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Cypress Semiconductor (NASDAQ:CY)

Q4 2011 Earnings Call

January 26, 2012 11:30 am ET

Executives

Dana Nazarian - Executive Vice President of Memory and Imaging Division

Christopher A. Seams - Executive Vice President of Sales and Marketing

T. J. 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

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

Dinesh Ramanathan - Executive Vice President of Data Communications Division

Norman P. Taffe - Executive Vice President of Consumer & Computation Division

Unknown Executive -

Analysts

William S. Harrison - Wunderlich Securities Inc., Research Division

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

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

John Pitzer - Crédit Suisse AG, Research Division

Jeffrey A. Schreiner - Capstone Investments, Research Division

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

John Vinh - Collins Stewart LLC, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

Srini Pajjuri - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Delos M. Elder - VantageSouth Bank

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Operator

Good morning, and welcome to Cypress Semiconductor's Fourth Quarter 2011 Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. J. Rodgers

Good morning. We're here to report the fourth quarter of 2010 -- 2011, rather. And I will start out as usual with CFO, Brad Buss.

Brad W. Buss

Thanks, T.J. Thanks, everyone, for attending our fourth quarter call. And as usual, the information in here is based on all our preliminary unaudited results. we'll be filing our 10-Q on schedule in mid-February. And obviously, there's a lot of forward-looking statements, and things especially with the way the economy -- and so many moving parts right now. So obviously, we can all please look through all the risk factors in our 10-K and as well as in our press release. And we have a full GAAP to non-GAAP recounts everywhere. I'm going to spend a little more time than unusual because there's a lot of moving parts going on between Q4 and Q1. And hopefully the detail will answer a lot of your questions.

So if you look at Q4, we're really pleased with where that ended up. We ended up with revenue of $242.4 million, slightly above the high-end of our guidance. And it was better than we expected, as we had some legacy communication product sales and our emerging tech division growing a little more than expected. We decreased 8% sequentially with all 4 divisions, most major product lines and all channels declining pretty much as expected. We continue to have 1 10% customer for the company as we did in Q3, and that was one of the large Korean cell phone makers.

And even in the ugly macro environment, we have the best revenue for Q4 since 2000. So I was pretty impressed with what the team pulled off there. By division, our Memory Products Group decreased 13%, pretty much as expected as we saw a lot of inventory adjustments and lower demand pretty much across the majority of the SRAM wireless infrastructure customers. And that was pretty consistent with what you've seen from other semi guys.

DCD decreased only 4%. There is a really big decrease in West Bridge, as we've talked about, offset by better-than-expected increase in our legacy comm business, which as you know is very lumpy and will be one of the things that will not be repeating and impacting Q1.

CCD decreased 8% sequentially and was driven by declines in touch, USB and clocks, offset by actually fairly flattish tablet revenue. And that was -- really only happened because we closed all the remaining HP comm inventory liabilities. And on the bright side, we actually had a small seasonal increase in our core PSoC business, which actually has its highest quarter for 2011. And we had a little better than seasonal revenue in our CapSense areas, and the initial ramps on PSoC 3 as we've been discussing have started. Albeit small, they will be continuing to grow year-on-year for quite a few years.

As a reminder, TrueTouch share of revenues in 2011 exceeded our annual target of $230 million to $250 million. CCD remains our largest division and accounted for 54% of revenue, and TrueTouch continues to be our largest individual product family.

Overall, we saw no major surprises by end markets. We pretty much saw sequential decreases across all of the markets, with the exception of consumer, which is basically flat due to some seasonality. Mobile handsets were slightly better than expected, but they were still down sequentially. It continues to be our largest end market at approximately 27%. And as I've said before, all of our major sales channels decreased sequentially, driven mostly by distributors and with Asia being the biggest impact.

On a GAAP basis, we had net income of $31 million, or $0.18 per share, and that's versus $0.05 a share in a year-ago period, so a nice increase there. Non-GAAP net income were also quite strong with $56.1 million. We posted $0.32 per fully diluted share. And again, that exceeded our guidance due to a tight OpEx control and a small year-end true-up in our tax provision. Again, a very strong earnings quarter for us, and that was a 28% increase versus the 25% EPS we posted in Q4 '10.

In our core semiconductor business, which excludes the impact of our investing in emerging tax, deliver $0.36 and the PBT is 27%. Again, near highest for us. Non-GAAP gross margin was 56.1, a little below guidance due to declines in our factory loadings. As you saw, we took our inventory down pretty heavily to react to the bookings that we saw. Stuff that I think is very prudent, and we expect to recover. We also had minor gross margin impacts due to product mix and some near-end inventory reserves.

The average utilization in our Minnesota fab, based on wafer storage for Q4, was 75%. Just to put that in context, that was the lowest since Q4 '09, and that was down from 83% in Q3. And again, we're being very proactive in managing our inventory. I expect the Q1 utilization to increase to around the low 80s. And obviously that will vary with the booking levels. Our wafers from foundry partners [ph] are 22%, and that was down from post of 39% in Q3. And again, it's been as high as the mid- to high-40s. And again, I expect margins to be impacted favorably as we increase loadings to the fab going forward.

The average ASPs decreased slightly to $1.39, again mostly due to the mix of products and customers. For the fiscal year, we achieved total revenue of $995 million. Not quite that billion but close enough to round it. That was an increase of 13% from 2010. And that's a raise that we think is going to be at least 2x, maybe 3x better than the industry when the dust is all settled. So I was really proud of the team pulling that off. I still expect this to grow nicely in the second half as we have a lot of new products and designs coming out. And for the year, we had non-GAAP fully diluted earnings per share of $1.22, an increase of 32%. So again, a rate that was 2.5x the revenue growth. Great leverage, I was pleased to see.

OpEx, the team did a very job there. We came in at 81.1, lower than my guidance. We saw some of the variable comp go down. We've tightened up OpEx control real well. I think, as you all know, that's been a major focus for us for the last couple of years, and it's going to continue to be a major focus this year. And we won't let you down in that area. Our headcount was down year-on-year, even after we've invested very heavily in our touchscreen and PSoCs group. And again, we only increased OpEx 5% for 2011, and we increased operating income by over 18%. And that's even with continued focus in bringing DecaTech up to a ramp stage. So real pleased there.

OIE was $800,000 due to interest income. Our tax benefit in Q4 was $200,000 as we have some year-end discrete items being trued up. And I expect the GAAP -- non-GAAP, I should say, tax rate to be around 2% to 3% for '12, which is pretty consistent with our expected cash tax rate.

So on the balance sheet, I think as you saw, our cash came in real solid. We had $166.3 million. That increased $31.3 million from Q3, even after we spent $62.8 million to buyback 4 million shares. So the buybacks that we kicked off in September was $400 million. We bought 5.1 million shares at an average cost of $15.78, and we've got about $319 million left to be able to spend. And just as another tidbit, about 23% of our total assets are in cash and related investments.

We have $56 million in cash from ops, free cash flow of $57 million. We paid out $13.8 million in dividends in Q4, and just last week, we paid out our dividend again at $0.09 per share. Our cash flow for 2011 was extremely strong, $284 million, and that's cash from ops, by the way, that's about 29% of sales. Our non-GAAP return on assets was 29%, the highest ever. And I expect to see very strong cash flow in 2012. And we remain committed to returning a substantial amount of our excess cash back to the shareholders.

Inventory, great job. We ended up at $92.3 million on a net dollar basis. That decreased 17% from Q3. And our days of inventory decreased by 12 days to 79, and that's a level lower than we were seeing in the '08, '09 meltdown. So again, very, very great job there. And a lot of that is due to the fact that our lead times are very low, and we're getting very good output from our factories. And again, included in the $92.3 million is 4.6 for the capitalized non-cash stock-based comp and about $10 million for last line inventory buys.

So you normalize those out, we really only have what I call true operating inventory that's sellable in the short term of $77 million, which is only about 66 days. I'd expect the inventory dollars to be flat to slightly up in Q1 as we start building die banks to support the planned revenue increases we expect to see in Q2. And we did about 72% of our revenue through distribution.

And again, we saw distributor inventory dollars decrease again by $8.6 in dollars and 13% in units as we're seeing them continue to be very cautious on holding inventory. So that's why you're seeing our deferred income drop from 1.69 to 1.51. The average weeks on hand to this is [ph] 5.7, which is again, down 20% from the 7.1 weeks in Q4 '10 and is below our targeted range of 6 to 8.

Accounts receivable was very good, $103 million, down $30 million from Q3. And again, that's pretty consistent with the distributors draining. DSO decreased 7 days to 39 days. That's the lowest DSO we've ever had. And again, our Asia remains very good, and we have no bad debt issues. CapEx was $8.8 million. We're pretty much done with DSO extensions. Depreciation for the quarter was $9.9 million, that was down from $12.9. As in the quarter, we've adjusted some of the depreciation life of our factories as being on leg in process technology. And having good output through our equipment, we're able to get our life expectancy greater than what we were actually depreciating at.

So if you look at the share count, the weighted basic was $154 million. The fully diluted was $175 million and as I said, we took out 4 million shares in the quarter. And we have 154.2 million shares outstanding as we exited Q4. And now I'm going to whip through the guidance. I'm going to go on to a little more of the details that's normal, because there's a lot of moving pieces here.

So obviously, the macro is weighing on us in customers. We've got the lowest lead times in years. We've got a bunch of product timing events related to tablets, which really should be no surprise. Some of the legacy comm products I talked about and some of our optical finger nav.

So as a result, we've seen some pretty big decreases in bookings and backlogs. We ended the quarter with book-to-bill of 0.58, which is below seasonality and the lowest we've seen in the decade. We also continue to believe that we are under-shipping, especially in our larger-end customers, to their true demand. And we're hopeful that inventory destocking will begin in benefiting Q2.

And remember, since we recognized about 100% of our revenue on disti sell-through, we don't see the benefit of the inventory restocking until later. So some of the old-timers that still do recognize revenue upon shipments of the disti, but we'll see a slightly lower, and we expect to see that for Q2. So we're 66% booked for Q1, and as such we're coming up with a revenue range of $200 million to $210 million, which is down 13% to 17% and probably higher than most of you are expecting. But hopefully, once I go through some of these other items, you'll put it in perspective.

So we think that all divisions and most product lines will decrease seasonally, or worse than seasonally, except for our core PSoC business, which doesn't include touch, USB and potentially SRAM. The majority of the decline in Q1 that you're seeing will come from TrueTouch. As result of these seasonal decreases in the handset market, because our business is pretty darn big, we're seeing a little bit of customer inventory adjustment, but the main issue is we're starting -- we've got a huge follow up in the tablet revenue, because we really don't have any major tablet business going on in the first quarter of the year. And a lot of our new tablet and eReader design wins don’t go into revenue until the second half.

We also have the impact of the Legacy comm business. It was bigger in Q4 than we expected. And that won't repeat in Q1. And as I mentioned, the OS ban is really a customer's specific inventory balancing issue. But we take the tablets, the Legacy comm and the OS ban and you subtract it out of the Q4, and you subtract it out of Q1, then we'd really only be going down 5% to 7% in the base business. But unfortunately, we got the benefit of these things in Q4, they won't repeat in Q1. So that's impacting the number by about $22 million.

So the thing that we're positive on, those are pretty limited issues, so limited customers. And again, we remain very positive on the second half of the year. And we expect that Q1 is the bottom for bookings and revenue. And that we'll talk further on that. And we expect to see a decent increase in Q2. And again barring any macro issues, a more robust second half as Gen4, PSoC 3, USB 3 and trackpads all begin to ramp and we'll talk a lot about that.

Okay. So if you roll that altogether, I'm thinking to a gross margin of around 54%. And again the majority of that is due to lower absorption of the 6 manufacturing cost over the lower revenue base. And a small amount of product mix, we're not expecting really any big ASP erosions at all. I expect this to be the trough for gross margins. And then I think as revenues increase, the utilization increases and we see more wafer loadings in our foundries, we'll be back to our target model range of the second half of the year.

I'm real pleased with what the manufacturing team has done. And as you've seen here even with this lower revenue, we're still keeping our margins fairly robust versus where Cypress would have been a couple of years ago. OpEx will be around $83 million, again, very tight still. We get the normal Q1 resets for FICA, lower vacation. We've got a big litigation event going on in the quarter. But again, we're going to be very tight on OpEx throughout the year.

OIE will be about 500K, minority interest and benefits of about 500K. Tax, like I said, around 2% to 3%, CapEx of around $10 million, depreciation of around $11 million. And I think the share count will probably come in around $173 million -- I'm sorry, shares. If you roll it all together, I think we'll see EPS non-GAAP around 15% to 18%. And again, I expect that to be the trough and us to be back up near record levels in the second half of the year. I'll finish up there and turn it over to Chris.

Christopher A. Seams

Thanks, Brad. I'll go through some of the usual indices and then get into a lot of the booking patterns that we saw during the December quarter and that we're seeing at the start of the March quarter.

Split by geography for rest of Asia-Pacific, 59%, North America, second place at 20, followed by Europe and Japan at 9% and 11%, respectively. Units declined to $174 million during the quarter, that's down 6% from the September quarter. The lead times, as Brad talked about, contracted again during the December quarter, with most of our products well below our normal 6-week target. The contraction, the end-market seasonality that Brad talked about, and the seasonal demand that drove our 6-month backlog down below the $200 million mark, that's now down to $176 million. That led to the book-to-bill of 0.58 that Brad gave by division. The book-to-bill for CCD was 0.54, for MPD 0.61 and for DCD, 0.84. During the December quarter, pushout cancellations actually declined. We talked in the last call about how those were slightly elevated during the September quarter. They've gone back to more historical norms and it looks so like normal order jockeying that's going on at that point.

Remarkably, expedites during this period of kind of declining bookings, remained at historical levels. Indicates to me continued conservative ordering attitude on the parts of our customers, with the ability with our short lead times to enable them to do last-minute demand adjustments. The most significant signal that we got exiting Q4 and into the first month of this quarter, January, is the decline in our order patterns that we've had over the last 2 quarters appear to have finally bottomed. And sequentially, week on week on week in January, we've been driving the backlog up which is very encouraging, especially given that Lunar New Year is happening during the month of January this year, is happening early. And with a lot of our revenue in Asia, that's very encouraging. So given that backdrop, let me hand it call back to T.J. for some other highlights in the quarter.

T. J. Rodgers

Okay, I'll go over some technical news and then we'll go quickly to questions. We introduced and started shipping our touchscreen generation for what we call PSD 4 chips in the quarter. We are ramping production this quarter. That's ahead of the schedule we announced, but I'd be less than honest if I didn't say that if that shipment has been ready 3 months earlier, some of the decline in revenues in the first quarter that we just forecasted wouldn't happen.

That's the bad side of PSD 4. The good side is, one of the reasons we are later than we would like is that we reengineered the chip from scratch relative to PSD 3, which is the chip were shipping now, and it's the one that's starting to roll down and so our competitors come up with comparable and slightly superior products.

CSG4 is a step ahead. It provides 10-volt drive speed, the drive on the line and sensor on your cell phones. How much higher volts you drive it in, it's directly proportional to the signal you get. So if you move from a typical 2.5-volt signal to a 10-volt signal, you get 4x more signal, all other things being the same.

You know that's a winner because we're now seeing our competitors talking about virtual voltage, where they improve some signal, the noise parameter by a factor of 2 and then say, "Gee, that's equivalent to driving the input by another factor of 2 higher." That's a score, we're a technology company, we've got the technology on the chip. We also put in the 32-bit ARM on too. We'd strip up the entire processing system for our chip and put in a 32-bit ARM to really do some sophisticated calculation on 10 fingers and track them on the chip.

We work hard on power consumption. The entire chip draws only 3.6 milliwatts of power. It's only 2 milliamperes. It's almost -- it doesn't even show up. And we what was required with the computer and other channel and elements we get up to 400 frames per second. So while I'm using PSD 4, it's one of the reasons we're going to be light in revenue in Q1. I'm also telling you in the second half decided that, that chip is going to be a winner in the marketplace.

We're also -- we also put -- roll out another version of the PSD 4, that's gotten more inputs and outputs on it, which means we can bring all of that, if I just articulated through 12-inch screens, meaning the tablet markets. Although as you heard, that market for us is not materializing, it's being significant relative to cell phones. We got a reference design with Nvidia, so we are the touch chip that hooks up to the new Nvidia processor for Android 4.

There was a rumor going around that our touch chip is going to be integrated inside the Nvidia chip. That is simply wrong. That chip is required to feed the Nvidia chip and this reference design speaks to that. We also are able to do something new with our PSD 4 chip, which is in the sense you have right now, if you look at the way a cell phone stack happens, on the bottom is some liquid crystal display. It has it's own drivers and it creates the picture you're looking at. Then on top of that, you roll out a piece of foil film and on that film are ITO, Indium Tin Oxide, traces that represent the touchscreens, and you have another set of x and y decoders that take that signal, which is different, and a different layer with different numbered rows and columns from the LCD.

What's going to happen over the next few years is that extra foil of touch sensing over the top of the phone is going to get integrated into the display, the first step which is a big one. And by the way, one more thing, that touchscreen sensor is interfered with by the display. That display that absorbs the noise that -- and appears to that touchscreen, typically there's a gap, the sub millimeter air gap where they actually put a space for you to lift up the touchscreen away from the LCD. And I've even seen designers where the top layer is thin and fragile and bends. So they talk about the minimum space at the middle, how can it be so much in the space instead of being bigger.

Well, it's unwieldy situation, and what you'd really like to do is to smack that touchscreen display into the LCD and directly into the phone. And that's called Sensor on Lens, meaning the lens is the glass that covers the touchscreen. And if you put the IPO slides for touch on the inside of it and glue it directly under the touchscreen, you get a thinner, smaller, more compact, more manufacturable system. The problem is, you're not putting your touch signals directly up against the LCD and that's noisy as hell.

And one of the things we've done to improve that is we have another what's called the listening channel. It's an extra channel. It's not -- can be used for screen, but typically it can be used -- the layout in the LCD and look for noise. And that noise that spikes from switching the LCD can be detected. Unless detected, it can go into the touch chip and tell the touch chip to hunker down and not try to sample anything for the brief period of time of that switching life. So that's the method, and in short form, how we're enabling Sensor on Lens technology.

There's another third leg in this tool side. It's USB. Cypress Semiconductors ship 1.8 billion USB chips in its lifetime. We reorganize and we now have the USB-only division and we're getting a new spurt of growth in USB, started our USB 1.0, 1.1, 2.0, now we're 3.0. We bought our 2 chips, we've talked about them before. The FX3 chip is a programmable chip. So it's a chip that has the attributes of a PSoC 5 product, it is a follow-on from our FX2, which is the most successful peripheral chip of all the USB chips in the world.

This chip, in effect, is a programmable system with an ARM9 in it. A very powerful computer and a bunch of I/Os that can hook up to anything. So you hook up to anything. You have a computer to deal with the data from anything that you hook up, and then on the other end, there's a 5-gigabit per second channel back to the personal computer. The Intel is bringing out in, what's it, the -- April -- when's Intel coming out?

Unknown Executive

Yes, it's going to be in April.

T. J. Rodgers

In April. Intel is finally coming out with the USB chipset, meaning people will want to start hooking USB 3 out to their personal computers and using USB 3. And we're ahead of that, with the programmable chip, we expect great success. The chip has a cousin product. We talk about West Bridge a lot. What that is really is the USB that has all the features I've I said. And it has the third port, which is an SD I/O card so you can stream data from your processor into the card, from the card to the processor with the USB in or out of the card. So it's a 3-ported device that we have successful in USB 2.0 and we replicated in USB 3.0.

This will start to turn on for us also in the back half of the year. It's another big reason that Brad talked about, of the back half. We brought out our second-generation PSoC Creator software. PSoC Creator is our new software for PSoC 3 and 5. We brought out 2.0. We've been taking inputs on our first software from our customers, a lot of them, thousands of them for over a year. And PSoC Creator 2.0 is a major improvement. We brought the development kit from PSoC 3 and 5 that allows people to start using our 20-bit analog-to-digital converters. Sort of the high end for the normal world for bits of accuracy is 12. Once you get to 16, you're sort of an esoteric A to D LAN. This particular A to D converter which we now have the kit is you can exercise and design win is 8 to 20 bits. So you could make it a super fast 8-bit converter, all the way up to a 20-bit converter that's slower bit but extremely accurate.

Finally during the quarter, we introduced Deca Technologies, I won't go into it. But again, for Deca technology is starting to make micro back-end assembly technologies that allow us to make bricks of chips that hook directly together with our packages. That is done before. If you saw any cell phone in half and take a look at the cross-section, you'll see that in order to make cell phones as thin as they are today, you're literally looking a little brick of silicon with chip stacked up and together with VGA and Chip Scale Packaging technologies.

The name of the game for Deca Tech that makes it different is they are using SunPower technology in order to do this. When you use ordinary technology, as the industry has as of today, you're in effect using expensive fab equipment, $4 million machines or more and doing a fab operation. So think about the fab, level of fab, it's $30, $40 per wafer per [indiscernible] to create these connection technologies. With SunPower technology, SunPower -- when I left SunPower, they were making a 6-inch diameter wafer for under $5. And that's 2 orders of magnitude cheaper than the equivalent wafer make with integrated circuit technology. And they have to do that to compete in their the market, but what it means is we have own technology for making interconnect on the silicon and cheap silicon.

This will enable a whole new generation of silicon interposers for example, that allow you to have silicon chips on silicon mini-print circuit boards, at costs that become affordable. That's the name of the game for DecaTech. We launched the company, we expect them to get first revenue this quarter. Did they get revenue last quarter?

Unknown Executive

They got internal revenue with us.

T. J. Rodgers

Okay. So we paid a little bit last quarter to make some of our first products. This quarter, they should get the first revenue from external company. And finally, Avago, sued us -- a year ago, over our ONS sensor, basically think about the center of the BlackBerry phone thing you put your thumb on. Our technology was different. I said it was different at that time. I said [indiscernible] that we get no merit that time. Our strategy was to minimize the expense on the lawsuit until it evaporated. Last quarter it evaporated. They perpetuate by mail. Okay. We're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Pitzer.

John Pitzer - Crédit Suisse AG, Research Division

I guess, Brad, can you help me understand, when you look at the TrueTouch business in the December quarter, the breakdown between sort of tablet and handset within the revenue, and then as you think about Q1 in the implied guidance, I guess can you help me understand what kind of seasonality do you now expect to see in that business versus some of the one-off issues you talked about relative to tablet ramps?

Brad W. Buss

Yes. So I think, what we said, I mean, we went down as we expected, right, with seasonality. And then the tablets were the big piece of this, right? I mean, we haven't split out the specific [indiscernible] but we said tablets are to run around 10% to 15% kind of above this number. We did run at that and again we're -- in Q4, we benefited from the HP thing. Remember, I was talking kind of, it's about an $80-ish million number that we were hoping that get resolved. We did. They were a very good partner and still remain a very good partner. So that's gone, but also the other tablet revenue that we had is gone as well. So it's a big chunk of the impact, and like I said, we've got really good pipeline of stuff, but unfortunately, it's not till the second half of the year. And I'm sure you guys will ask Norman those questions. So we expect to go backwards again. And as Norman and T.J. will talk about, the Gen4 is kicking ass. It's probably at a run rate better than where our Gen 3 runs. And again, the designs are coming in the second half, and I'm sure Norman will tell you how he expect it to be a record in the TrueTouch revenue in the back half of the year again.

So I look at it as just a transition and nothing new, right? It's all about the sell-through. And we're in a shipload of guys and we just got to make sure it's the right guys in the right phones and we continue to broaden the base.

John Pitzer - Crédit Suisse AG, Research Division

And then T.J., you kind of pointed out the reference design with Nvidia. Can you help me understand how important that is? Do I need to think about reference designs with the TIO map and the QUALCOMM's Snapdragon?

T. J. Rodgers

Norm, why don't you answer the questions, what reference designs do you have in there for us?

Norman P. Taffe

Reference designs are an important aspect. We do have reference on actually on the Snapdragon QUALCOMM as well. I think, I still consider them frankly a little bit secondary mostly targeted toward the tablet space including the Nvidia. So there's up and downs on that. I think what T.J. was mostly trying to emphasize is that I think there's a lot of [indiscernible] there's a lot of confusion over that. There's a little bit of what I call over-aggressive marketing of integrating touch. Just slightly, say the least. The fact is, that model has been around for a long time. I've forgotten that CS, but our original palm designs, way back on those phones, have used exactly the same model. We put the algorithms on the host and used the touch controller at the side. The point that was -- I think that you're trying to emphasize is that reference design, we worked very well in that same environment. In fact, Gen4 is probably the best chip there is, I think, for sure the best chip there is to use that because of the high-voltage externally and we can operate algorithms on the host.

So to an aspect of it, I think to be fair, the biggest handset guys still do their own designs, but represents very important as well. They can get you energy and broader base. And so we hope for both.

T. J. Rodgers

I need to just talk for a minute on integration of touch into the processor. So we had the discussion with Nvidia, but the fact is our touch cost to Intel processors. And basically, any system that has touch in it, there is some processor inside that runs that system. Think about the description I gave to PSD 4. We've got analog channels that are custom analog channels that we want through 3 revisions for silicon, minute capacity variations between X and Y lines. We've got programmable, digital circuitry that allows you to add functionality, unique to your circuit. We've got a 32-bit ARM microprocessor that allows you to compute X and Y coordinates and takes statistics, get rid of that data. We've got an extra listening channel that allows you to get the signal, a noise signal, and then you can come in and use both analog and digital signal processing techniques to subtract the noise away from the signal. Then the machine calculates the X Y position of 10 fingers and sends it to the computer.

Okay, that is not going to get integrated in anybody's big chip because if you think about their big chip, they work for the last 2 years in the latest technology with the finest bandwidth in a logic only chip, try to get to a market first ahead of their competition. And the concept that they will take sophisticated analog microcontrollers, the memory, embedded flash memory, embedded static RAM and take all of that and somehow get it into the chip and create a;; the Y and P blocks only chip [ph] blocks because they're moving to a new technology.

Have you thought that [indiscernible] This will be more economic we've been working on for many -- for 3 or 4 years in a 0.13 microtechnology. This is often the fourth -- just doesn't make economic sense that anybody could or would even want to put a risk on their next-generation processor being late by putting in a 1 square-millimeter block, you can buy them on [indiscernible] It just doesn't make sense.

John Pitzer - Crédit Suisse AG, Research Division

I guess, guys, this is my last question. Back to Brad, just on the gross margin side. Is the gross margins variance that we're seeing all cyclical relative to the utilization? Or are there some pricing issues that we need to be aware of as well? And how long after you start reloading the fabs do you start to see the gross margin benefit?

Brad W. Buss

Yes, I would like -- as I commented early. I would say like there's no real ASP pricing issues that are having any meaningful impact. And if you get a little of the mix, it's flying around, the emerging tech was a bigger piece, obviously, right? But yes, I would say, John, if I look, I would say 2/3 of this is on the loading and then obviously, we have a certain amount of fixed overhead and as revenue goes down, the percent of that goes up so that impacts margins. And like I said, I expect, definitely to trough, and I think we can move up to our 58% to 60% target range, definitely near the bottom, hopefully, in the back half of the year, as long as the revenue, the revenue moves. And you can't underestimate the impact as we deal with the foundries, too. We get very good leverage out of that model. I'm very confident in that part of it.

We -- OpEx and gross margin are probably, obviously beyond the field of the design. We have a laser focus all the way up to my supervisor here, that we spend a ton of time on. So you're going to see very nice leverage in both of those.

Operator

Glen Yeung, you may ask your question.

Delos M. Elder - VantageSouth Bank

This is Delos Elder for Glen Yeung at Citi. I just want to ask 2 questions. First was in general, for the industries, I guess the SRAM market and USB. Could you maybe quantify or qualify the gross in 2012, your expectations there?

T. J. Rodgers

It is for SRAM?

Delos M. Elder - VantageSouth Bank

SRAM and USB.

T. J. Rodgers

Higher than last year.

Dana Nazarian

Okay. So this is Dana Nazarian. If we look at the first half of the year, as we stated earlier, it's looking like we're at or near the trough. So in the first quarter, we'll be flattish. As the year progresses, we're expecting to increase our market share with our new product introductions, and the fact that one of the biggest suppliers is exiting the market. So we continue to see prediction of improved market share. That combined with the macro bouncing back should make our revenues go up.

Delos M. Elder - VantageSouth Bank

Thanks. And then, finally on touch--

Unknown Executive

USB, on USB, I expect it to be [indiscernible].

Brad W. Buss

[indiscernible] USB is the division manager for what we still call DATACOMM, which has become the USB-only division. Question is, what is, what is USB growth going to look like in 2012 versus 2011?

Unknown Executive

So in 2012, we expect it to be flat compared to 2011. The primary reason is the previous generation, West Bridge, has been declining as you guys know. And that's going to be compensated by the USB in 3.2 going to pickup in the later half of 2012.

Brad W. Buss

So flat USB and low single-digit out on the SRAM. So this year, we expect those 2 -- we don't expect any loss in those 2 on the growth coming to PSoC's less aspect.

T. J. Rodgers

And again, I think, you guys, when you think USB you don't always include West Bridge. So like Badri said, you strip the West Bridge impact out, I think the USB is doing real well. And USB 3.0 really is on fire. From where we saw, the same point of the USB 2.0 introduction. So again that's one of the bigger growth drivers we're expecting in the second half, and that will continue well into '13 and beyond. It will take a couple of years to really ramp that whole product.

Delos M. Elder - VantageSouth Bank

And just on touch, when you talk about, I guess, where the industry is heading, we obviously see a lot of phones with the marriage of merchant silicon with software at the manufacturer. Do you see that trend -- do you see that continuing or do you see it moving more towards your touchscreen controllers?

T. J. Rodgers

I'm sorry. Can you repeat the question?

Delos M. Elder - VantageSouth Bank

I guess my question is, what makes your flavor of touchscreen technology the one of choice in the future or anyone else's versus a holistic solution that marries merchant silicon with proprietary software?

T. J. Rodgers

Well, for me, I can say, I must say, 3 of the premises of merger silicon. I mean, I think in general, the reason that touch solution is superior that we have one that frankly dominated the market, whether it be ours or not, and of course we think ours is the best is that these are really sophisticated analog devices that would have to measure signals that are very, very -- in a very, very noisy environment. And they're positioned right -- right next to the display to be able to detect a very low capacity signal. They're not something that can just be integrated in any easy manner, if I understood your question correctly.

Christopher A. Seams

This is Chris, let me add. Our solution is exactly a marriage of very sophisticated software and a very sophisticated hardware. The fact that you have to discern between 1, 2, 4 and 10 fingers at the same time that you have to get rid of palms or understanding the thumb has 1 finger instead of 2 fingers, those are all sophisticated software routines that run on our solution, not on a host processor.

T. J. Rodgers

The preferences of the world is, as a matter of fact, of the demand is you can't give them a touch chip like PSD 4 and say, "There you are, knock yourself out." They won't even talk to you unless you walk in with a cell phone with the sensor on it, and show that it works. So they expect you to create the software. And in the reorganization, we've announced that earlier and we've actually promoted Alan Hawse to the EVP, reporting to me, of a new software division that is going to create the software for us because it's become such an important part of the solution. You have to ship but then again, there are some companies that our leaders had touch that have roots of unparalleled quality inside their company, and they like to bring stuff out early and have the advantage in the market for a period of time. But the rest of the world, they want to complete solution, which include a cell chip and it's not just a chip.

Operator

Steven Eliscu, you may ask your question.

Steven Eliscu - UBS Investment Bank, Research Division

UBS. So Brad, for Q2, you're talking about growth and restocking. Can you give us a sense, since you probably have, at least some visibility into that. How much of that growth is going to be restocking? In other words, is Q2 largely a restocking event and design wins really don't kick in to the second half? Or is restocking a secondary effect?

Brad W. Buss

It's a tough one. I mean...

Christopher A. Seams

Hey, this is Chris. If you look at the number Brad gave you which is on our channel partners distribution, their weeks of inventory now being below 6 weeks, I think 5.7 is the number he gave, that target that they have, we have is traditionally between 6 and 8. The question is how many weeks of that delta are they going to restock? Is it 1 or is it 2 during the quarter? Either number, probably on the overall run rate of things is going to be a secondary effect.

Brad W. Buss

Yes. Again, I'll remind you of our calling that our chip through key distribution don't show up as revenue. So to answer your question directly, we shipped the distribution this quarter and early next quarter. It won't show up as revenue until after that period of time when they ship because we don't credit revenue until the end of shipment as we know [indiscernible] trough definitely to our distribution book price is applicable.

T. J. Rodgers

And I think, Steve, whether you extend the supply chain between them and the customer, there's definitely got to be a level of inventory replenishment that's going on. Some guys have been impacted by the flood. We've heard handful of customers whine about that, that winds its way through, we're hearing for Q1. But specifically, our design stuff, I mean I would say, yes, the vast majority of design stuff is really kind of a Q3-ish kind of event. We're getting a little bit of list in a couple of product lines, but Q1 is mostly kind of a reset for those customer issues and then just really I think the start of what you'll see customers restocking again, assuming that the world doesn't blow up in Europe somewhere.

Christopher A. Seams

And we do have a very nice -- we have one of the most big design pipelines that we have seen. And even during this concern macro-wise, there's been no wind up in design activity. And whether it's Gen4, USB or SRAM, we have a dominant position in each one of those huge markets. And they all have very good end demand characteristics coming whether it's Q2 or Q4, or next line but...

Steven Eliscu - UBS Investment Bank, Research Division

That's helpful. And Norm, if you could put a stake in the ground as to how much you expect TrueTouch to grow year-on-year?

Christopher A. Seams

I know I've answered that question before. We're not -- Brad is cautioning me about providing any specific guidance certainly. What I can say is we still expect growth, although I think the tablets are a wildcard with what happens there. And there is really limited visibility right now. What we're confident of is we're going to be, back to setting records in Q3 and Q4, because we're seeing outstanding traction in Gen4 and that's where they get -- that turns into a significant revenue.

Steven Eliscu - UBS Investment Bank, Research Division

Well, let me ask the question a different way. If we just focus on smartphones, let's say they grow some percentage, will you grow in line more or less than that percentage?

Christopher A. Seams

I would say, I mean, we hope to be tracking it obviously. I mean a lot of it is customer dependent and how well the phones do, and those have been wildcards. Again, you've seen a lot of guys bob around. I think we're very happy in that area. Norm can talk more of it, but we're pretty much dealing with every single major guy in a lot of the Tier 2 guys and Chinese guys and Gen4 is getting kind of a traction. There will be some customers we've had no business with, we'll get business. I'm sure there will be a share shifts between all of us like we normally see. But we should be tracking pretty heavily in that area. I think we'll see a higher push into smartphones, the higher end of the smartphones, definitely with Gen4.

Brad W. Buss

If you normalize our touch growth rate to smartphones, it serves an available market in Q1 and Q2, we will probably grow slower in that market because we're in the deciding phase, very successful but nonetheless in the designing phase of PSoC 4 and with PSoC 3 less generation revenue is slowly rolling off. And in the second half, we now have been garnering assignments for -- since last quarter. Those design wins will come to fruition, we're getting big ones with the right people. And then second half, we should outgrow smartphones unit volume.

Operator

Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

Barclays. Just maybe starting with the impacts. I just want to understand this, Brad. When you talked about $78 million in Q4, you obviously ended up getting that $78 million. I think I heard you right when you said that the impact in Q1 is 22. So what I was trying to figure out is, is there other tablet impact outside of HP. Or does the rest of that balance the legacy business?

Brad W. Buss

Yes. Yes, we had another fairly large customer that we're expecting to go down pretty heavily, and I would say almost closer to 0. So quite frankly, I mean, we were in double digits in tablets. And I expect it to be under $1 million. So that 22, tablets, in general, is the vast majority of that. And like I'd said, we've got some very nice design wins, and they were all eReader tablet market, but it's really a second half event. So I expect the dry -- the well to be dry, which, again, I don't think is any real surprise or shouldn't have been a huge surprise. But unfortunately, it somehow never made it into your guys consensus numbers.

Blayne Curtis - Barclays Capital, Research Division

I got you. And then 'maybe a question for you or Norm. Just following up on touch. Even with this impact, it seems like the handset part is down a decent amount as well. Is that what you think is just normal seasonality? Or is there some inventory in the channel? Or maybe you can hit on pricing as well, whether it's the impact of units or is there pricing or share in there as well?

Norman P. Taffe

I think, on that side, it's mostly a combination of seasonality, and then frankly, the -- we're in most of the top guys, except for one particular leader. Those top guys also have had a little bit of a struggle. So you see some down numbers from them. We're seeing -- we're being hit by that as well. Outside of one vendor in Korea, most of them, I think, saw some softness, and we've seen that in the programs we've run I would say, going forward, we are really much broader than we used to be. And that one thing that Brad sort of commented last and I'd like to reiterate is, with Gen4, and actually even Gen 3, there's a couple of holdouts we've had in top 10 that moved over, and I think you'll see them start to ramp in the back half. But in the first half of this year, we've seen slowness in the main guys outside the #1 that we've been in.

Brad W. Buss

Just to put it in perspective, we could be shipping revenue to north of 75 different customers, right? Not SKUs, customers, exiting this year. And then -- but then a lot of those customers, you have boatloads of SKUs, right? So to my point on the broadening of just what we've done in touch, but also Gen4, because one of the big things the customer base is seeing is we are, in fact, the leader in the user interface revolution, right? Whether it's CapSense, whether it's touch, whether it's the FingerNav, which obviously has its ups and downs, but we're seeing traction, and trackpads, right, which Norm can talk on. There's no other guy that's doing that whole suite, and there's no one the has programmable interface on all of those like we do. And we're going to have the path of further integration on that. So we're getting a lot of the attraction, as they set in, at the right levels in the company where it's more of a system architectural level. And we're going to continue to focus on that.

Blayne Curtis - Barclays Capital, Research Division

Got you. And then maybe just a quick clarification, Brad. The utilization is going up and Q1 margin is down. Do you take the utilization charge in the current quarter or when the product flows through?

T. J. Rodgers

Generally, in the current quarter. I mean, again, the margins, even though the utilization is going up, that will be kind of later in the quarter as we build the wafers for Q2. But most of it, the margin impact for Q1 is going to be on the overhead. There's a fixed amount of overhead that's in there, and it has been increasing with DecaTech, by the way. So the way we run our fab is we have separate P&L, and we account for it. It hits revenue. At the company, in effect, it hits revenue by shipping wafers through our product line. It subtracts all of its gasses, square feet, insurance, rent, all power bill, all that, the president of Cypress -- the manager of Cypress Minnesota salary. And then they ship these wafers at a pre-agreed price, like in a foundry. They don’t have a P&L. They don't report to you. So it's an internal P&L you don’t see. If they lose money, which means they're underloaded, their revenue went down and their overhead stayed relatively same. If our fab loses money, as an internal P&L, that loss is divided up on a pro rata basis and given to the product lines that do report to you, VCD, MPD, et cetera. And therefore, it shows up realtime in the quarter as a loss. That's not true for foundries. We have a fixed price at foundries. And that's one of the benefits, and today, in the downside, one of the benefits foundry is that we're buying it to get incremental cost. On the flip side, when things turn back up in the third and fourth quarter, and we're jamming wafers in our fab. Our fab becomes very, very cheap, and they have a profit. And they actually spread out that profit back into the product lines. We see this report in realtime as well.

Brad W. Buss

So I think where you're going, you can expect a margin increase in Q2, in Q3 and probably up through Q4. If, again -- obviously, a big if on the macro, if it doesn't blow up then, the revenue and designs come in like the customers are telling us. But I'm fairly confident we can get back up to that range of our gross margin targets because again, I expect our revenue to be running back up the old Q3 levels and beyond.

T. J. Rodgers

I want to make one comment on gross margin. Our standards incorporation is 60% to a 40 gross margin. And we've been between 56% and 60% for the last 6 quarters. And we dribbled down a couple of percentage points, and that bothers me. They alluded to the fact that we're working on gross margin intensively. The last time I talked about gross margin was with few of the members of our Board of Directors, yesterday. And I exposed them to a 75-point plan that we have working on gross margin, and it includes getting better power rates in the plant in Minnesota, et cetera. 75 different areas we're working on. I am confident that we can get our chip gross margin back up to and even a little bit above 60%. There's another factor that we'll have to figure out how to report. Our module business, which includes ONS and trackpads, is going to grow from sub-$10 million to $20 million to $30 million this year. And the model for the -- our module business is just different. You can have like 35% gross margin, 15% SG&A and have 20% profit with lower gross margin. And then if that module business grows up to be $25-plus or minus million, it will have some percentage point dilutive factor on the chip margin. And we will come up with a way before the next meeting to figure out how to let you know if our chip business is healthy based on that dilutive factor.

Operator

Doug Freedman.

Doug Freedman - RBC Capital Markets, LLC, Research Division

RBC Capital Markets. Brad, you mentioned starting to see some traction on PSoC 3 and 5. Can we get some color around what the design kits and downloads are looking like for -- to give us some visibility on how those design wins are going?

Brad W. Buss

Dinesh, why don't you take that.

Dinesh Ramanathan

Sure. Doug, this is Danesh Ramanathan from the programmables division. So as T.J. mentioned earlier, we introduced Creator 2.0 into the marketplace, and this was announced and introduced to the general customer base in the November timeframe. And since then, we've seen over 2,100 downloads of Creator 2.0. In the same time, we had, in that quarter, over 1,700 downloads of Creator 1.0. So you're seeing a significant traction on the new piece of software and the old piece of software that we have put out into the marketplace. In addition to that, we have over 10,000 PSoC 3 and PSoC 5 kits in the marketplace as well since we introduced PSoC 3 and PSoC 5 products to the end market. This quarter, we did over 1,700 PSoC 3 and PSoC 5 kits into the marketplace as well. So that should give you a reasonable amount of color on our presales metrics into PSoC 3 and PSoC 5. It's actually, we are looking at being 3 quarters ahead of where PSoC 1 was in terms of all the presales metrics that we've been looking at so far.

Brad W. Buss

And again, like I said, it was the core PSoC, which has 1, 3 and 5 in it, right, did well. And I expect it to be flat to slightly up in Q1, which historically, it would tend to go down with seasonality because PSoC 1 is -- it's fairly heavily consumer-oriented. So you can't start flipping twinkies yet, but it's going to be going up multimillions over the next quarters and years. And I expect that to be -- business to be as big or bigger than PSoC 1 was. And again, I'm going to be retired before that thing peaks because it'll have a 10-year run rate as at a minimum.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Now that you have a fairly good suite of design wins in those products, can you give us some idea of what type of ASPs we're looking at for the 3 and the 5?

Dinesh Ramanathan

The current ASP basically range anywhere between $3 and $5, which is kind of interesting given that it's 3 and 5.

Brad W. Buss

Good marketing. For starters, if you think PSoC 1, 3 and 5 and that being dollars, you're not more than 20% off.

Unknown Executive

The beautiful thing with 3 and 5 is, it's tough for you guys that it's not a lot of big, sexy design wins and huge volume guys you can track. But we're getting into some fantastic end markets that as a company we've been under-penetrated. We could cross sell the portfolio more, and they're very sticky. They're a lot longer, design win cycle. But once you're in, they can go for 3 and 5 years versus the PSoC 1 kit, up every 6 months to a year.

Unknown Executive

And so we've implied the reorganization, I'm not sure that we've explained it. CCD, the Consumer and Computation Division, has been run by Norm, it's been "PSoC division". We have divided it in 1/2. So now CCD is our touch division, touch, CapSense, sort of the rocket-ride market we found with PSoC. We've created a new division, programmable systems division, PSD which Dinesh Ramanathan runs. And that focuses only on those devices. One of the problems we have in the company is if you're chasing a $10 million per quarter touch, cellphone touch, win versus 8 wins in industrial heartland of America, all of which will add up to $50,000 each. You can only imagine what's going to get the attention. But we now have a separate division, PSD, that works on platform PSoC and has started to build that, one brick at a time to build the franchise. The old Data Communications Division, that's the Badri that I introduced earlier, is now USB-only. So we have focused on that. We're going to report memories, all of PSoC together, despite the fact this runs with 2 different -- totally different business models inside the corporation. And data comm being USB, we're going to report that way in the future but we have reorganized to address the -- what we call the platform PSoC market.

Doug Freedman - RBC Capital Markets, LLC, Research Division

And any plan to split the reporting out on the CCD side into the 2 pieces?

Brad W. Buss

We're looking at a bunch of different things right now. The answer is no. Internally, we look at it, and we scrutinize the power of the penny. The fact is that the platform division, the heavy lifting of building these $50 million chips with derivatives being $10 million, and then takes 5 years to dig out design wins, one at a time, but once you've got it, it's a business that's like Great Wall of China. It's not going away. But the P&L suffers short term from it. Then, the separated touch division takes derivatives of this PSoC that are streamlined, once the PSoC scores a victory, some sort of past application and make smaller chips and sells them by $10 million. So the touch division is very profitable. The PSD division is near breakeven. And the 2 of them together are nicely profitable. But when you think of it as a distortion and report them separately, because they really are PSoC and they reflect the 2 halves of it. What it does do is put our nose on it that we need to build that legacy and put energy into it every single quarter internally.

Operator

Raji Gill

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

Needham & Company. A few questions on the TrueTouch business. I'm kind of struggling that you guys will be able to even kind of grow in 2012. If based on the mash, if I take out -- if tablet's are going down pretty dramatically that would imply that the smartphone portion of the touch business would have to grow in over 15% to 20% on a revenue basis, and that will mean the units will have to grow even above that 30% to 40%. So maybe if you can walk me through what's happening there. Is there -- are you losing share or any customers? Are you not tied to the right customers? Any details there to get me more comfortable in the TrueTouch?

T. J. Rodgers

Well, I think, the way I understand the premise is I think the -- we see the tablets going down, that is a Q1 and first half issue. I don't think we're saying that -- actually we have some significant eReader and tablet designs, as Brad indicated, that will ramp in the second half. And I don't -- as much as we're-- there's obviously a lot of cracks about the core sell-through of most tablets. I don't want to portray that we don’t see to that important market. In fact, we just introduced a product, a Gen4 version, for that market. We're going to actually introduce a bigger one shortly. We have good plans in that space, and I think over the next couple of years, it will actually become a very significant place. We'll grow in that. So I don't want to -- I think you may have taken that too strong, I think. But it's definitely a big impact in Q1, and it was a significant change there. But it isn't -- it doesn't infer if that is gone -- a big backwards for the whole year.

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

And just for me to clarify. I mean, you said that the tablets are going to be about -- we're about 15%, right, of TrueTouch revenue in 2011. You've exceeded over the 250 range, so that would imply that tablets were about $40 million. So if you're going to take a big hit in Q1, even I show some growth in the back half of the year, it would imply that the smartphone business would have to grow significantly just to be flat on TrueTouch.

Norman P. Taffe

Yes. We'll all see where the dust settles. I mean, you do that correctly. We are going to underperform the market in Q1 and Q2. We are in the design win phase of PSoC 4, and we will have a rocket ride in Q3 and Q4, and net-net for the year, we'll be lukewarm. You're absolutely right.

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

Okay. And now on the gross margin, the CCD gross margins fell like 300 basis points sequentially, they've been flat for most of '11. I guess, I mean, I understand increasing the factor load and utilization, but are you saying you're not showing any ASP erosion at all -- in the touch market at all? What makes you confident that the CCD gross margins might get back up above 58% like you did in third quarter?

T. J. Rodgers

What was your ASP degradation in 2011 versus 2010? We look at this to 2 decimal places.

Brad W. Buss

5%.

T. J. Rodgers

Our ASP rose in this 5%, so if you -- for the year, 1.25% per quarter. So if you've ever been in the memory business, that's like laying in the sun on the Riviera. So what we're going to do to improve the margins and get them back up to 60% is, we're going to go in on a cost reduction program that, like I said, the 75-point program, I would say 1/2 of that effort is in CCD, and we're a very cost-conscious company. We know how to do this, and we haven't done as complete a job in our PSoC touch products as we've done, for example, over the years in our memory products. And we're going to -- we're just going to beat the hell out of cost on these products and live with that. Definitely, we've been eyeing price attrition going forward and get our gross -- chip gross margin in that position be back up to 60%.

Brad W. Buss

Yes. I think, you guys all have a lot of paranoia on the ASPs and stuff has moved, and there's different segments of it. I think the good thing from our end of it, we didn't play in the top end as much as some of the competitors. I mean, there's been a lot of price erosion in that area. And obviously, the tablet thing, we're all aware of the multichip to single chip, right? So I think, to T.J. and Norm's point, it's not a big issue. We generally have manufacturing cost that offset the erosion, anyway. But specifically, if you look at CCD right now, don't forget you've got clocks and USB in there, right? And they all went down, and they're both pretty good margin business, especially the clock. So you get a little bit of mix issue in there. And also Norm is the biggest part of the fab, right? Because Dana has been moving to UMC, right, with a decent chunk of the SRAM, and a lot of Dinesh's stuff goes through fab, foundries, I should say as well. But he takes a little higher impact of that absorption. And again, I agree with these guys. I think if we look at where we're going, whether it's ASPs, the cost reductions and then the mix issue because Norm really benefits when the fab is cranking and the foundry mix moves up. He is the guy that filling most of the foundry stuff. He really gets the benefit when the revenue kicks in, which again, you'll see all that stuff moving up in the back half of the year. I'm very comfortable with that. He tracks up pretty closely.

Operator

Ruben Roy

Ruben Roy - Mizuho Securities USA Inc., Research Division

Mizuho. Brad, just to follow-up on that. Was there any impact in Q4 on the CCD margin from the inventories, the touch inventory stuff?

Brad W. Buss

Yes, but nothing outside the norm.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay. And then for Norm, on touch for this year, are you starting to see any material penetration of your capacity into like good industrial or anything else that could help contribute to growth?

Norman P. Taffe

It's a good question. We will get some folks in handset as we get to the markets. There, absolutely, is a breadth of penetration on their markets. In the end, of course, the numbers of handsets seems to dominate. But there are some secondary markets where we've done extremely well, like digital still cameras, which are meaningful contributions. And relative to at least handsets is people still spend so much time talking about them. Areas like white goods and automotive, we've had quite significant success, obviously, those are much slower growth market, but have much more stability. And I would say given the fact -- like in automotive, in fact, we actually have automotive touchscreen products that makes us unique, and we're dominating that design and space. So those are markets that aren't as flashy short-term, but long-term, I think, it should be significant to our bottom line.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Great. And then just finally, no one has really touched on the communications biz as it relates to memory. Obviously, we've heard about wireless infrastructure being slow. Any commentary on that market specifically as you look out into Q2? Any signs of resurgence in spend there?

T. J. Rodgers

There was just a general slowdown that's continued on through the last 3 to 6 months. As we looked at it forward then go into the lunar new year now, we are, as Chris mentioned earlier, we're now starting to see a pickup in backlog. It's flattening out. I think it's going to turn around right about now. But again, it has to do with the macroeconomic. Spending is down in those sectors, and it's not regionally-based. It's pretty broad, Europe, China, Japan, et cetera.

Operator

Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Wedbush Securities. I was wondering -- you talked about Avago and the litigation that you have. I was wondering if you could maybe give us an update on the litigation, which you signed. There has been a lot of press releases going out between the 2 companies.

Dana Nazarian

Betsy, this is Dana. I'm glad you asked that because I wanted to clarify some potentially confusing statements by GSI. To set the record straight, initially, we filed our infringement contentions against GSI's SigmaQuad products. And as we were going through the pretrial deposition process in Q4, we came to discover that even more of their products were infringing our patents. So towards the end of November, we expanded the scope of the case to include not only the SigmaQuad products, but also other products, specifically GSI standard Synch and ZTB products and the proprietary SRAM that they sell to their largest customer. Recently, they have stated that we didn't expand the scope for our case, and that's simply not true. So perhaps GSI legal team ought to check the official infringement contentions to ensure that they understand the true scope of the case. But we are proceeding forward. The trial is set for March, and we expect to get on when.

Betsy Van Hees - Wedbush Securities Inc., Research Division

That was very helpful. Also, I have another question on SRAM. So you said that growth would be greater in 2012 than it was in 2011. I was wondering if you could help us out a little bit more. Is growth going to be kind of the same that we saw in the beginning of this year? And then -- or is it going to be more of the slower trajectory up in the back half of the year? I was wondering if you could just kind of help us for modeling purposes. And the second question within that is gross margin. How should we be looking at gross margin? It did decline a little bit in the current quarter, but how should we look at gross margin, particularly in the back half of this year?

Dana Nazarian

Okay. Let me answer the first question a different way. We've been gaining market share in the SRAM space for the last 20 years, consistently. We typically picked up 3 to 4, potentially 5 percentage points per year, and I expect to do the same thing this year. So when you asked me about revenue growth, I can tell you our market share is going to increase by about the amount that I said. You got to multiply that times the total market, which is massively influenced by macroeconomics, and I'm not an economist. So I'll let you to do the math on that one. But we should track with the economy and continue to gain share along the way. On the gross margin side, I was also impacted by the fixed overhead and a reduction in revenue the fourth quarter, less than norm. Going forward, I think that impact will be less. We always see a price decline in cost per bit in memories, and we think with the initiatives that we're doing, we'll be able to at least offset that decline and hold our margins and inch them back up a little bit.

Operator

Vijay Rakesh.

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

Sterne Agee. I'll make up for that. I just want to go back to the handset side again. When you look at 2012 -- I was just wondering, you see handset business picking up in the second half you said. What do you think the touch market share would be as you look at 2012 versus 2011? Does it go up, down? And if you can give some more color there.

Brad W. Buss

I don't know if I can give it. I mean, we think we're at 25% to 30% play, and we think we'll be at again this year.

Dana Nazarian

If you look at the units of touch products, I think we feel very comfortable we're #1 in units shipped. And obviously, to my earlier comments, Atmel has been bringing up higher dollars with some of the higher ASP phones and also from some of the tablet stuff, which I think is going to be more of a headwind for them really versus up. We think we'll maintain where we're at. As a whole '12 versus' 11 thing is tough because of the Q1 thing. We're more focused on the second half and where we're going to exit the year. I think we'll be in a stronger position with Gen4 and the Gen5 that will be coming out as well.

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

Got it. And do you see kind of the pricing plans in 2012 kind of -- on the handset side -- we know the tablets, but on the handset side, very similar to 2011? Or what do you see there?

Dana Nazarian

I think for the overall market, I'd say they are going to be very similar. I do think kind of -- Brad sort of alluded to earlier, I think we're going to have an uptick in our ASPs just because we're taking more of a high end with Gen4, I'd say. And traditionally, we've been a significant supplier in the midrange phones, and now we expect to complement that with a more input from the high-range phones. And what I think I'll about ASPs, maybe kind of T.J. alluded to it. Cypress is very good at tough markets. And I think CapSense is a little something we kind of forget about. As an example, we came in, we had the best -- very good solutions but when the market are really tough, pretty much everybody left except for a lot of low-priced players, and we've dominant market share. And touch as in handsets can be a competitive space. I think we're as good as any company there is to compete in a very competitive space, and we expect to continue to hold share because of that.

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

Okay. And lastly, Windows 8. What are you seeing out there? Are you seeing OEMs working on it? Do you see any meaningful traction in the industry with Windows 8 tablets? And what are your expectations on Windows 8 tablets and units like for the year?

Dana Nazarian

Okay. As far as units, for you, I don't really have a good number to give you. I'm starting to see some interest. I think we're all a little skeptical now in the tablet uptake and what it'll deliver. But I think it's another opportunity, and we've designed Gen4 to be an excellent solution for Windows 8, from an, technology perspective. It's a target. We're seeing a lot of design opportunities there. I can't count how much real growth we'll see through in the second half of the year. One thing I would tell you that I have quite confidence is the trackpad side of Windows 8. On trackpads, it's less talked about in the Windows 8 stuff but Windows 8 requires multitouch gestures on the trackpad. And it's one of the things that's allowing us to gain a lot of share in trackpad space as you move to ultrabooks and click pads and multitouch gestures. That's really our strength, and it's one of the things that's driving some of our success in that space.

Operator

John Vinh.

John Vinh - Collins Stewart LLC, Research Division

Collins Stewart. Sorry to beat a dead horse here, I had a follow-up from Norm on tablets. Norm, you said that you expected tablets to grow, and I just wanted to clarify. With your second half weighted expectations with pretty meaningful significant e-reader tablet opportunities, are you expecting tablet revenues for you guys to grow in 2012?

Norman P. Taffe

I don't think we specified it all, either one way or the other, so I don't recall saying that. And I really don't want to -- as Brad indicated, we don't want to break it out even further, as we're trying not to actually give you guidance for the whole touch. I didn't want to do it at a lower level. I don't know, Brad, if you want.

Brad W. Buss

Again, we're focused on the second half and the exit versus the year-on-year because it's going to be a tough comp, with where things are at in Q1, John.

John Vinh - Collins Stewart LLC, Research Division

Okay. And then just on the overall market for smartphones, what sort of unit growth expectations are you guys kind of looking at for the overall market in 2012?

Christopher A. Seams

John, it's Chris. I think you're right on one of them, but the industry reports for smartphone growth is around 30%, and that's what we're targeting internally right now.

John Vinh - Collins Stewart LLC, Research Division

Okay. And then my last question...

Christopher A. Seams

That's unit growth, John.

John Vinh - Collins Stewart LLC, Research Division

And just last clarification, Brad. You've mentioned at the beginning of the call that OFN [ph] would impact some of the seasonality that you're seeing in Q1. Can you clarify what's wrong with that? Is that an end customer demand issue? Is that a product transition issue?

Brad W. Buss

I'd say it's really more of an inventory demand balancing thing. And it's specific with our large customer in that area. And again, it's kind of like a one-time event. I expected it to kind of level through and then we shouldn't see any big hiccups exiting Q1.

Operator

Sujeeva De Silva.

Sujeeva De Silva - ThinkEquity LLC, Research Division

ThinkEquity. Can you quantify in DCD how much the legacy fall-off will impact the first quarter?

Brad W. Buss

A couple of million bucks, and it's Good margin stuff too. That's the other thing I probably forgot to mention on the margin. It's part of the mix issue that I mentioned, but that stuff is extremely high margin. And we're hoping to get a lot more of it but it's very lumpy, and it's hard to predict. You guys would buy it, and they come in and they go.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Okay. And then on TrueTouch, just to understand how the Gen4 design win percent has been. I know you talked about 20% to 30% market share. And how many customers you had exiting '11 versus 75 expected by the end of 2012?

Brad W. Buss

Just on the -- from a design traction, one of the metrics we track very closely is kind of design win [ph] and to compare Gen4 to Gen 3. And of course, Gen 3 was, I think, one of the most successful products in our company's history. Gen4 is already tracking 30% ahead in terms of design wins than Gen 3. And I will also say we're tracking it at a higher end of the design space, more in the smartphones space than the Gen 3. so both of those are extremely encouraging, part of the reason you hear the confidence in the growth there. And what was your second question?

Sujeeva De Silva - ThinkEquity LLC, Research Division

The expectations of 75 customers at the end of '12? Where does that compare to by the end -- at the end of '11?

Brad W. Buss

I think it was like 52, somewhere around there.

Norman P. Taffe

Yes, about that size gross.

Brad W. Buss

I mean, it's good growth. To Norm's earlier point some of the new smartphone guys and new tablet guys, a lot them are starting to branch out into these other areas. I mean, we're hoping to see another few hundred million units start coming in into the touch landscape up for grabs over the next couple of years as you proliferate and everybody wants an advanced DUI, a big focus for us.

Operator

Sandy Harrison.

William S. Harrison - Wunderlich Securities Inc., Research Division

It's Wunderlich. I'll make it quick, guys. I just wanted to ask from a competitive landscape on the touch, there's really 1 or 2 other folks that are really in the business. There's been talk that some of the merchant guys outside of Apple might start doing their own. How do you look at your competitive landscape? Are you're seeing any of the merchant solutions -- excuse me, any of the captive -- I apologize for the confusion, the captive guys moving more towards it? And then on the opposite of that, with Apple being obviously one of the largest captive guys, any movement on seeing some of those come and move towards merchant?

T. J. Rodgers

So on your the first side, the flat answer is really no. I think there's been a couple of guys that tried a couple of years back, and they're some our biggest customers. And I think -- one thing, and I'm glad you you've kind of reiterated this, there's 3 guys. While, there's all kinds of entrance to take part here and there, in the end, the technology is complex enough and the requirements strictly on this whole solution have really kept it to be the same main guys. And we don't see that changing going forward. That's really where the battle is. And the second part of your question, I would say we expect that to happen, and we don't know when. And we expect that were in the best position. We've had success there, previously. And it's hard to -- and today, we provided touch screen in an iPhone, iPod devices. I don't know, but certainly that's something we would like to see happen.

William S. Harrison - Wunderlich Securities Inc., Research Division

And on that, is it more of a -- and I guess the timing I understand, but on the catalyst side [ph] , is it more a technical issue? Or is it a more religious issue?

T. J. Rodgers

Well, I cannot answer that one.

Brad W. Buss

Technical. I told you earlier that we were a quarter later than the market really wanted for PSoC 4 because we decided to reengineer a bunch of stuff. So one of the 3 leaders in this field, we were shipping -- we shipped 300 million PSoC 3 units or more. We have a huge market of PSoC customers. When you're palm is wet and you lay your palm down, it's perceived as 4 fingers, and that's not okay. We've modified our hardware and software in concert, over time, with all of that information. The #1 design team in the company is the 100 people working on PSoC 4 and brought us the innovations I described, and our competitors, that I respect, do likewise. The point is if you're a new company, if you're hot dogs, maxim, and, "Oh, we got good analog design", you can't learn all that stuff by not being in the market. You can't design a chip, and say "I've got smart guys there, so I'm just going to get into your market." Like all the companies, over the years, that have decided they're going to get in the microprocessor business and blow away Intel. So it's a standard GE thing. If you're not #1 or #2, you're at a big disadvantage. We got out there early. The reason we got out there early is that we had -- not because we're a great touch company. Because we have PSoC and PSoC allowed us to take the parts, get it on the chip and design it a bunch of touch sockets and start to learn. I'm not going to underestimate new entrants into the market. And perhaps, the entrants that were suppliers to the leader in touch, Apple. But it is going to be very, very difficult to get in. It's like so many -- equivalently saying, "I'm going to go do SRAMs and kick their butt". Well, we've been there a long time and learned a lot. We've got smart people, and it's difficult to enter into the market if this place stays safe [ph].

T. J. Rodgers

And then again, we can't underestimate the patent issue. There's a lot of stuff going on, and we're very, very, comfortable in our position. What we see applying for these patents and the patents keep coming, rolling in the door through by our nice little government every quarter. So you'll probably see some further action in that area this year as well. We have how many patents in the pipeline?

Dana Nazarian

200.

Brad W. Buss

We have 200 touch-related patents in the pipeline. We have 25 already issued, 200 more in the pipe. And they'll be coming out at the rate of tens per quarter. We're not -- I'm not making an offensive statement, but our lawsuit against GSI is very rare. Once per decade, we find egregious use of our intellectual properties. But the fact is we're going to be -- us and I would say Synaptics and perhaps Atmel are going to own the bulk of the intellectual property. So there is yet another barrier that companies are going to have to get over. That doesn't mean we're going to go cowboy and start shooting. But eventually, when this becomes a mature market, intellectual property is going to have to be dealt with.

Unknown Executive

But it's already getting rate that the customers of #1 or #2 issue on pretty much every interaction we have.

Operator

Jeff Schreiner.

Jeffrey A. Schreiner - Capstone Investments, Research Division

;

Capstone Investments. I'd really like to pick up on the touchpad market here. I mean, you talked about a captive market of 3 people kind of in the handset and tablet market, yet there's only really maybe one Taiwanese competitor who's trying to be up and coming. And one real captive competitor in the touchpad market. Are you going to be chasing share gains given the guidance you ONS and the growth you see there and if it's going to go 2012 or just benefiting from new units? And can you also just talk about maybe the traction you've seen in terms of announcing a couple of your first touchpad wins in the marketplace?

Norman P. Taffe

Yes. It's Norm. We definitely expect to see share gains in the trackpad space. And I think as you pointed out, we announced, wins at both Lenovo and Dell, and we are expecting further penetration on those accounts. And we expect to add others of the top OEM for the list. And that transition to the click pads, in particular. And the multitouch features is helping us very much gain share.

Jeffrey A. Schreiner - Capstone Investments, Research Division

Okay. And just talk about maybe possible impacts from the litigation. How would that work out? and talking to other SRAM players, it seems that Cypress is in the best position being a leading vendor and obviously, sometimes probably having a dual or sole source that may be at the same customer as GSIT. If there was a favorable outcome, do customers move to Cypress, right away? And does that maybe give a real lift from SRAM in the back half of the year?

Norman P. Taffe

No, let me clarify some things. The current proceedings we're going through right now are the ITC. ITC blocks the importation into the United States. So that would have had a definite impact on GSI. But let me be clear, our chase, it's about IP. It's about IP contentions. It's about respecting IP. The customers have several SRAM vendors, and they can choose any vendor they want, and there are several SRAM suppliers still.

Operator

Charlie Anderson.

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

Dougherty & Company. Just a real quick question for Norm. I wonder if you could maybe give us sort of a geographical flavor on where you're seeing the design wins on Gen4, if there's any adder color there. and then, in terms of who you're taking market share from, I wonder if you expect any kind of a response on the pricing or anything like that for them to try and get the share back.

Norman P. Taffe

So Asia, Europe and North America, anywhere on the map there's a handset guy, Charlie. We're engaged with every top guy, Charlie. And I guess, relative to response, I mean, certainly, we're kind of say we expect response. I will say, I can tell you that the responses we have seen so far has convinced us that nobody is really very close to the capabilities we offer in Gen4. And I will encourage you all to be very skeptical of virtual phrases, effective phrases like that. We think we have some very unique capabilities in Gen4 customers like in the -- T.J. mentioned the 10 volts, and by the way, I want to emphasize. We generate the 10 volts. I think it's not viable to us in the customer handset. We put 10 volts into the chip itself. So we generated on-chip, the listen channel capabilities that's unique. And then one thing that we had talked about together these days, we call Tx-Boost, which is a hardware feature into the device that we just announced, because it requires also sophisticated software to enable. That is effectively like CDMA like encoding technology we've taken on to the device, which allows us to integrate much faster and effectively increase the signal noise yet another 3x because we integrate quickly, and we can find very small signals encoded in the noise. So it's -- we're really -- a significant advance, we believe, and everything we've seen so far as a competitive response, we think, falls far short.

T. J. Rodgers

You asked the question about response with ASP, dropping prices. That's one of the nice things about this market. In the RAM markets, for example, if you have a set compatible parts, 3 or 4 people make it, that's a viable response. But our response is, "Okay, if you want your cellphone to become noisy and inferior to your competitor's cell phone, then probably don't need to buy our parts for $1.25. You could buy somebody else's parts for $0.85, knock yourself out." So you can't respond to the functionality on the consumer device with price.

Unknown Executive

The handset maker will not put their multi-hundred dollar bomb at risk or their end customer for the price differential that will be offered, Charlie.

Unknown Executive

Yes. In the old days, when these things were north of $3, $0.25, $0.50 could make someone think. But I think, Charlie, where the ASPs are, that's really not even in the ballpark and the performance and the ability to take the cost out of the bomb. As you go more to the sensor and lens [ph] in that, it's far outweighing it. And again, people underestimate the support. The company values that, after performance, it's the support, and it's your IP. It's a whole solution. I mean, we have hundreds of guys making the chip and hundreds of guys supporting these customers. And the odd pricing thing is great. Go ahead, let's see if that guy can support you the performance through there. Guess what, a few of them including a company's talking a lot, those are coming back because they're somewhat short on performance and support. And it isn't worth it for $0.05 or $0.10..

Operator

Christopher Danely

Christopher B. Danely - JP Morgan Chase & Co, Research Division

JPMorgan. Just 2 quickies . So Brad, I think you said this inventory, is at about 5.7 weeks. Do you remember how low it got in the '08, '09 downturn?

Brad W. Buss

Not off of the top of my head, but it was probably, around that level or maybe slightly less. But the big point that I threw it, it was 20% down from Q4 of last year.

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Got it. Okay, great. And then just one last one or 2 part are on touch. Do you expect any issues? Or are we having any issues with your leading handset customer in the touch business? Or has that been fairly stable through the tablet issues?

Christopher A. Seams

Chris, this is Chris. No, we expect that they'll continue to be our leading customer going forward.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Great, and then one last one. Given all the trials and tribulations in the tablet touch business and the lack of success with any non-Apple tablet has had out there, can you give us a sense of how much you're sort of baking into your tablet touch business for the second half?

T. J. Rodgers

The rough kind of ratios that Brad talked about and kind of where we think things will go in the steady-state, I think, unless you want to distinguish it, there's a lot more opportunity in the eReader space. I wouldn't say -- I think, the tablet space is still very unclear, how much significant changes there. But those are the rough numbers. Over time, maybe they'll grow, but it's still a bit hard to tell this year.

Unknown Executive

The large screen format, whether it's an eReader or a tablet, it might be [indiscernible] and cars. In total, we look at it as a very good opportunity in the area we expect to lead in. So again, the Gen4 for tablet is kick ass, and it's getting a ton of recognition. Hence, again, the confidence we have in the second half of the year in the larger screen format.

T. J. Rodgers

Okay. Thank you very much for joining our Q4 '11 conference call conference call. We're signing off.

Operator

Thank you. That concludes today's conference call. You may disconnect at this time.

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