design activity continues to be really strong, and I'm sure Norm and Chris can touch on that and that's really across the PSoC, including 3 and 5 and all the touchscreen stuff. The handset revenues, it again increased 62% sequentially. And I think they could be 25% plus of our company's revenue in 2011, and definitely will be probably the largest end market that we serve going forward.

Just on the tablet stuff again. Just to hit that up, I know there's been a lot of questions in the press on tablets and non-tablets requires and how they're going to do in supply chain and sell-through and all of that kind of stuff. Now remember, when we gave your guidance for TrueTouch, we said it would more than double in 2011 which is extremely strong guidance, yet we only need kind of the tablet format products to be less than 5% to achieve that guidance. We're actually doing very well in that area, and I see no issue in tablets regardless of what they do impacting our guidance and if they could continue to do as well as we think, we may be able to raise that later in the year.

Turning to the profit end of it, we had net income of $55 million, about $0.28 a share. That was on a GAAP basis, by the way. We have the gain of the Image Sensor business that obviously, we pro formatted and we have a donation of the building to the bank that we're very proud that we can support them on that. And that was a big change versus the year-ago number of $0.07.

The non-GAAP net income was very strong at $48.5 million. That's the $0.24 of fully diluted EPS, which was higher than my guidance -- at the high-end of our guidance, I should say. And we had a little bit of a tax benefit there and we also had higher shares in OpEx that I'll talk about. So I think overall, it came together pretty well.

More importantly, it was very strong EPS growth. It was a 40% growth year-on-year, almost 3x faster than revenue. So I'm just pretty excited on that. You strip out the Emerging Tech business and just look at the core business, we would've had $0.27 in EPS so almost a 3% drag on Emerging Tech.

The non-GAAP gross margin was $58.1 million. It was down from Q4. Again, mostly due to the product mix and plant capacity reductions at our Fab as we try to balance the lead times with customer inventory levels. And most of that was in the memory products group. We're ramping nPD and backed up in Q2 actually quite strongly to meet increased demand.

If you look at our core semiconductor margins without the Emerging Tech, we came in at 58.7%. Utilization in the Minnesota Fab based on starts for Q1 was about 76%. That was down from 82% in Q4. Like I said, as we proactively put down the wafer starts. And we think the utilization will probably bump up to around 88% for Q2. Another record, we actually had 55% of our wafers come from our foundry partners, so we expect to begin 50%. We've actually had it earlier than we expected, and most of that is because of the rapid rise in the PSoC family of products.

We continue to be pleased with our ASPs. They remain relatively flat at around $1.48 and saw memory and CCD group actually increase slightly in the quarter. Our non-GAAP operating expenses were flat to last quarter and totaled to 86.6. If you adjust out the deferred comp like we've done, they actually moved up from Q4. And that was basically due to a couple of items. We've had our sales conference in Q1 the first we've done in 7 or 8 years, and we also have a pretty big hit beyond the standard fringe resets.

The Medicare tax that keeps on giving, what it does is we had a bunch of RHUs that were performance-based that were delivered in the quarter and we had higher option expenses. So both of those will trend down in Q2 and I expect OpEx to actually go down in Q2. And we held our headcount relatively flat, even though at the same time, we had substantial additions to support PSoC and TrueTouch.

The OIE was about $600,000 mainly interest income. So the tax rate, you're seeing a much lower rate it we thought. We're close to resolving an audit. We had a few other true-ups going on. So you're seeing the effective tax rate in there of about 2.2%. We actually think a 3% rate is what we'll be using for Q2, Q3 and Q4, for the balance of the year. And that's getting us much closer to our actual cash tax rate.

On the balance sheet, we saw a lot of fluctuations in cash. We ended up with $261 million, that's down $173 million from Q4 as we turned on some stock repurchases as we took advantage of the volatility of the market. Also, decreasing cash at the end of Q1, we had a prepayment for 2 different gaps of about $110 million outstanding. Subsequent to the end of the quarter, literally over the last just couple of weeks. Both of them have matured. We ended up getting about $37 million in cash back and we also nailed another $4 million in shares. And I'll take you through the shares stuff in a minute.

If you add the auction rates in, we've got close to $280 million in cash up to about $1.64 per outstanding share. And just under 30% of our balance sheet is cash and again, we have no debt. Entering Q1, we have $571 million remaining on our share repurchase program, which again we said we'd deploy opportunistically and saw some opportunistic opportunities, we did take advantage of that. So year-to-date, we've taken out 12.5 million shares. We have 324 million left under the repurchase plan. And again, we'll continue to look at gaps and buying back opportunistically in the market as it warrants.

Inventory just increased slightly. It was basically for planned inventory, really focused on PSoC, TrueTouch and our optical fingernails. All of them are ramping and growing and you'll see that reflected in our guidance. We actually took down our SRAM inventory as we planned. Altogether, our days of inventory went down by 4. Nice to see our finished goods actually went down by 7%. And as usual, we have some last time bills and stock-based comp charges that were close to $8 million. So if you x them out, we really only had 89 days of inventory, which is actually pretty reasonable considering the amount of proprietary inventory that we do. I think you'll see inventories remain fairly flattish even with the much higher sales and backlog.

DISDs accounted for 70% of revenue, a new record high. DISD inventory units increased only 3%, but the dollars increased 20% and you'll see that reflected in the deferred income. And that really is mostly due to some increases in disti booked costs, as well as higher mix of proprietary products that are going on. So all of that's pretty normal. You'll see it in the A/R and most of that's already been collected. So there's nothing you need to worry about there. And again, I think most of you know we have very conservative resurrect and we don't recognize anything until it's all true.

A more meaningful metric that we look at is actually the weeks of inventory that the DISDs hold and it actually dropped down to 5.1 weeks down from 5.8 weeks in the last quarter. And that's kind of near the lower end of history where we would like to see stuff, especially with our focus on proprietary products. And I think we'll probably keep them relatively flat to maybe down going forward. The ARU saw that part uptick to $6 million and again that was all due to the DISDs taking inventory in the last few weeks of the quarter. We're actually collected almost that entire amount as of yesterday. So it really is just a standard timing difference. Our aging continues to be excellent, our DSO stock generation, I have no concerns there at all.

CapEx was $19.3 million. It was really under our guidance really just at the timing of a once that was actually brought in. The big assay capacity expansion is going very well, the ops group and manufacturing teams has done very good in that. We're actually ahead of schedule, we're on budget, we're about 60% complete and they expect to be fully ramped kind of in the October time frame probably a month or 2 ahead of schedule. And we had about $12.5 million in depreciation for the quarter.

On a share count, I think as you can see in the release, that weighted share is around $171 million, fully diluted $205 million. A little than I expected, really just due to option exercises and the timing of the buybacks. As you saw, we did lot of buybacks in the quarter. You don't get the benefit, they're all weighted based on timing. So you'll see a lot more of that benefit in my guidance and probably in the future as well.

So let's jump into the guidance. I think you saw we had a very solid book to bill at 1.07, everybody is above 1 except DCD. We had record backlog, we're 100% booked and we're seeing very good strength in the PSoC, TrueTouch, SRAM and the Optical Finger Nav. So I think if you look at the revenue, we're going to tell you a range of about $248 million to $255 million, which is really up 10% to 13% if you adjust out the Image Sensor business that isn't repeating. So obviously, 2x to 3x normal seasonality. I think it's fairly conservative based on what we're seeing and we're looking forward to delivering that to you guys.

I think GM will be around again, 58%. We're seeing some pricing pressures. We're trying to be conservative with some of the costs potentially related to Japan and obviously, there's product mix. We're seeing Emerging Tech move up, et cetera, et cetera. OpEx is going to be down. I think it will be around $85 million, which is pretty nice to do with that big sales increase. And that will obviously vary with R&D, timing, et cetera.

You can think of OIE of about $400,000. The minority interest benefit of $300,000 and tax expense, like I said, should be around 3%. CapEx 12% to 15%, depreciation about 13%. I think the fully diluted share count, I would take a range of about $195 million. And that will swagger around a little. If you'll roll it out together, you'll get non-GAAP earnings of 30% to 32% -- $0.30 to $0.32, which is well above the street and really, the highest we've had in over a decade. I'm pretty as pleased with this guidance because again, you're seeing our earnings increase about 3x faster than the revenue and this is the highest level of probability we've literally seen since 2000.

So I'll now turn it over to Chris, and we'll take your questions.

Christopher Seams

Thanks, Brad. Let me go through the revenue splits by geography. I'll start at the bottom. In spite of the disaster in Japan, they actually climbed as a percent of our revenue in the last quarter going from 11% to 12%. Europe was next up the ladder, 14%. North America down to 18% and 20% and Asia-Pacific at 56%, though Asia-Pacific and Japan together are over 2/3 of our sales today. It explains why I'm on an airplane a lot.

Units were up 4%, about in line with fee revenue at higher than $158 million. Brad talked about ASP, the pricing environment is still remaining very stable and there may be a little bit of tailwind from constraints from the disaster. From an end market perspective, Brad talked about the segments that grew for us in the first quarter being handsets and large screen touch. Those 2 again will grow in the second quarter, and we also expect consumer and computation to grow back in the second quarter as well.

Let me move on to lead times. Our lead times overall for most of our products were around our 6-week target. Those that were not were in Touch and Static RAM. Actually in Touch, we moved our lead times back over 10 weeks in the 6- to 10-week range. Brad talked about our capacity expansion efforts being ahead of schedule and it's paying off and that's in an environment where we are in a very steep ramp as Brad talked about. So it's a really good performance by our ops manufacturing teams.

In Static RAM, we've actually had our lead times in the last month pushed from about 6 to 10 weeks because of what's happening in Japan. That's good for us. We are able to service the businesses we had. We'll bring those back down.

For our backlog and order pattern with respective cancellations and push outs, we really don't see any change from normal patterns. But we have seen the expedite spike up with the SRAM activity that we're seeing. We'll take care of those orders thankfully.

Brad said we had a record backlog level up to $355 million of backlog after you back out the distributor book price impact. So $355 million of real shippable backlog for a six-month window. Our book-to-bill, as Brad said, was above unity for the 3 divisions. CCD was just over 1, 1.01, MIB climbed to 1.22 with the activity we talked about and DCD was 0.74. And just so I don't get any questions on CCD, I'll remind you last quarter was 1.89 in CCD as we got our customers get their orders on the books, so we could align it with our manufacturing. So CCD was very, very solid. And for 2 quarters in a row, although TJ won't let me take a vacation, I entered the quarter 100% booked. So I'll start working on Q3 now.

Let me turn the call back the TJ and then he'll give you a few more details on the quarter.

T. Rodgers

So I'll be able to start talking, $19.69 a share. By the time you get done giving the finances that has gone up to $20.40. Chris got out and was back down to $20. So Brad made $140 million for shareholders. Chris lost $80 million, we're now $60 million. I guess my job is not to lose any more of that. They go through my cart.

Just to reiterate record TrueTouch revenue growth, obviously cell phones are the big volume, much sought after wins. We're focusing also on the second tier and the sweep of cell phones is going through consumer products. With multiple digital cameras, we're finding that automotive dashboards are turning over and we have a group that focuses only on that. GPS devices, printers, IP phones, e-books and tablets. So we're pushing all of those, not just cell phones. Last quarter, some exemplary design wins are Garmin, TomTom GPS, Cisco IP

phones, HP printers and Sony state-of-the-art cameras. This is the camera where we had to make touchscreen work under 15 feet of saltwater and we got that done with them.

Another source of growth which is finally kicking in for us is the Emerging Technology division. They call it a division, it's organized as such financially. But in reality, it's a collection of all of our start-up efforts in the company. That group grew 55% in revenue quarter on quarter and 134% year-on-year. Again, that 155% is growing from a few millions to a little bit less than $10 million, but we're starting to move the needle for us and will more so in the future.

I'll give 5 -- 7 important events and then we'll go to questions right away. We worked with Qualcomm to create a design reference kit with our touchscreen. And I said, that's important to get us an early edge in new cell phone designs. We announced TrueTouch support for the Google Android 3.0 Honeycomb operating system. That's one that purported to bring holographic quality displays. We got 2 big wins in -- we had 2 touchscreen controller addition products. One is ultra-thin stylus that's 1-millimeter. Full capacity screens primarily in Asia and they've got the verifying complex letters we need to verify [indiscernible].

On the automotive side, we got the BMW. With wins announced through both BMW 5, 6 and 7 series cars. The factory is our second generation PSoC chip. It's now up to 250 design wins. If you compared it to PSoC 1 that got it going. We're at a rate which is 3x of what PSoC 1 was. They took 2 of the most interesting PSoC factory designers this quarter. A company called Oscium has a mixed-signal oscilloscope for an iPhone. It's an amazing little device. We actually have one here. You take your iPhone, you plug a little box into it which is about 1-inch square and maybe 0.25-inch thick. And it's got 4 probes out of it and you stick the probes on your electronics and actually see waveforms on your iPhone. That means you have an oscilloscope for a couple of hundred bucks. It's really starting to take on the equipment industry.

The biggest design for the quarter, the biggest new chip to come out of Cypress is our USB 3 Controller. Our USB 3 is going to take over, over the next 2 years over USB 2. Our USB 3 is 5 gigabits per second, it's 10x faster than the USB 2 and we brought other chips called FX3. It is the chip that resides in the peripheral that attaches to the personal computer. So when Intel's chipset later this year enables broadly USB 3, there are already USB 3 in computers out there, where they hatch into the PCI-Express box. But when it becomes broad later this year, everybody in the world will want to hook up their peripheral to a USB port in this programmable device. It is actually a PSoC-like device. It isn't PSoC, but it's programmable, will allow a whole array of people to customize chip to hook up through the USB 3 ports, of personal computers.

There is an organization called the QDR consortium, Quad Data Rate consortium. Quad Data Rate is the name of the static rims that go less, say, primarily into routers, in multiple stocks and routers. It includes us in Renesas and what we do is we specify chips with a common data sheet so that our customers can have resources. We just announced a new product called QDRII+ Xtreme. A bunch of marketing jargon, but it basically is our next product that we've achieved with next-generation agreement with Renesas.

Finally, we've introduced a family of serial non-volatile Static Random Access Memory. So RAM takes data, serial means the data comes in through a single port and goes out, and they are non-volatile so they store data. So the way they work is they sit on a wire realtime and data comes in and comes out at electronic speed, they can keep track of the data. When the power goes out, our non-volatile static memories, the way they work is they cut off from the outside world and they're using energy in a small capacitor and they dump the data from the static RAM into the non-volatile memory that shadows the SRAM bit by bit.

Not as keen as it sounds, for example, event data recorders which are starting to come available in cars and will be mandated in the near future use this kind of memory. So, for example, a little canvas, that will monitor your brakes, your steering wheel, the angle of your steering wheel, the engine, the engine revs, what gear your car was in, et cetera, realtime. And in the event of an accident or some other event, when the data is fully shut off, that event data recorder will record all the data. This is a new product for us and it's a new market.

Daph, those are the main events. Let's go to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tim Luke. [Barclays Capital]

Timothy Luke - Barclays Capital

Thanks so much. Brad, if you move forward, how do you see the sustainability of your book-to-bill levels and your bookings levels as you move out through the year? Obviously you've had several quarters in a row of above 1 circuit start with that?

Brad Buss

I just want to say that on behalf of the Cypress family, we are really going to miss you. We hope you help straighten out the U.K. government and bring tax breaks to the semiconductor industry. We are going to miss your probing questions. I think the book to bill, as you know, I mean to us is a lead indicator. We really focus really on the backlog and being booked. And the book to bill being down and still above 1 is obviously really good keeping for us. And the customers continuing to book out, they continue to give us new visibility. And again, a lot of that's new programs. So we'll re-ramp a lot of these cell phone guys and new programs and that will continue so you'll keep seeing that. I'd expect to probably be around the 1 range. Whether we're 0.95 or we're 1.05 or 10, from our perspective, it's good and as long as the backlog is there and the visibility is there, that's what counts because now we're ramping up revenue much more. And then the other big trick really is with being north of 70% through distribution, you kind of looked at what they're buying and you don't have visibility into every end customer. We obviously see it on the top 40, 50 guys that we track. So that gets a little mushier. So I think the combination of backlog, percent booked and looking at the book to bill, is what you guys should focus on. That's what we focus on.

Timothy Luke - Barclays Capital

And then just with respect to your gross margin going forward, how do you see that shaping through the year? Then for TJ, you guys have talked about some power seeing something that might receive some focus for investors possibly in the middle of 2011. How is that timeline developing?

Brad Buss

Well, on the margin end of it? I think we said we want to be between 50 and 60, we want to grow faster than the industry and hope we're 2x faster. I think we're on that path this year to definitely probably goes 2x faster than the industry. More importantly, we'll grow their earnings faster. And I think for the margin end of it, it's going to be a function of some of the volume with bigger customers and where do you go with volume pricing. Where are some of the cost increases going to go? We are starting to see cost increases after kind of 2 years of price decreases and flatness, you'll see a little bit of pressure in that area which I think we'll be able to manage very well when we're not really concerned on. So I think we're going to be somewhere in that range over the next year or so. And that's what I kind of model. And then again the other thing is you've got Emerging Tech continuing. As that grows in the margin structure as you can see it, it's positive now but we still have different groups ramping at different times. So they're not going to be to their margin model I think for a good year, and that will start having a mixed impact on you. Hence, that's the reason we try to break out the core part of it. What you saw was much closer to 59% this quarter even with lower factory loadings. So I'm very pleased with where we're at in that area.

T. Rodgers

On the question of Emerging Technology growth. The biggest story for the next couple of quarters is going to be OMS optical navigation systems. It's a optical PSoC, if you want to look at what's in it. It's a laser we buy for $0.13. It shines infrared light out, bounces off your finger, bounces back under the sensor. Unlike a normal image sensor, which is in effect takes a picture, this image sensor looks at the thought pattern comes off if you've ever shined a laser on a wall or on a piece of glass. You notice that little speckled pattern around the laser beam? It looks at that speckled pattern and uses that to measure motion. So a relatively techie description. What does it do? Think about a rim, cell phones, for example. There used to be a rollerball and now they've gone optical. And underneath that little black plate on the rim is the infrared laser, which you can't see which shines right through the black thing which will take to optical light, this transparent infrared light minutes measuring your thumb moving over the sensor. That rim is obviously one of the biggest customers for that. There are others. And that thing is how much this quarter? $2.5 million and it's going to grow doubling per quarter for the next couple of quarters. So that's the biggest thing and you heard about before in a different way. That comes from the Celeste of our silicon-like machines acquisition we did in 2010. And finally, we were going to go and conquer the Datacom world, which kind of ended abruptly after we acquired the company. And we eventually took their optical expertise and got this product out of it. So that's a big one. We've got a second announcement that I'm going to just wait. It will happen in the second half of the year.

Brad Buss

I think on your Stealth 1, what you think you're referring to, the sum of some part. I think your timing of midyear is right on track some time. I mean, it's doing very well. We're very happy, we're working with the management team there to figure out what and how we want to make the announcement. And timing it with certain manufacturing/customers/things that they have the appropriate timing. But rest assured, it's tracking very well and will be unveiled.

Timothy Luke - Barclays Capital

And to squeeze in, on the Qualcomm reference design, can you just give us some sense about how significant that is and when we might begin to see some fruits of that announcement on the Touch?

Norman Taffe

Timothy, it's Norm. I guess I can't comment yet. I can't tell you that obviously, the references on the market is quite important, becoming more important as the second tier of cell phone makers start to ramp touchscreen phones. So we do have a concerted effort to work with companies like Qualcomm, get on those reference designs and really positions us to get that next-tier of phones that are starting to ramp over the next couple of years, as opposed to maybe the very top OEMs that's really did 100% scratch designs we've been working on for the last year or 2.

Timothy Luke - Barclays Capital

Thanks so very much and good luck going forward, guys. Thank you.

Operator

Our next question comes from Ruben Roy.

Ruben Roy - Pacific Crest Securities, Inc.

Great. Pacific Crest. First, on the Touch and the focus on the kind of the second tier lower end handsets. What's your impression of the competitive environment for those specific phones? It sounds like there's going to be increasing competition as you look out into the second half of this year. So if you talk about that a little bit to begin with, that would be great. Thank you.

Norman Taffe

Ruben, it's Norm. From a competitive standpoint, I guess I could tell you don't see a difference necessarily in what may be called the second tier of the broader handset market and top tier. I don't think there's a big distinction there. There's certainly a lot of newly announced competitors, but frankly, the competitive landscape for real handset to me hasn't changed much. We still see really the same top guys. The fact is, it's a pretty complex problem to solve and every quarter there's more challenges as they change the sensory stack up, increase the noise and we find the necessity to keep bringing out new products to stay at the front end of that. And the technology's actually quite difficult to deal with things like very noisy chargers or thinner and thinner stack ups that lower the cost of the system solution. So while there's a lot of announced competitors as far as real working solutions being designed in at really anything of high volume, we haven't seen that much change in terms of the competitive landscape of the customers.

Ruben Roy - Pacific Crest Securities, Inc.

Great. Thanks. And then can you talk a little bit more about the West Bridge strengths? And also, as you look ahead to USB 3.0, is that something that you see as potentially pulling across more demand for West Bridge? Thank you.

Dinesh Ramanathan

This is Dinesh Ramanathan. Yes. So the strength this quarter or last quarter in West Bridge was primarily our older phone taking designs into the more emerging-market from our customers. So we think that, that's going to continue at least throughout this year for us because those phones are -- we are designing through phones that are slightly cheaper and therefore, go into markets where our customers end up selling those phones at lower cost point. On the USB 3.0 front, yes. We think that there's going to be a fabric of momentum that's going to come out, primarily because as TJ pointed out, we have both Intel and AMD announce 4-port hubs actually being integrated into their chipsets. Intel in their pass points and AMD actually announced that it's available for mass production right now. So we think that once the PCs have USB 3.0 ports available on them, then the devices will start having USB 3.0 and we actually have a part now that our customers are beginning to design in more production towards the end of this year and some beginning into next year. So we think that there's going to be a fabric of momentum getting -- coming out because of USB 3.0 getting traction in the market.

T. Rodgers

Let me just comment on the products in the market. So if you ask, "What is the USB 3.0 chip?" The chip, it goes in peripherals. The hookup to the host on a computer. In effect, there are chip with 2 ports. On 1 side is the USB port, which is 5 gigabits per second. It "talks" USB to the computer. On the other side is the parallel bus, meaning a number of line with, let's say for the sake of discussion, 32 lines. So the data comes in at 5 gigabits and the serial port goes out at 5 gigabits per second divided by 32 in the other side. So the real electronic systems can handle the data. So USB 3.0 chip, just like USB 2.0, just faster. A parallel port in 1 side and a serial USB port on the other side. West Bridge, if you go beyond the trade name, is a very close cousin of USB 3.0 and it's a 3-port devise. So on 1 side, you got the parallel port that can talk to a peripheral or it can hook up to pretty much anything. And you've also got the USB port and then there's a third port. And that third port is for storage cards. So think of a NAND Flash type storage card and with a lot of bits in it. So what you can do with the West Bridge chip is grow a lot of data very quickly from the outside world via USB into a storage card and then later on, when the machine is not busy, take it from the storage card into the machine or alternatively, down from the machine into a storage card and then the storage card out later. So West Bridge is, you can think of it as a 3-port USB chip. It's sort of the second-generation higher-priced spread that West Bridge -- that was successful for us in USB 2.0 LAN. We are going to introduce a West Bridge, USB 3.0 West Bridge. You'll be hearing about it shortly. So we're planning on doing both on this generation and we're planning on doing the West Bridge a lot earlier than we did in USB 2.0. It came in very late in the life cycle of the USB 2.0. That won't be true in the USB 3.0

Ruben Roy - Pacific Crest Securities, Inc.

Thanks, TJ. Last one for Brad. Just did you give any details on the pricing pressure that you're seeing? And it sounds like we should think about gross margins kind of -- I understand that the range is 58 to 60, but as you ramp up top line growth kind of think of the gross margin through the second half towards the lower end of that range? If you can help me out with that. Thank you.

Brad Buss

Yes. Just to clarify, pricing pressure, we're not seeing pricing pressure in our retail. It was more pricing related to costs. Raw materials, costs going up. So just so we're clear on that, I don't want anybody to get spoofed there. So again, we don't see that at all. I don't think you'll see much of that again. The only comment we made on that is certain guys at certain volumes, we may give out volume discount. But we're still heavily proprietary these days and taking the leadership end in the SRAM end of it that I don't think that's going to be an issue. So I think somewhere between 58, 59 is probably the right area to think about in the back half of the year, especially. I think we'll still see seasonal ramps in Q3, which will drive higher volumes, which will drive better absorption in the Fab, et cetera.

Ruben Roy - Pacific Crest Securities, Inc.

Thank you.

Operator

Your next question comes from Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc.

Wedbush Securities. I did have a couple of questions and I wanted to start off with the record backlog 100% booked. Are you concerned at all, given the recent events in Japan that some of your customers could be double ordering?

Christopher Seams

Betsy, this is Chris. Frankly, we've done deep dives with all of our major accounts. Brad gave you the distribution weeks of inventory, they're definitely not loading up. And in basically every major account, we don't see any sign of that. We've actually had 1 conscious and formal request for 1 customer to actually put inventory on their shelves in a scare right around the event when it happened, and my guess is that will fade over time. So the short answer is not really.

Betsy Van Hees - Wedbush Securities Inc.

Okay. Thanks, Chris. TrueTouch, while 40% quarter-over-quarter and then north of 200% year-over-year, and looking at you could even increase your guidance of more than doubling. Can you help us as we look at this quarter and next quarter in Q4, how should we be looking at that ramp to help us model that business?

Norman Taffe

Betsy, this is Norm. I think you can expect significant growth again in the second quarter. We are absolutely ramping I think the biggest difference this year versus last year is that they're been ramping a couple of really big guys. We're ramping more like 5 or 6 at the same time. So that had given us multiplicative effect on our growth. I think we're still very confident in the guidance we gave that we expect again just like we did last year this year to more than double again. And I think as Brad said, we have increasing confidence in the guidance. And we may be able to change it even favorably going forward, but we're not ready to do that yet. But definitely the backlog is extremely strong there and the back, we've been able to bring the capacity on pace that's allowed us to support that backlog and bring our lead times down to make sure customers have no concerns about supply, even though we are ramping dramatically the TrueTouch family.

Betsy Van Hees - Wedbush Securities Inc.

Thanks. I appreciate it. That was very helpful. And then I had just 1 last question. I was wondering if you could give us an update on the lawsuit with GSI? They had been around for a while and you guys have been around for a while and I was wondering what the catalyst was behind the lawsuit at this point? Thanks.

Dana Nazarian

Betsy, this is Dana. So we've always been a company that valued IP and we've always respected the IP that the engineers have created. But the fact is we've spent 3 decades and hundreds of millions of dollars in R&D and building up the SRAM business to the #1 position. And although we're not a litigious company, we believe that the IP that we've worked so hard to create should be protected when it's being unjustly used against us. So that's kind of the basis of it, but I'll turn it over to TJ for further comment.

T. Rodgers

Dana, I can't complain like what you just heard to me. I've probably more colorful language. The Legal Department reports to a different path of [ph] and he asked me to look at it. I did. We have 1,800 patents, we have hundreds of SRAM patents. I was shocked to find out that when I compared the GSI products to our patents they were -- let's just say, they overlap way more than is healthy overlap and I'll leave it at that. Then in the typical case, you'll look at the other company and they've got a bunch of patents that you find out you may be using. And when I went to look at their patents, I could only find 6 patents for the entire company. There may be more but I can't find them in the patent office. They have fewer patents than I do personally and I run the company. I don't -- I have 13 or 14 patents here, and the patents don't relate to what we do. So we're looking at a company that uses our stuff. They haven't spent very much money or have been very careful about patenting what they do. They made products that follow our data sheet, literally, parameter by parameter. And I wrote them a couple of letters, I took the trouble to do it personally, I didn't use lawyers to begin with and I asked them, "What's the problem here? I want a meeting. Let's talk about it." My latest request for a meeting is still in advance but I haven't heard from them. We will always negotiate a fair deal if we can do that. The only other time we've ever done an offensive patent maneuver in our history was in the '90s. We found a clock company that was copying our products and we sued them. And then we negotiated a settlement, and then that particular settlement is stop making clocks and then finish their patents. So we're not trying to make money, but this one's pretty egregious. And some stuff happened. They'll formally stick with it. I've been through this drill before. I've been through Federal court trials when we were the small company and we had to deal with larger companies. My response was to sign 13 licenses and pay money to the bigger companies that have a bigger patent portfolio. And then they wanted so much money, I couldn't afford to pay it. Then those were the trials. We had a couple of MCI and one with DMZ. So that's where we are. Not a blood feud, but what's happening is not reasonable relative to our shareholders' intellectual property that they own and it's being used without compensation. So something's got to change.

Betsy Van Hees - Wedbush Securities Inc.

Thank you, TJ. That was very helpful. And I said I didn't have another question but, Dana, I do, one last question for you. At the Analyst Day, you talked about 50%, gaining 50% market share in SRAM. And I was wondering based upon the tragic events that happened in Japan and your Renaissance's strong position in SRAM, do you think that 50% is now at this point to light of a target?

Dana Nazarian

50% was sort of the mid- to long-term goal for the business, and it still is. When you talk about long-term market share improvement, you don't talk about events, you don't talk about what happened this quarter and, God forbid, the tragedy in Japan. You talk about consistent performance over the long period of time. And Chris mentioned that we're in a good position to support some of the customers that are affected by our Japanese competitor, and we'll certainly do that. But I don't look at that event as an opportunity to change our long-term strategy and goals. So we're going to shoot for 50% and when we get there, then we'll talk about the next milestone.

T. Rodgers

We just discussed our strategy yesterday with regard to this, and we cited what we would do is not try to make an extra buck, raise prices or anything like that. We try to support people pretty much at the market prices. What we would ask is that they remember it in the future and give us some points of market share for having supported them without having taken advantage of it. That's our official position on it.

Betsy Van Hees - Wedbush Securities Inc.

Well, I think with that strategy, you definitely will be on your way to obtaining that 50% and exceeding that. And then, Brad, when we look at the MPD margins, they went up quite a bit, 57.1% from 55.5%. Can you tell us what was behind that to driving gross margins, and can we see are gross margins really higher for MPD?

Dana Nazarian

Yes, this is Dana. Betsy, I'll take that one. So we have a slight -- we continue to convert more product to 65-nanometers. We also are doing a technology improvement on the Non-Volatile part of the business that TJ referred to earlier. So the combination of those two and selling higher valued products is what made the little tweak. We're going to continue to hang in there at margins we're at. Don't expect massive changes in the future, but we're in a pretty healthy position.

Betsy Van Hees - Wedbush Securities Inc.

All right. Thank you very much and once again, congratulations, guys.

Operator

Our next question comes from Vijay Rakesh [Sterne Agee & Leach Inc.].

Vijay Rakesh - Sterne Agee & Leach Inc.

Stern Agee. Just wondering on the West Bridge, you had a pretty nice quarter here. Just wondering what development [ph] was for 2011 and where you're seeing -- you mentioned traction on Chinese handset, guys. Just how that is that just coming through?

Dinesh Ramanathan

Rakesh, this is Dinesh. We're expecting the revenues to sort of remain at this level throughout the rest of the year. The expectation is that the handsets that we were designed into like I said before are getting sold in the South American market, in the Indian market and in the Russian market, and that's the breadth which is actually causing increase in our revenue numbers. And as I mentioned before, the next wave of opportunity for us is based on our USB 3.0 set of parts, which we should be announcing shortly.

Vijay Rakesh - Sterne Agee & Leach Inc.

Got it. Do you see getting back into the Korean OEM source by the end of the year? Do you see a shot of that this year?

Dinesh Ramanathan

Yes, we do. I mean we have some designs at the Korean vendors and those are in the process of -- I wouldn't say ramping. Those aren't big design wins that we typically have seen. They are smaller design wins. But collectively, we are hoping that it will contribute dollars to us going forward.

Vijay Rakesh - Sterne Agee & Leach Inc.

And on the Qualcomm side, the references is -- Cypress now referenced to sign with Qualcomm, and does that get you guys more design wins now as they, let's say, enter the China market or into other large OEMs that they've talked about. Is Cypress pretty much becoming a standard -- will that become a standard reference design or just an option?

Norman Taffe

Hi, Vijay, this is Norm. I guess don't know exactly how to interpret your question. It is a standard reference design and, yes, it's absolutely driving kind of the Asian handset market demand as one of the solutions for designs around the Qualcomm chip set. And I think you're going to see more of that reference design-type approach from us, affecting design wins over the next couple of years.

T. Rodgers

And yes, it does mean that we will be able to get into the second Tier of design wins that we wouldn't have gotten into otherwise. The model right now for passing your sensors [ph] in your touch screens is everybody's different, every cell phone wants to look a little different, have a little different feel, therefore, they've created different sensors, the ray of the Indium Tin Oxide and electrodes that are on the phone that you can see through. And therefore, you need a custom design for every phone. The design is touchy. And the way it works is you pick your 6, 7, 8 biggest customers and you divide up an engineering teams 2, 3, 4, 5 people, and you go live in your customer's place and tell her your new cell phone works right. That means you can get the big ones but it's not a scalable model. So by having a reference design is the second-tier cell phone manufacturers wanting to accept these form factors, you will have 21 rows and 23 columns, and you can make your safe a little different, but that's what you're going to have. Then they can get in the touch screen pretty quickly because we can pre-design in the x standard product forms.

Vijay Rakesh - Sterne Agee & Leach Inc.

And last question here, do you see TrueTouch doubling in 2011, and if you would give some color on the big guys, on the big customers on the tool desk side?

Norman Taffe

Yes, I'd reiterate the guidance we gave which actually we expected to more than double in 2011. Relative to larger customers, obviously, we can't comment specifically but I can tell you that we're now shipping to 8 of the 10 largest handset suppliers touch solutions.

Vijay Rakesh - Sterne Agee & Leach Inc.

Great. Thanks, guys, that's very helpful.

Operator

Thank you. Our next question comes from Jeff Schreiner. [Capstone Investments]

Jeffrey Schreiner - Capstone Investments

It's Capstone. Thank you very much for taking my questions, gentlemen. Brad, could you help us with maybe what some of the offsets here are in near term because if I understood your commentary about where utilization is going or projected to go for June from where it was in March, that's a pretty big increase. I'm wondering maybe why your gross margin guidance -- isn't maybe reflecting a little bit more benefit than this utilization jump?

Brad Buss

I think there is maybe close to half a point. Again, we're looking at the cost end of it and that will depend on kind of the mix of the products and then really it's going to be the mix of certain end customers in every division as well as the growth in Emerging Tech. I mean those are really the only 4 things that we're wishing on. And it could fluctuate pretty heavy in a quarter. So I'm just trying not to set unrealistic expectations, and I'm trying to be kind of up the middle where I think things could go. But again, don't forget, we're north of 50% through foundries now, right? So the traditional while you're utilization's up. I can run it through the whole company. It doesn't really reflect because it only really is going to impact potentially, Dana and a few of the other legacy product lines that actually run through that fab because the assay stuff impacting the norm and no effect. It is already running at full kilt, so it can't go anymore. So you don't get the fall through the whole company it's really just a fraction.

Jeffrey Schreiner - Capstone Investments

Okay, thanks for that clarification. Maybe for you, Brad, or for Norm, I mean you guys have talked about a little bit about hinting at the possibility that you'd be willing to increase your Touch guidance maybe further down the road and maybe just wondering, what's the lever there? Is it a pending design we're waiting on or what's going to give you that confidence to come out and tell us that you guys are now seeing more favorable year or favorable environment for TrueTouch in calendar year '11?

Brad Buss

So it's very normal from the typical equivocation which would come next. Let me just answer that question. If you're more bullish on Touch and yes, we have a good product, now what's on the other side of the equation? You're in the cowboy cell phone world. Somebody can change your mind in a single meeting and all of a sudden, you lose 5 million units overnight. You're dealing with companies with the pricing clog. You're dealing with Huawei and Samsung and LG, and they're starting to feed on us about price. So we're sitting here looking at it. We're talking about a doubling. And when we first said that, we thought we had it. we still think we have it, but we're in a world where things are very uncertain plus we got new guys coming into the market. I'm less worried about the new guys in the market than I am about winning and losing designs and getting beat on for price. So he wouldn't have said it that way but he would have pointed out if it's reluctant to use to do anymore because those are the uncertainties in the other side of the equation.

Norman Taffe

I would add on to that. I think the competitive design wins that we won have continue to be better than we expected, and the big thing is how do they ramp and when do they ramp, right? We don't know. The guidance we've given you, that actually discounts what we think and what we hear from them based on design wins. So I think as everybody knows that you guys always get your channel checked. And all this guy is telling that's about that and I kind of laughed, like no kidding. But most of us at supplies never believed in the numbers to begin with, right? So you've got that game. And then I think the other big wild card really is the tablet element, right? Like I said initially, that guidance we gave assumed a very small nut. We are definitely going to surpass that nut, and we want to see how things sell through and where they kind of go. And additional design wins that we hope we'll talk about in the future, I think will give us a little more confidence. But it's one quarter out of a whole year. Let's get through this quarter and then we'll give you a mid-year update.

Jeffrey Schreiner - Capstone Investments

Sounds fair. One more question and I'll step off, gentlemen. It would be great to hear some more detail about the ONS business and kind of that business how it's progressing and some of the wins there. I was wondering maybe, Brad, or, TJ, if you could talk about the TouchPad for the Notebook business and if there were any revenues this quarter and what type of ramp we should maybe expect to see from this business throughout calendar year '11 and into 2012?

Brad Buss

Okay, our TouchPad business, although electronically is a very, very close cousin of the touchscreen business, a grid, an X-Y grid of electrodes you put your finger on and sense that it now moving through gestures, that's the reinvigoration of that market. Our TouchPad business is in our China business unit. It's one of our Emerging Technology groups. It's one we hope will grow. It reports to Shahin Sharifzadeh who ran China for us for a while and manufacturing. So Shahin, go ahead and talk about TouchPad.

Shahin Sharifzadeh

We are engaged with 2 of the top PC manufacturers, and we expect to start ramping the second half this year. And we expect the market to grow rapidly for us, and we are using some of the same technologies that have been spearheaded by Norman's group in terms of touchscreen, in terms of all points where you can use multiple fingers. And that's a big growth path, growth area for our TouchPads. Though I think the next couple of quarters, we should see it ramp in those 2 customers.

Brad Buss

Revenue this quarter, I mean it's not significant. But I think the backlog, the design win penetration that Shahin talked about is definitely favorable. And I think it's a business we could see taking very strong share in over the next couple of years as a innovative second source in an area that really hasn't innovative a lot and will last a while.

Jeffrey Schreiner - Capstone Investments

All right, gentlemen, thanks for your answers. I appreciate it.

Operator

Thank you. Our next question comes from Sujee De Silva. [ThinkEquity, LLC]

Sujeeva De Silva - ThinkEquity LLC

ThinkEquity. Nice job on the quarter, guys. First of all, I think you've talked about bits and pieces. Can you talk about how the forecast plays out by segments? And in that, whether time infrastructure inventory correction is down at this point?

T. Rodgers

Sujee, we had a hard time hearing the first part.

Sujeeva De Silva - ThinkEquity LLC

Can you talk about the segments and how the growth breaks out across them?

T. Rodgers

Going forward?

Sujeeva De Silva - ThinkEquity LLC

Yes, in the second quarter.

T. Rodgers

I think you'll see growth in most of the sections. I mean, obviously, VCD from a dollar- and percent-wise will be one of them in the Emerging Tech. You talked with marketing? Okay. Sujee, we'll have Chris...

Christopher Seams

Let me answer, Sujee. Good morning. As I told you, handsets will have another strong double-digit quarterly growth rate, so will the large screen touch. I did say that consumer and computation would both come back to life. And we'll wait and see when the dust settles if it's single or double-digit on those two. And if you look at the com market, probably in the forecast, won't grow for us but we'll have to see how that plays out with what's going on with the supply chain and the Japan tragedy that went on. So overall, all of our end markets are either going to grow or flat in one of them.

Sujeeva De Silva - ThinkEquity LLC

That color helps, great. And then you talked about the puts and takes of TrueTouch and the ASP there. Can you talk about where you think that will trend against volume on one side? And then you have volume increased functionality, how that will play out for the rest of the year?

Norman Taffe

Sujee, this is Norm. You actually -- this is exactly right. While we are seeing numeric increase in volume, actually we're seeing in TrueTouch continuing growing ASP. And add in what you said, which is we're selling more of the higher value and that's really just in the handset space, we're seeing some growth on ASPs. The tablet solutions, which is gaining momentum for us, are higher ASPs yet. And I would say, one of the biggest successes we've had and related to the introduction we had last quarter of what we call Solo or TMA 884 single-chip tablet. So that 's getting designed in very successfully. Won't really impact the first part of this year but -- sorry, the end of the year, next year, we expect that to actually be an uplift on our ASPs and Touch.

Sujeeva De Silva - ThinkEquity LLC

Okay, and then last question. I was intrigued by the TrueTouch Charger Armor product you have, and I realized you have a lot of placements now at phones across various products. Are we going to see more of these kind of opportunities as these products kind of can be used across them or how to use it far between?

Christopher Seams

I'm sorry, can you repeat the opportunities?

Sujeeva De Silva - ThinkEquity LLC

With the Charger Armor you're able to leverage the USB competency and the Touch competency. I'm wondering if there are any more opportunities like that. So make placements of the phone across various products.

Norman Taffe

That certainly is part of our strategy. As a company, I think that there will opportunities for that. I think also within touch, there's tons of opportunities to distinguish on future requirements that Charger Armor is a really big issue with our handset suppliers and being able to, with PSoC, adapt the product to address the wave of issues they're facing. There's a big differentiator. I think you'll see more and more things like that in the future.

T. Rodgers

Let me talk about that at a higher level. Charger Armor, what the pain of the gain is that chargers come from China, the cheapest one rules. And you don't know which USB charger is going to get plugged into your cell phone. And therefore, here you've got this touchy no pun intended facet of the touchscreen and you've got noise coming in from a charger and they can interfere with the screen. The noise is non-trivial. We've actually seen noise spikes up to 100 volts on the phone, not current carrying it can't shock you or anything but basically, the phone can whip up and down 100 volts relative to ground due to the ineffective, crappy, cheap USB charger. So you got all those delicate electronics and you got to prevent this noise from getting in. Well, the way we've prevented that, we'd go to our laboratory and we start programming PSoC genes and how to change its code, operating the different frequency, look at the spectrum and noise, run your PSoC and the whole noise where there is no noise et cetera. So that's one solution called Charger Armor, and it's actually a big deal right now. Next thing, you want to sell in Asia, and Asian characters are very intricate, and they're very fine. So you can't put an 8 millimeter finger on a cell phone and pick out a character so with the use of the stylus and the interesting thing about it, it's just a metal pen for a minute. Stylus has a standard 1-millimeter point on it and all of a sudden, you've got a very fine point and your capacity to interaction with the screen is different. Now as you try and solve the problem but you got to go create -- the user create a chip or modify chip you got or in our case, change your firmware and make the chip run differently. Camera, I said earlier, making a camera run under 15 feet of saltwater with touch is non-trivial because now you're in a conducted medium in saltwater. So we are right now focusing, trying to build a base, trying to get away from 3 or 4, 5 big runners being the event for the corporation of solutions and we're using software to do it and build up the base and try to get into a lot of products other than cell phones. And then another big difference, having PSoC allows us to do that over the competition whether it's current or whether it's new guys. And Norm's going on to project 10 4 of his products to ready. And with PSoC, we're able to crank out new gens quicker, add more features and continue to differentiate and provide value.

Sujeeva De Silva - ThinkEquity LLC

Sounds good. Thanks guys.

Operator

Thank you. Our next question comes from John Pitzer. [Credit Suisse]

Stephanie Sun - Crédit Suisse AG

Credit Suisse. This is Stephanie Sun for John Pitzer. I know you mentioned some potential share gains from Japanese competitors seeing some disruptions. Maybe you could comment on whether you're seeing this materialize and increase order activities for new customers in the near term or if your guidance speaks on any of that benefit.

Dana Nazarian

Stephanie, this is Dana. So I'm assuming you were referring to the memory portion of the business and, yes, we're seeing a little bit. I mean, the book-to-bill ratio we mentioned earlier and the division is 1.22. I think it would have been over 1 anyway. So it probably would have been in the 1.1 range. And then maybe there's some tailwind from Japan, so we're seeing orders spike a little bit. We're also seeing some expedites, and it's mostly on the asynchronous portion of the business. But again, it's not a panic situation or anything like that.

Stephanie Sun - Crédit Suisse AG

Perfect, thanks. And as a follow-up, on the gross margins within CCD and DCD, I think both were lower sequentially on up revenues. Maybe you can talk a little bit about what's impacting gross margin in these segments and expectations throughout the year?

T. Rodgers

On DCDs, specifically, because of the small revenue base, that group can pop between 65% and 70% pretty easy depending on the mix. One quarter, it goes 2 million and end-of-life sales, you get 70 or 72. And again the higher mix of the West Bridge business, right, was really the big element that impacted that. Norm began, remember we got PSoC but we also have USB and clocks. They tend to go down on a sequential basis. There's a little bit of the FAB impact for those guys so mostly mix within the reporting product lines in there and then a little bit of the Fab impact. Like we said before, we're not seeing ASP issues anywhere in the company at all. If anything, ASPs will remain flat and start moving up.

Stephanie Sun - Crédit Suisse AG

Great. Thanks so much for that.

Operator

Thank you. Our next question comes from Glen Yeung. [Citigoup, Inc.]

Delos Elder

Citi. This is Delos on behalf of Glen. Congrats on the sell quarter. I just had 2 high-level questions on Touch. You've already talked about this to some extent but if you can just share maybe specifically what are some of the key relative strengths of TrueTouch going into 2011 as well as 2012 versus your competitors?

Norman Taffe

Okay, let me list a couple of them kind of segmented by area. This is Norm, again. Certainly, in the large touch space, the key strength was, first, delivery of a product for a single-chip solution with the most diode nodes and build a bigger screen with a single-chip solution we brought out last quarter. So being in the leading edge of that was a big strength for us in that segment. In the handset space, we've ramped up what we call our Gen 3 solution to significant volumes based primarily on just excellent noise immunity. And then the related program, the product responded to things just like we talked about earlier, Charger Armor and those kind of capabilities. But these handset suppliers, there's a lot more money they spend on the sensor design and on the sensor itself and the LCD. What they can't have is devices controlling it, not be able to withstand the noise being generated in that system. So in many ways, it's all about signal and noise ratio on these products and we've had outstanding analog in our product from Gen 3 standpoint. And I can tell you that we'll be introducing very shortly our Gen 4 solution, which is going to extend that capability with even more significant features. We'll be announcing shortly that it allows to have even better signal-to-noise going forward. That's really the key dynamic in this market. I would also tell you that we we're the first people to introduce Multi-Touch All Point solution, which drove our Gen 3 volume capability. And we have solutions both at the low end and the high end. So we have Multi-Touch solutions fully featured. We also have very low cost single-touch and two-finger solutions that allow suppliers to use single layer solutions, single layer sensors which are for lower cost. We're also seeing a lot of ramping volumes in more of the mid-range handsets, not just in the smartphone segment. And that's been one the big volume drivers over the next couple of years.

T. Rodgers

And I think if you look -- on top of that, like Norman was saying, right, I mean, we are probably the technology leader in that area and we have the flexibility to do the PSoC. And so it's also the support between his team, the apps and build guys. I mean there's a huge support infrastructure that builds up, and it's going to be very hard for new guys coming in to be able to ramp it and gain the trust, gain the mindshare. And then on the operational end of it, we've done a fantastic job of supporting these guys. We've never impacted them. We've provided upside when necessary. And that's a huge deal when you're kind of like the single source chip for a particular handset model. It's the whole first new routine is working very handily. And I think on top of it, the non-handset markets that we're focusing, I mean, e-readers, they're kind of like the cell of tablet. Those things are selling faster than the tablet if you want to compare it and put it in that same category. And all the other stuff whether it's the cameras we're talking on and I think we've got a huge lead in the automotive end of it. We've got a tremendous backlog and design that will be coming out over the next few years. And we're going to continue to push the technology investment, it's probably the biggest area that we're spending the copious amounts of R&D on.

Delos Elder

As a follow-up on touch, how does the strategy overall address the risk of integrated solution coming in and offering lower power or cost or even just space and potentially taking market share?

T. Rodgers

Let me answer that one. Touch chips aren't that expensive and 2 years from now, good luck. Okay, so then the question is do you want a seventh generation touch chip which by the way will operate on less than 10 milliwatts with power. It will be extraordinarily good on power that is programmable that can fall after your new sensor and the sensors are changing all the time. Or do you want to take your next-generation cell phone chip and hope to integrate that touchy analog firmware meeting function into it. This is like why the USB market didn't go away there's some integration of USB. we're going back on USB 3.0. It will be disintegrated. It's just moving too fast, we're bringing out new chips every 6 months and if you count the firmware based products we bring out we described earlier we are bringing out a new chip every month. There's no way you can take a cell phone platform and jack it and around every month. Those guys come out if they are lucky once a year and it's a huge psych to Intel bringing out a whole new generation of personal computer chip. So I have a bunch at worries but getting integrated is not one of them.

Delos Elder

Thank you.

Operator

Our next question comes from John Vinh. [Collins Stewart]

John Vinh - Collins Stewart LLC

Collins Stewart. Thanks for taking my question. First, I had a follow-up on the Qualcomm reference design. Norm you mentioned that, that was a standard reference design. By standard mean that you guys have an exclusive with Qualcomm reference design or can you clarify, do some of your other competitors also have reference designs with Qualcomm on this platform?

Norman Taffe

Just to clarify there is no exclusivity there I can't comment, I don't really know if others also have reference to Qualcomm but it's not an exclusive situation.

John Vinh - Collins Stewart LLC

My next question is on tablets. If I look at your guidance for tablets in 2011, it appears to be a little bit underrepresented in terms of your market share relative to smartphones. One of your competitors talked about tablets could make up about 20% of revenues in 2011. Can you comment on that? Is it because your tablet guidance is conservative and if there's discrepancies on market share can you talk about maybe address that?

T. Rodgers

I think like I said, we we're conservative and we told you we're doing much better than the conservative guidance we have we can't really comment on the other guys. I think there could be different ASP assumptions of where the markets are moving versus multi-chip and then I think the best these to settle on how they all end up selling and how long that stays through and we're pretty confident that we're in a pretty good selection that will again be nothing but incremental. From our end of it. To me that's the obvious answer. Stated straightforwardly, Apple invented it, they have proprietary chips that maintain a proprietary position and therefore, that markets not available to us and as long as they own more than 30% of the market in that space, we're striving to get share among the rest and that's why it seems conservative. We talked large touchscreen, tablets are only one element. Whether it's a card as whether it's a PC, tablet, maybe a netbook, the e-readers et cetera it's a very big new category that you're going to see very strong growth from that segment. I think when the dust has settled in that format, you know, we will probably be the market leader in units in that area.

John Vinh - Collins Stewart LLC

Just on pricing can you give us an update on where your ASPs are on tablets versus smartphones these days?

T. Rodgers

We don't break them out obviously for competitive and obviously customer issues. There are obviously well north of the cell phone. The first order to think that the tablet chip is in cell phone chip and its handling 4x more crossovers in the tablet than in the cell phone. And the alternative solution would be to take anywhere between 2 and 4 cell phone chips and then an aggregator chip and have a 3 to 5-chip solution to decode all of the extra pixels and use that for trade and crossovers on a big tablet. So when you go to a single-chip solution, you provide to exit price, you're still offering a huge benefit to your customers.

Operator

Our next question comes from Christopher Danely. [JPMorgan]

Christopher Danely - JP Morgan Chase & Co

JPMorgan. You gave us a pretty good rundown of how the end markets are expected to do in Q2 how about the second half of the year, what would be your best guess on what would be strong in what you're more worried about?

Christopher Seams

If I really knew that exactly, TJ really would let me take a vacation. I'm expecting second half to be larger than the first half, obviously, we have the traditional seasonality for consumer and what's becoming handsets and in Q3 a little bit in Q4 for handsets I'm expecting of course it to be bigger and I'm hoping that the networking business is going to start the pickup in growth in the second half of the year. We'll wait and see. Nothing that would change the seasonal expectations even with the big step up we've done in Q3 in Q2 here.

Christopher Danely - JP Morgan Chase & Co

And then you guys said that your Japan business has actually done pretty well since the earthquake. Are you guys worry that there might be some sort of demand construction or a bit of a step down in revenue at some point later on this quarter?

Christopher Seams

This is Chris again. I remain worried in a longer horizon. I can tell you all the way through this quarter and somewhat into Q3, we don't see any issues that people putting plans back online and that having to happen is in Q3 to make me see the second half and not worry. No big storms caused that I see for us.

T. Rodgers

I also answered earlier about a strategy which was to help people out without raising the price and return giving us some extra market share going forward and having remember what we did when we could have taken advantage. There is a bit of a self-service in that strategy as well. So we don't want to do exactly what you are worried about which is to go in and fight the price make a bunch of quick bucks and go backwards in a quarter. We're playing it to try to ramp our business and not go backwards with the strategy I said earlier.

Christopher Danely - JP Morgan Chase & Co

For Brad, how about the OpEx trend in the second half of the year would you expect that to go up with less than revenue or can you take some more costs out of the model?

Brad Buss

I think obviously, much less than the revenue growth I think sales commissions are going to go up. We'll have a pay increase that will start taking effect midyear. I don't see it going up more than $1 million, $2 million credit type of thing. We readjusted all the variable comp plans harder to make the same amount of money et cetera, et cetera . so I think the leverage again like it talked about in pretty huge and probably not going to be 3X-ing all the time but we're definitely going to grow earnings much faster than revenue so no worries there. You might need to make some room in the minivan.

Christopher Danely - JP Morgan Chase & Co

Thanks a lot.

Operator

Our next question comes from Steven Eliscu.[UBS Investment Bank]

Steven Eliscu - UBS Investment Bank

UBS. First question regards of course Touch, you presented at the analyst meeting that you presented your design win pipeline. Can you give us an update now that we're 6 months out from that in terms of relative to what you presented. How are you seeing things now if you look out the next 6 to 12 months relative to what you've presented then?

Brad Buss

Broader and bigger. I think we continue to see more applications expand and we set better penetration handsets than what we presented at the analysts. Things from both in the high flying segment which is certainly handsets but also much broader adoption of touch as well. So an updated graph would be more impressive.

Steven Eliscu - UBS Investment Bank

Can you give us some quantification in terms of if he said in aggregate it's up 50% or something, can you give us a sense of where 2012 is going to go?

Brad Buss

No, on the guidance to take the fact that we're tripling capacity. I think you can feel an extremely confident theme.

Steven Eliscu - UBS Investment Bank

In terms of your next-generation products, what are you doing to lower the OpEx intensity associated with winning designs with the Gen 4?

Christopher Seams

It's a good question. Actually, we are doing a couple specific things in that product as we grow more and more understanding the space and handling the problems better we've done 2 things. One, we are doing graphic designs in parallel so one of the reasons we feel confident versus the competition is while we're ramping our Gen 3 we're taking out our Gen 4 and we're already working on our Gen 5, as you're doing multiple designs we get much better at it and are you're faster in your R&D. The cost for development is controlled from that standpoint. At the same time, our software is getting more and more sophisticated to allow handle multiple customers much faster than we did previously. So we have something like PTSD that we market itself which adds features like stylus, Charger Armor and makes it much quicker for customers to adapt to things quickly as far as changes in marketing. That's a big focus for us and some will continue on obviously and Gen 4 is going to come right out of the gate with PTSD, as well as the generation after it.

T. Rodgers

With regard to R&D cost, if you look at our R&D cost back in the '05 to early '07 timeframe, you're in the 22% to 25%, 26% of sales range. If you look at the last 6 quarters, the highest number is 18.5% below some 16.7% we've actually cut dollars out of R&D, consolidated our R&D side and we're working on improving our efficiency, and PSoC is kind of like a vehicle that allows you to do that. So we're not going to cut dollars anymore. We're going to be able to support the OpEx intensive nature that we've got and we're going to get our R&D of 18% down to our model of 15%, we hope, simply by growing the top line and holding R&D costs. That's our plan.

Steven Eliscu - UBS Investment Bank

Also on the touch side, we've seen a couple of your competitors now, talk about for the large screen format controllers that they're using, 32 bit micro-controllers there. How do you see on your side the scale up processing power in the meantime do you think you're at a disadvantage with less processing headroom?

Norman Taffe

I guess to answer that, I think to answer the second part first, I don't think there's been a disadvantage at all because we have very, very good analog and very good algorithms that are running. Having said that, we're certainly looking to expand capability a lot bigger in bigger screens more efficiently but it hasn't impacted our design success to date.

T. Rodgers

Let me add some more color on that. Yes, we have today finally not before but today a disadvantage of some design wins with a small microcontroller we have a homebrew microcontroller and PSoC which we call the ME. The fact is the micro-controllers a commodity is totally relevant as long as the cell phone can respond quickly with the right number of the crossovers and get the information nobody cares what micro-controllers in it or what holds that microcontroller. As we get, for example, to the bigger screens, which have 4x more pixels on them crosswinds for touch and they still want the same response rate let's say pick a number of 100 cycles per second for response rate the requirements for the micro-controller goes up. Fortunately for us, the next-generation microcontroller we think is the best in the world is not proprietary it's in our microcontroller and we've already got that microcontroller out it's called the M3 PSoC 5 and it offers in the entry. Hundred MIPS our OP sec micro-controller has four MIPS so that puts you in as far as the touchscreen goes supercomputer land and we plan on bringing out 32-bit high-performance computers and that's coming up where we have now called pSoC 5 which is fully capable of doing effects screen including a single-chip tablet touchscreen and that will be our roadmap going forward, with the ARM, you can get now an ARM computer 32 bits with more horsepower than you need that we can make and how many that's 1 square millimeter.

Brad Buss

That's $0.03. So yes, we're going to bigger machines it hasn't hurt us at all. The numbers speak for themselves and we're moving forward with ARM.

Steven Eliscu - UBS Investment Bank

That clarifies it a lot.

Operator

Our next question comes from Rajiv Gill. [Needham & Company]

Rajvindra Gill - Needham & Company, LLC

Needham & Company. Question on the rationale of your strategy of the handset space it seems like you're focusing more on the Tier 2 relative to maybe your other competitors focusing more on the higher range that they have said publicly. Wanted to understand little bit the reason behind that what you think the impact will be to pricing and what do you think of focusing on the high-end of the market what do you think some of the pitfalls are with that strategy?

Norman Taffe

I'm responsible for giving them this conception so let me get the answer. I talk about focusing on Tier 2 phones I also talked about focusing on other consumer products digital still camera GPS et cetera. Because we have an effort in the company to broaden our base. Our primary focus has always been the Tier I cell phone people and like I said earlier, when one of them says you have an opportunity, we get in an airplane we like to where it is and we put our best people in there and we actually do oftentimes a direct design for them or at a minimum if they're doing their own design, we've got people consulting realtime. So we're supporting Tier I with dozens of people and it kind of burns up all of our top resources for Tier I and the reason I talk about Tier II and other consumer products is to point out, we're trying to create an infrastructure that supports them as well given that all of our direct support is being used by Tier I cell phone people.

Christopher Seams

Norm gave you the step. We're in literally every Tier I guy except two guys and one guy does proprietary solutions so we pretty much cover the entire expect to cover that other one remaining customer as well down the road and all this growth that we've done and we're doing next quarter is all Tier I guys whether it's 90% plus it's Tier I guys. So we're covering them all and we're going wider and deeper is what we're telling you. And I think we're further ahead than the competitors in the ability to do what it with products, service and the manufacturing.

Rajvindra Gill - Needham & Company, LLC

What are your thoughts on selling in cell permutation you think that's going to be a trend going forward and if so, how that impacts your strategy and your manufacturing strategy going forward?

Norman Taffe

It's certainly a trend and I expect change to be the constant in the way they stack up these cell phones and absolutely impacts our strategy is one of the reasons why the need for the next generation is so important and the need for the learning you get. Each generation you just mentioned is even more difficult to solve from a touchscreen standpoint because they decrease the thickness to get you closer to the LCD and require even better noise immunity and capability. So the Gen 4 solution I talked about that we are just coming out with is exactly designed to support the road map for an is really going to tap over the next couple of years and it's critical for us to have solutions ready for that change.

Rajvindra Gill - Needham & Company, LLC

If you kind of look at the market over the next 2 to 3 years, there's always a risk that this will be commoditized. Would you see other larger players outside of the ones you talked about potentially coming in like a TI or Broadcom or the players coming in commoditizing the market or is that a much longer time frame?

Brad Buss

Again, whether it's a possibility it certainly is right now I'm not too concerned about it from a standpoint of there's a lot of technology in these. I think if the leaders have many years. We've been doing capacity solutions for 7 years now I think it's a much tougher problem to come in and solve and at the end of the day, cost competitive company we are successful in products like RAMS and number one and we're more than willing to compete with anybody in terms of that side of the marketplace. I'm less concerned about that, to refer to TJ's point earlier there's a lot of other things I'm more concerned about.

Operator

Our next question is from Doug Freedman. [Gleacher & Company]

Doug Freedman - Gleacher & Company, Inc.

Gleacher & Company. Could we focused in on the tax rate change that seems to be one of the biggest changes to guidance going forward. We were previously thinking 9% to 10% now it's down at 3%. When does it bounce back up and how much NOLs do we have, what are the factors contributing to that?

Norman Taffe

The odd discrete thing, but like I said the 3% rate we're comfortable with. You guys modeling and us delivering through the rest of the year. We're in the midst of finishing up an audit. That's actually worked out and it's obviously reflected in that rate. That's really a big thing. Doug, what you're actually seeing is it getting very close to what the cash tax rate is.

Doug Freedman - Gleacher & Company, Inc.

So you're baking into the pro forma number, you're bringing forward basically the stock comp discounts that you get all your NOLs and any charitable impacts that you're making?

Norman Taffe

That's really all in the GAAP rate. It's truly like I said the cash if you look at our structure and the fact that more and more of our business continues to go offshore, that's really the biggest driver and like I said, in any kind of effective tax rate, any assumptions on different audit assumptions and then when they go away, those numbers go away with it. I think you all see through there and then I think the rate will get closer to probably the 9, 10 range that we talked about for 2012 and beyond, as far as NOLs, we got plenty of them. That is not going to be an issue for U.S. tax. I don't even know if I can see out that far because again the less business starts coming back on shore, the growth that we keep seeing, 80% plus if it is to be offshore,.

Doug Freedman - Gleacher & Company, Inc.

My last one, just always like TJ are you happy with the portfolio of the products that are anything you're looking at divesting we just didn't finish with the image sensor business are there any other segments that you're looking at divesting?

T. Rodgers

Image Sensor was the last one we've now gotten our portfolio of products down to what we think are all strategic and synergistic and we're best behind it now.

Doug Freedman - Gleacher & Company, Inc.

Can you talk about non-touch PSoC 3 and PSoC 5 design wins?

Norman Taffe

Sure, broad question that we're very, very happy with growth in PSoC 3 and PSoC 5 we're in full production on PSoC 3 soon to be on PSoC 5. We had I think it was mentioned in the press release now over 250 over $100,000 wins and we are actually ramping up. We're now actually sold over 5,500 development kits for PSoC 3 and 5 and that sales rate is much higher than the PSoC 1 introduction sales as we expected because we're addressing a much bigger market. It will start impact revenue this year at a small level. You can certainly think of a bigger impact overtime or next year-end of course, this is also a pull up in terms of gross margins and pricing because they've got a broader, higher ASP and higher value market places.

T. Rodgers

We've trained over 20,000 engineers on PSoC 3 and 5. They downloaded what were 10,000 chips of software and 70,000 of them came to our website last quarter.

Doug Freedman - Gleacher & Company, Inc.

Terrific. Thanks, guys. And any further questions, I'll answer on the call back. Thank you.

Operator

Our next question comes from John Barton. [Cowen and Company]

John Barton - Cowen and Company, LLC

Cowen. Thank you. Maybe just to follow-up on the last question. You highlighted PSoC 3 growing 3x faster than the original PSoC 1. Norm, I heard you throw out the reason the TAM is bigger. What other reasons are there? I mean, is it familiarity by the customer base, install base, kind of leveraging into the larger one? And what do you think the real CAGR is for PSoC 3 and 5 when you look outside of handsets and real lumpy, potentially lumpy kinds of business?

Christopher Seams

I think the real reasons are the larger TAM address and just frankly, the much more competitive nature in terms of the capability the product. It has much better analog, more logic integration. It has much higher performance, the CPUs, both 8-bit, 8051 and of course, the 32-bit ARM M3. TJ talked about those have great appeal. What we're able to do with that is go into multiple segments as opposed to just being peripheral but really to go in and be the solution of a lot of spaces. We have early successes in the portable medical space slow to ramp but eventually very big volume we've got a quite a few designs there that will really impact 2012 revenues. We've had significant success in what I call the communication and processing server markets where workstations, servers et cetera. what because as the management control where we can do both analog and digital functions to control the overall system. That's driving the biggest portion of our design wins right now. Another area that's driving a lot of design wins is made for iPod which is our ability to interface the iPad and iPod and create functions just like TJ described on your iPhone or iPad. Those -- basically the capability is just so much bigger than what we're able to cover as driving a lot of it and into your second point, people are PSoC not brand-new anymore starting to get attention. We still think we have much bigger audience to address and taking on yet. But it certainly that certainly helps drive the factor acceptance as well.

T. Rodgers

The neat thing is PSoC one is going to be coming up on its decade anniversary soon and it's still growing. I'm going to be retired before this thing ever hit university level. Hopefully. It will be still here though don't worry.

John Barton - Cowen and Company, LLC

Best guess is 3 or 5 year CAGR for the family, Norm?

Norman Taffe

Not without certainty. 5 year CAGR for PSoC 3 and 5? I have to get back to you with a number. We got to go think about that.

T. Rodgers

CAGR is like when you get through $100 million and you talk about CAGR, we're in kind of our original design wins phase right now ramping up the first few million. So we've got to go do some homework on that one. It will be big.

John Barton - Cowen and Company, LLC

Last question if I could, TJ. You highlighted USB 3.0, the growth was driving the marketplace. Curious, your take on Light Peak or Thunderbolt as far as a competitive technology, what it might do to USB 3.0 and if you are planning on addressing that.

Dinesh Ramanathan

John, this is Dinesh. We do keep a close watch on what's happening with Thunderbolt. I think the biggest count indicator we have for that is the install base that we go after. We are looking at USB install base which is close over 5 million units, pretty much every PC has it. And the fact that USB 3.0 is backward compatible to USB 2.0 makes a gigantic difference in terms of what kind of infrastructure you're going after and what kind of infrastructure exists. No such infrastructure exists for thunderbolt on any of these fronts. So I think the analogy is actually go out and spend you it are other standards which are trying to penetrate the market at that point in time but they didn't succeed at all. And I think this is one of the areas that we're seeing similar things happen again.

John Barton - Cowen and Company, LLC

Thank you.

Operator

And our final question comes from Charlie Anderson. [Dougherty & Company]

Charlie Anderson - Dougherty & Company LLC

Dougherty & Company. Thanks for taking my questions. On the ONS optical MAV, I wonder if you can kind of give us a character of are similar to touch, how many of the top 10 OEMs. I realize not everyone has that capability in their phone yet but if you can help us there. And then also, just some commentary on the lawsuit with Avago, kind of similar to your commentary on the GSI lawsuit. So just any commentary there would be helpful. Thanks.

Dinesh Ramanathan

Sure. Charlie, this is Dinesh. We are engaged with two top OEMs at this point in time, primarily in the handset space and both of them are ramping at this point in time. And we expect to increase that going forward. We're seeing some definite traction on the remote control side as well. So we expect that business to grow into handsets and then proliferate into other segments. And then the lawsuit case, I'll let TJ take that one.

T. Rodgers

So, the ONS finger navigation in mouse products measure movements by watching the spec off the little box around a laser move across the windowpane type image sensor. The Avago mouse operates by shining a light admitting diode, not a laser, at an angle on a surface illuminating the surface, the surface has mountains and valleys in it and casts shadows and then looking at it with an image sensor. It's just an inch away typically and in effect taking a picture of the surface and then watching that picture move over time and calculating motions from that. Short form of that discussion is our method for doing things than FingerNav is totally different obviously different and has a total different path development. So the only claim they can make is somehow we violated some peripheral patents some aspect this is really covered by the basic engine of the mouse. My personal opinion is it's a reaction more than the commercial state to influence the doctors than it is in legal action that will put in trial. If it does go to trial, I will do what I've done for 28 years. I will show up in court. I will sit at the front table. I will work with the lawyers, and I will argue every day. And I'm quite convinced that I can win that lawsuit if we ever get to trial.

Charlie Anderson - Dougherty & Company LLC

Great. That's it for me. Thanks, guys.

T. Rodgers

Okay, thank you. Thanks, everybody, appreciate your support. And we'll talk to you at the 800 conference this coming next month.

Operator

Thank you. This does conclude today's conference call. We thank you for your participation. You may now disconnect your lines.

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