Cypress Semiconductor Q1 2007 Earnings Call Transcript

Apr.26.07 | About: Cypress Semiconductor (CY)
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Cypress Semiconductor Corporation (NASDAQ:CY)

Q1 2007 Earnings Call

April 26, 2007 11:30 am ET

Executives

T.J. Rodgers - President and CEO

Brad Buss - CFO

Paul Keswick - EVP, New Product Development

Chris Seams - EVP, Sales and Marketing and Operations

Dinesh Ramanathan - EVP, DCD

Ahmad Chatila - EVP, MID

Shahin Sharifzadeh - EVP, Manufacturing and Research and Development

Norm Taffe - EVP, CCD

Analysts

Craig Hettenbach - Wachovia

Tim Luke - Lehman Brothers

Srini Pajjuri - Merrill Lynch

Glen Young - Citigroup

Doug Freedman - Amtech Research

Alex Guana - UBS Warburg

Sandy Harrison - Signal Hill

John Barton - Cowen and Company

Tore Svanberg - Piper Jaffray

Michael Masdea - Credit Suisse First Boston

Adam Benjamin - Jefferies & Company

Louis Gerhardy - Morgan Stanley

Chris Stanley - J.P. Morgan

San Kamaladegi - B. Reilly and Company

Caitlin Wolford - Trellus Management

Rich Newman - First Capital Alliance

Presentation

Operator

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

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

T.J. Rodgers

Good morning. We have first quarter results to report this morning, good ones. We will go in the normal order. Brad Buss our CFO on finances; Chris Seams our VP of Marketing, Sales and Market; and both will go onto further information and then I will cover some highlights of the divisions and we will go to questions in about 20 minutes. Brad.

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Brad Buss

Thanks T.J. good morning. I just want to thank everyone for attending our call. As usual I would like to give you the standard statement that we will be doing a lot of forward-looking statements and we incurred you to make sure you look at the forward-looking language in our press release as well as all of our SEC filing. I will take actually a little more in depth look through Q1 since we had a lot of things going on in a lot of new items for Q1 and then I will give you guidance for Q2.

So our consolidated GAAP revenue for Q1 was $343 million. We exceeded our guidance due to record revenues from the SunPower division which I think as most of you know included the results from PowerLight for the first time.

Revenue increased 19% sequentially and 38% on a year-over-year basis. SunPower continues to grow strongly and accounted for 42% of revenue which was a new record. The semiconductor revenues totaled $201 million and they decreased sequentially due to normal Q1 seasonality some continued softness in base stations and the divestitures of certain product lines.

Our PSoC revenue was better than expected in a normally slope Q1 quarter, and customer designs and the customer account continues to grow strong, sequentially. Our adjusted GAAP operating income totaled $34.5 million for Q1, which increased 35% sequentially and 294% year-over-year. However, we had higher minority interest in tax expenses for Q1 of approximately $11.3 million which is up $5.2 million, sequentially, thus our adjusted GAAP net income was $28.2 million and resulted in diluted earnings per share of $0.16. This was an increase of a penny from 15% in the prior quarter and 129% increase year-over-year from $0.07 in the first quarter of '06.

On a GAAP basis we posted a net loss of $2 million resulting in dilutive loss per share of $0.01 and that compared with the $0.09 earnings in the prior quarter. Lot of first time charges in here related to purchase accounting for PowerLight that totaled over $18 million of which obviously we would have been on a normalized Q1 profit where we have been historical and we also had, higher minority interest related charges.

Other non-purchase accounting PowerLight related charges for Q1 included, standard stock-based comp of approximately $13 million, amortization of intangibles of $3 million. We had an impairment loss related to the termination of our synthetic lease of $7 million and we wrote-off $5 million of un-amortized board bond issuance cost. And they were really offset by the $11 million in gains from the divestiture of the SVTC and our SMaL Camera business unit.

The consolidated adjusted GAAP gross margin for the first quarter was 40.2% it was down from 42.5% in the previous quarter due entirely to the fact that SunPower was higher percent of the revenue mix. The adjusted GAAP gross margin for the semiconductor business was 48.2% it remained unchanged from the prior quarter. Our average corporate ASPs remained strong and increase began sequentially in Q4 and are up year-on-year as we continue to be very focused on our proprietary and programmable solutions.

Moving over to the OpEx side or adjusted GAAP operating expense in dollars increased by $7 million compared to last quarter entirely due to the acquisition of PowerLight. For example OpEx in the semiconductor business actually declined $1 million on a sequential basis and R&D was at $48 million and is at the lowest level in 7-years. And I do expect it to decrease by another $6 million in Q2 due to the divestiture of the SVTC.

On the balance sheet I think you might have noticed if you had a chance that we put in a new supplemental schedule to try to lead some of the breakout between the semiconductor business and SunPower, so I hope you find that useful.

Looking at cash our total consolidated cash and equivalents was $498 million. The semiconductor cash balance was $283 million and it decreased from Q4 because we called to convert and we spent $180 million on the old convert, and we receive proceeds of about $64 million related to the two divestitures that I have already talked about.

You will also notice that the restricted cash balance, that we historically had of approximately $63 million is now gone as those synthetic lease that we terminated that I have already explained use that up and we put the assets underlying that lease back on the balance sheet.

Turning to inventory you see a big increase in inventory on the balance sheet of about $59 million, about $50 million of that again is due to the PowerLight acquisition. The increase in the semi business is about $8.5 million and it was mainly due to a standard change and some builds in MID and CCD to meet customer profile that has been lower than the target that we like to keep. The majority of the semiconductor inventory growth was in die bank and wafer and finished goods actually declined in the quarter, and remains at a two year lowest percentage of inventory, we’re keenly focused on inventory.

Inventory in the channel with our distribution partners decreased by $14.2 million, or 16% sequentially, so obviously we look to see them start stocking up over the next couple of quarters.

Accounts receivable is $186 million, up $22.9 million from the previous quarter, and again SunPower increased $31 million due to the PowerLight acquisition. While the semiconductor business we actually decreased accounts receivable by $8.2 million. Consolidated DSO decreased 3 days from the prior quarter to 49 and then semiconductor business again decreased their DSO down to 47 days.

Turning to CapEx, it was approximately $67 million for the quarter of which $47 million was for SunPower and $20 million was for semi business. And like I said we also added approximately $50 million into fixed assets from the termination of the synthetic lease of which we already have the cash restricted, so there is no cash out what have we laid it to that transaction.

Depreciation in the first quarter was $27 million and that included $5.6 million for SunPower, you'll be seeing depreciation for semi business declining as SunPower’s depreciation increases due to their additional plans. So, if we look at the capital structure a lot of stuff went on in Q1, I think you all know we regained the $600 million, 1.25% convert in February, we paid out $180 million in cash, we issued 33 million shares. And there was really no impact on the fully diluted share count since the converted and dilutive for over a year.

In March we issued another $600 million convert; this is 1% coupon and it's due in September 2009. And we used 100% of the net proceeds of $571 million to implement an advance share repurchase. We did repurchase 25.2 million shares in late March and expect to retire another 3 million to 5 million in Q2. And the ASR will be fully complete in early June.

Now, so since the EPS is calculated on a weighted average basis for the quarter, you saw a very minor impact in Q1, but we will get the full benefit of the ASR in Q2 and as such I expect the basic share count to drop down to around 153 million and the fully to be around 162 million that will obviously fluctuate, but option exercise and our stock price, which is most of you know has climbed up nicely throughout the year.

A little more on the new convert that it is very different from the old one. Our new converts net share settle convert and it also have the call spread that will limit future dilution upon the final settlement. The conversion price of the convert is $23.90 and we’ll have no share account dilution up to those prices as we will be able to pay all of that back in cash.

And above $23.90 we have the ability to pay the difference in cash or stock. We’ve also entered into a call spread which was already paid for from the net proceeds that I’ve already discussed of the convert. That will limit our dilution exposure up to a price of $27. So, with as such we will have no net settled share account dilution up to a price of $27. So to put in a perspective that if our stock moves up to 30 bucks on the time we need to settle, we’ll obviously issue some shares under the convert who will receive proceeds from the call spread and when it's all said and done its only going to be 2.5 million shares of dilution. So a vast change from the old convert and I think very favorable from an equity dilution standpoint.

The new convert we have about $1.5 million in quarterly interest and the bond amortization is about $1.2 million on a going forward basis. You will also notice that SunPower data convert $200 million is due in 2027, its puttable in 2012 and their conversion price is around $56.75. So, adding their 200 or 600 on their consolidated balance sheet we now see a convert balance of $800 million.

Just to remind you in Q1 the Board also authorized that $300 million cash buyback. We have not spent any of that since we have been pretty much in locked-up of the variety of the transactions that have gone in Q1 and we do intend to use that money as market conditions dictate. Our basic ownership of SunPower is approximately 70% and on a fully diluted basis it was 64% and declined from Q4 due to the PowerLight acquisition. And we continue to own 52 million shares of SunPower which crossed the new record of $3 billion as of yesterday.

So, I am now going to turn over to the guidance. We are looking for consolidated revenues to be in the range of $345 million to $360 million. We expect the revenue from the semiconductor business to be down sequentially really due to the divestiture of the SVTC and the end-of-life of our pseudo-static RAM business, which totaled approximately $12 million in Q1 revenue that will not repeat again in Q2.

Okay. And most of you, I don’t believe, have adjusted your models for that so you need to take that into consideration. If you normalize Q1 for those divestitures that won't repeat, then our semiconductor business would be up on an adjusted basis at about 3% to 6% driven strongly by CCD and PSoC, which I think you saw in the press release we are anticipating to set a new quarterly record.

Some part of margins was expected to be in the range of 22% to 23%. Our semiconductor gross margins are going through a transitional quarter, which I will explain in a little more detail, and I expect them to be around 45% to 46%. And it's really two things impacting. That is: one, is the [FCCs] going away. That was an approximately 90% gross margin business. So there is a 1.3% gross margin impact there. And we are also impacting maybe a percent or so impact of fixed costs absorption in the factories as we rebalance some of the inventories.

Overall, we are very confident in our ASPs, and our customer direct margins that will remain fairly modest for all the divisions for Q2. And we do expect to move up closer to the model in the back half of the year as we continue to grow in our higher margin proprietary products and we begin loading the factories again. So netting all that down I think we are expecting consolidated fully diluted adjusted GAAP EPS somewhere in the high 14s to around 16% - I am sorry $0.16.

CapEx for the semiconductor business, my prior guidance, was $70 million to $75 million in the prior year I expect that go down to probably $60 million to $65 million in 2007 as our strategic initiatives are driving our CapEx lower. So, we are quite pleased to see that. May be you will get your guidance for CapEx on this call.

Tax rate should be around 8% for semi and 13% for SunPower. I have given you the share count already, and obviously that could move around depending on with options. And obviously a lot of these changed depending on the customer order patterns, product mix, and the manufacturing absorption.

And in summary, I just want to add to what T.J. said. I think we had a good quarter. A lot of our strategic initiatives we have been executing ahead of schedule and we are going to be driving some very good leverage in the model I think going forward.

So, thanks again, I’ll turn the call over to Chris.

Chris Seams

Good morning. Let me cover the usual indices for the first quarter, at this time concentrating solely on the semiconductor business. Our revenue split by geography; Asia was 45%, followed by the Americas at 30%, Europe was 16% and Japan was 9% of sales. No single customer was greater than 10% of sales. We shipped 150 million units during the quarter.

The pricing environment as Brad talked about was stable. Our corporate ASP actually increased slightly from a $1.22 up to a $1.25. We have a book-to-bill of $1.03, just above unity. And our semiconductor backlog climbed to $235 million, that’s a six-month backlog.

We entered the second quarter 87% booked and the booking patterns three weeks into the quarter looked normal.

Finally, PSoC momentum continued as Brad talked about. We broke the 4,000 customer mark, double over year-on-year. And we set yet another design win record on PSoC, up 40% year-on-year.

Let me turn the call back to T.J. now for some more details.

T.J. Rodgers

Some details on finances and other events in the divisions, and then we will go to questions. First I’ll talk about CCD, Consumer and Computation; remind you that is the focused division for the corporation's charter. It includes PSoC programmable clocks, where we are number one in the world in programmable clock, and number two overall in USB and WirelessUSB where we are number one in the world. Our solutions are also programmable. So, it is a micro-systems-based division.

Its revenue was $76.8 million. That was down 4%, that’s normal seasonality for the first quarter, nothing special. The revenue was 22.4% in Cypress and our PSoC customer base as Chris said went up to 4,200 customers. We are now driving in and I am personally involved in customer expansion initiatives on several fronts. And we are starting as a new company under Norm to focus more over management methods on driving design wins and revenue with the PSoC family that we have.

CCD margins were 43.8%, that’s lower than we wanted. The primary impact there was we are starting up Cypress Semiconductor to run PSoC and there is overhead associated with that. We have a group there doing technology transfer. And since we are running PSoC it creates all of those charges and [we] want to get manufacturing in the CCD divison.

CCD contributed $2.1 per share. That was up from $0.011 in the quarter. We are expecting gross margins and contributions in earnings both to go up next quarter.

On the product front, we introduced -- I'll use the jargon to turn the CapSense module in the PSoC Express. That is important for our business. CapSense are the buttons that are soft buttons where we type something. It doesn’t have a button or a switch on it and a capacitor touch controls the machine, radio or the washing machine, whatever you run.

Capacitor sensing switching is a big deal. It's taking over in almost all consumer products, a sort of flagship product where everybody became like the scroll wheel on the iPod, where the system is controlled by running your thumb over a circular wheel, without any buttons exposed to get water into them.

What we did was put CapSense in the PSoC Express. PSoC Express is our software where we do not need to write code. You go in and you select buttons and you say what they are supposed to do and the software create a capacitor sensing module for you and does all of the hardware and software programming we acquired in PSoC. We think that’s a big advantage relative to the competitors that pioneered in that CapSense marketplace.

We also added, and again -- part of in the jargon, two more ways of doing capacitor sensing. The way capacitor sensing works is that your finger has a capacitor and when you get near a button, the capacitor can sense by its circuit. And we added two ways, called Sigma-Delta, and successful Approximation Cap Sensing.

The reason that matters is that as you know, those buttons are more touchy than mechanical buttons where you are pushing things down and making a hard contact with your finger. And these two new methods of doing capacitor sensing increases signal to noise ratio. That’s a big deal to make capacitor sensing more stable like mechanical button switch, which is one of its shortfalls.

I'll point out that we did both of those new ways of doing it without making a new chip at all. We simply worked over the last couple of quarters taking new resources that were already in PSoC and rewiring the hardware with software and changing the software to bring those things to market very quickly.

Two interesting design-wins; SignalONE put out a very popular smoke detector. It has a recorded voice on it. It's popular for children’s rooms where the voice tells you there is smoke in the room, it’s time to leave and go outside. And you can pre-record the voice and the brain, if you will, of that smoke detector [works] with PSoC.

Another example of sort of a nice volume, but bizarre kind of application for PSoC is there is a helicopter, toy helicopter, and it uses WirelessUSB and PSoC to control a helicopter. And if you think about the number of radio-controlled toys out there and if we can get a PSoC in a significant fraction of them, it’s a market that we have never even seen before at Cypress.

By the way the last design win includes the PSoC for controlling the helicopter and the WirelessUSB chip for connecting helicopter to the controller. We’ve now combined those two chips and what we call PRoC, Programmable Radio-on-Chip, which is a PSoC to control within it with a radio I/O, so you can connect to it.

This is a product that will do basically anything that you want to monitor or control remotely going in the future. We think that wireless version of PSoC is going to be a big business for us.

In terms of WirelessUSB, our wireless technology, we’ve had some 3 million unit mark. I think that’s important because we acquired two companies in 2000, companies named Alation and RadioCom. The key people that helps build a radio are here. And we've finally got that thing up and running.

What we’ve done is, created a communications radio in the 2.4-gigahertz band, it is very much more robust than other radio that connect things. If you have a wireless mouse right now, you are using a 27-megahertz connection. You can only hook up two mice. The mouse from one cube can interfere with the mouse from the other cube. This thing being a digital radio, a very close cousin of secured military communications in the technology, allows 1,024 channels an absolutely interference immune communication.

So, we are starting to make headway in the mainline products at HP and Sony for example for connecting wireless Bluetooth.

And finally, our wireless effort which we launched in 2000 and starting to turn into the volume for us. Turning to the Data Communications Division, they did $32.5 million for the quarter that was up 16.5% quarter-on-quarter better than we expected. And we expect to remain flat in the second quarter. They had a gross margin of 66% for the quarter and typical high margins for that division. They contributed $0.041 to our earnings that’s up from $0.021 and we expect them to remain flat in earnings at the higher level next quarter.

There is one important product announcement there, we have a chip called Antioch, it is a chip that goes in cell phones in high volume. As you know, people are downloading song onto cell phones, if you’ve ever had the experience of downloading, for example, CDs with the song onto the cell phone/MP3, you’ll know that it takes about 10 minutes to do it from a computer; it's very annoying.

The Antioch chip, its primary purpose was to speed up that download. We now have to get that download done in a minutes that is 10 minutes 10 times faster. And furthermore, during the time we are downloading the Antioch chip actually acts as a traffic cop and moves the MP3 files through its into the phone and therefore the phone itself the processor in the phone is unencumbered and can do other task. And the other way of doing is the phone translates and moves the data across and goes out of action during the transmission. Because of the easy transmitting data in the cell phones and PDAs, this is going to be a very high volume chip for us.

I would like to point out that our Data Communications Division which is a high margin divestiture of communication focused in the 2000 timeframe is now switching its talent towards cell phones which are one of the three platforms that the company focuses on cell phones, PC peripherals and [3M] market platforms.

In Memory and Imaging we did 84.7 in revenue that was down 7.6%. The down revenue came primarily from reduced volume and that was primarily due to the base station industry going through one of its slowdowns, revised inventory and then it takes a while to adjust it. And they were 24.7% of our revenue for the quarter, and we expect them to go down again in the fourth quarter, for two reasons; unit demand will go down a little bit again in the fourth quarter and at the end of life are pseudo-static RAM. So they all are lower revenue, in the other hand the gross margins were 42.7% in the first quarter flat with 43% in the first quarter. So our SRAM, ASPs are stable we are looking at a unit base slowdown. Now they contributed $0.051 to earnings down from $0.081 because of the unit slowdown. Nonetheless, the MID group which is now turned into a cash cow for us was contributed more to earnings per share for the corporation than the other two semiconductor divisions.

Our Cypress SRAM group is also changing its focus and introduced a new product and non-volatile static RAM this is a static RAM which acts like a static RAM which we are going to make. But when the power goes off, its storage charged in a capacitor and actually dumps the charge in the capacitor to keep the chip live long enough to store every bit of data in the SRAM. Both in SRAM which doesn’t lose data, so in effect in an electronic black box. And we introduce that products non-volatile SRAM bits up for 10 times per bit with static RAM bits so forth.

Finally in the SRAM group we sampled a very high speed 300 megahertz Quad Data Rate static RAM, synchronous static RAM it goes in the high end which is in routers. The 72 megabit version sells for 100 bucks. And it’s a reason that that our ASPs in the SRAM group were actually higher than ASPs for the corporation and remain relatively stable this quarter.

Turning to SunPower, SunPower had huge jump in revenue up 91% quarter-on-quarter, $142.3 million, because of the acquisition of PowerLight. I described PowerLight last time they are the Berkeley-based Company that I described is the back tail of the solar industry, for example, last quarter they turned on a dedicated 11-megawatt of power plant in Serpa, Portugal, they announced the largest project ever in North America and Nellis Air Force Base of 14-megawatt installation. The Portugal installation is 52,000-panel that’s enough for 8000 homes.

But we now have some real muscle worldwide muscle to deliver our product and capture the half of the value that happens after we make a panel. Solar panel cells was something like $4 a watt. And, the installation of a solar panel on your house is high as $10 a watt but the average is about $8 a watt. So the acquisitions will allow us to establish a brand in the end market and to capture the other 50% of the value.

SunPower’s margin were 29% for the quarter up 26.5%, they contributed $0.091 to our earnings that was up 5.1% in the prior quarter. Brad already mentioned, that was SunPower trading around 58 right now, the value of the 52 million shares we own is at $3 billion. We have all that fun talking about what we’re going to do with that. SunPower issued $200 million convert 1.25% converts. They’ve already passed their conversion price on that using the $200 million to build plants and grows at least they can.

On the retail front they also put the solar cells into a solar division, 650 homes in Roseville, California. These are homes where the solar is integrated into the roof and becomes part of the mortgage and very low cost. This is the largest solar neighborhood in the world.

Finally, in other corporate developments, Brad already talked about the $600 million convert, the only thing he didn’t mention is that there is only 1% coupon and that’s where we have gotten some very affordable money. Second point is we taking out of that debt and our balance sheet was enabled by the $3 billion SunPower asset. So, we in effect were able to take the SunPower asset and lever it without selling any of it to get out 25 million shares of the stock out of the market last quarter and other three to five this quarter.

Our Silicon Valley Technology Center [8-K/A] Fab 1, [8-K/A] Cypress processed R&D is gone we don’t own it, I drove by it this morning and they have got a new tombstone up there, they are non-independent company owned by venture capitalist and we have got 53 million in the bank. Big change there is while we are doing process development, its now a contractual process development which we do on a variable cost basis by renting that fab as appose to owning the fab and dealing with the depreciation and capital expenses.

We sold their SMaL Camera on image sensor business in Boston, it was no longer aligned with where we were going with our new programmable product strategy. We announced the deal with UMC the foundry, the second largest foundry in the world. The SRAM business is becoming an attractive business particularly that the big synchronous static RAMs with very high performance.

And therefore we do not desire to terminate being in that marketplace with 90-nanometers the last technology we developed internally. We did a deal with UMC and a 65-nanometer technology. We will be chasing up extraordinarily high performance synchronous static RAMs later this year into the UMC foundry again and the normal more initiative that makes for variable cost in the SRAM business. So we can write up and down in cost as that market goes through its fluctuations.

And finally, we did a deal with HHNEC to license our 0.13 micron CMOS. We have a lot of technology in the company, both process and design technology. And we are beginning to enter into deals where we will bring in revenue. We had a good experience with the Silicon Valley Technology Center, building up our revenues to a very high gross margin 10 million bucks a quarter. So in process technology, which is much more difficult to understand itself than design technology, therefore, we are going to try to replicate the success of Silicon Valley Technology Center over the next few years and build up a business in licensing our non-proprietary IP, not PSoC or any of the core functions.

With that, I will turn it over to questions.

Question-and-Answer Session

Operator

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

Craig Hettenbach - Wachovia

Yes, it’s Wachovia. Brad just a follow-up on the R&D front which you mentioned it was near 7-year low. At what point would you expect to have to start to increase that R&D on the semiconductor side of the business?

Brad Buss

Let me answer that question. We are not. The decline has to do with basically divesting Silicon Valley Technology Center and all the process R&D people in it, on the design side, how many designers do we have Paul?

Paul Keswick

400.

T.J. Rodgers

We have 400 designers. So we have plenty of designers to build the products we need to go forward. So right now, the word in the company is hold your R&D costs flat. Let the company grow making the percentage of R&D go down and produce some new products we need on time. So right now, the R&D picture is, because of no more, more is going to be good for a while.

Craig Hettenbach - Wachovia

Excellent, and then on the linearity to the quarter. Chris, you mentioned that orders April to-date have been good. Can you just talk about, how orders progress as you went through down to Q1?

Chris Seams

Yeah, we track an eight quarter running window of how orders book in both this quarter and the next coming quarter. And I would say that for the first quarter they were about in the middle to the upper half of the envelope. Not telling any records, but slightly positive. Net shrink continues into the second and the third quarter.

Craig Hettenbach - Wachovia

Thank you.

Operator

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

Tim Luke - Lehman Brothers

Thanks. Lehman Brothers, I was wondering, maybe T.J., if you had any broader comments about how you perceive the current environment in terms of demand levels on the semi side? I was also just wondering for Brad, on the gross margin front, you mentioned that obviously the semi will be lower now. How should we think about the shape of gross margins through the year. So, I think you also mentioned that some of the elements that we're taking a little bit this quarter, to some extent one time. Thank you?

T.J. Rodgers

Let me hear Chris comment on semiconductor market as a global statement in the markets for us looking like a bee. Pricing environments, they are a little bit stable, but there is certain spots like cell phone base stations, for example some cell phone manufacturers that are softening their business right now, slowing down unit volume. Chris.

Chris Seams

Hi Tim. T.J summarized well, breaking out, if you look at handsets, while they have had their troubles in low end for end market handset demand. We really don't play there very much, what we’re participating is in the mid and the high end. And everybody is vying for position in those higher margin handsets. So even though that market remains okay. Our penetration into TI with both PSoC and Antioch in USB type applications, is where we see growth continue this quarter and also into the second half of the year.

Tim Luke - Lehman Brothers

(Can you allow) Chris, to give us a framework for how much is PSoC out of CCP these days, just a range?

Chris Seams

Brad or Norm has that number.

Tim Luke - Lehman Brothers

Alright.

Brad Buss

Yes it's about a third of the sales of CCD.

Tim Luke - Lehman Brothers

Maybe Antioch by the end of the year. How big is that going to be of the datacom side? Or maybe some framework for registering the great the potential of Antioch and West Bridge?

Dinesh Ramanathan

Hi this is Dinesh Ramanathan. I manage the Data Communication Division. It would be in the order of about 10% of the division at that time.

Tim Luke - Lehman Brothers

Net by the end of the year?

Dinesh Ramanathan

Yes.

Tim Luke - Lehman Brothers

Thank you.

Chris Seams

And let me finish answering on the other major market segments where we play. Base stations, we have come on several times, we don’t see that easing through the second quarter, but we believe in the third quarter we should [see] some recovery.

Networking remains what I would call stable and healthy in the second quarter, no major ups or downs. Consumer, we are seeing the usual cyclicality, I will say the front half of the year is a strong low half. Usually the first half is fairly weak and for us because of our product portfolio predominantly PSoC and wireless USB. We are enjoying some strength in that end market.

And in the PC market where we haven’t played very much with the divestiture of PC clocks. But we are seeing, as T.J. talked about penetration with wireless USB, and we see that continuing through the rest of this year.

Brad Buss

Another comment on Antioch business, T.J.?

T.J. Rodgers

The absence of a dollar number on which my bonus will or will not get paid on this year. 10 million bucks for the year. Almost all of it happening in the fourth quarter, then that will establish the run-rate for 2008 and 2009. We’ve already got follow-on products launched.

We believe connectivity and for the cell phones with a chipset is going to follow the same pattern that connectivity into the personal computer with the North Bridge and South Bridge chipset had in PCs and has had for a couple of decades actually. As a matter of fact, that’s why we named our part West Bridge, because it is analogous to the North and South Bridge in PCs. I believe that this business and then obviously I'm looking far forward in making a rough statement, but there are solid designs behind a lot of what I say. I believe this business will turn into the next big business with Cypress and USB size business.

Tim Luke - Lehman Brothers

Great. Did you guide the networking down was it sort of weaker our inventory correction you mentioned?

T.J. Rodgers

The outside of base stations, I got it flat.

Tim Luke - Lehman Brothers

Correct. Margins?

Brad Buss

Margins for what?

Tim Luke - Lehman Brothers

I think just a broad comment on the gross margin how we should think about it for the second half of year, something like it was lower this coming quarter?

Brad Buss

Yeah, I think, as I mentioned, I mean the one big chunk obviously the SVTC right, that’s a 0.3 some of the absorption. I would expect the absorption to pick up. I think our growth in the back half of the year, we’ve been saying all along to the DT, South West Bridge more the proprietary. You are obviously going to see that probably a little earlier with PSoC hitting the record in Q2. So, I do expect them to move up closer to our target in the back half of the year.

Tim Luke - Lehman Brothers

Excellent. Thank you, so much.

Operator

Thank you. Our next question comes from Srini Pajjuri. You may ask your question. Please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Hey Brad, first a clarification on the share count. You are going from 183 you are taking out about 28 to 30 million and then you are guiding for 163. I'm trying to understand where that difference comes from. Is it all share price or is it something else?

Brad Buss

It's just a dilutive option impact obviously, the stock moves up pretty handling. Right this year-to-date, so that puts more options, either you could exercise it or move in that account. Like I was telling you the basic is based on around 153.

Srini Pajjuri - Merrill Lynch

Okay.

Brad Buss

It will bobble around a few million on a fully diluted basis.

Srini Pajjuri - Merrill Lynch

Okay. Got it. And then just a follow-up on the gross margins. Brad to get to your target model, is it pretty much a function of product mix or do you think there is more cost that you can take out in the system?

Brad Buss

I think mix is the big thing. And obviously as you are seeing in Q2, we got the loading impact. The mix is number one and then the more as we move to select fab partners, assuming we get high utilization of our current fabs, we get that additional leverage from that. But it’s truly really the mix of the product I mean having the (inaudible) starting to move benefit. That's surely below our margin line. Just pretty straight forward with the mix lookout.

Srini Pajjuri - Merrill Lynch

Okay. And then finally, on SRAM Chris, could you give us a little bit outlook in what do you think will happen to the pricing environment as we look into the rest of the year?

Chris Seams

Srini, I am going to let Ahmad Chatila will answer that question for you and to the memory division.

Ahmad Chatila

Hi Srini, this is Ahmad. The pricing, I would say we have to be competitive it's pretty flattish for a soft market and base stations. The margins I would expect them to be flattish throughout the year.

Srini Pajjuri - Merrill Lynch

Got you, thank you.

Ahmad Chatila

Pretty positive.

Operator

Would you like to go to the next question?

Brad Buss

Yes please.

Operator

Thank you. Glen Young, you may ask your question and please state your company name.

Glen Young - Citigroup

I am from Citi. And I guess it’s a question I don't know whom for actually, but I want to get a sense as to the implications of moving the SRAM business to UMC. I guess starting with the ramp, it looks like a moving business from in house to outsource. What are the implications to the model from doing that?

Ahmad Chatila

This is Ahmad again, Head of the Memory and Imaging Division. Glen, what's going to happen is our operational expense is going to be more competent in the long run. And as you can see, what we are going to do is the high-end synchronous SRAMs where we can get very high speed. And we expect the gross margins actually to increase. Because we are going to be on a very advanced technology on 300 millimeter wafers. And we have got some competitive pricing, surprisingly competitive pricing from UMC.

Glen Young - Citigroup

That's good. And how long is that pricing for? Do you have a longer-term orientation to that?

Ahmad Chatila

Ask again?

Glen Young - Citigroup

How long do you have that pricing for? That's something you have negotiated for a long period of time.

Ahmad Chatila

Contractual and it's over the next three to five years.

Glen Young - Citigroup

Okay. And the second question I had, may be for T.J., just an update on the cost cutting initiatives. In the quarter, you sold to SVTCM, the small camera business. What's last, if you can be explicit about that and what other elements of the plan are last to go?

T.J. Rodgers

We are in the end-of-life phase with static RAMs. We are supposed to be just making a onetime shutdown we want to sell our inventory and take care of our customers, gracefully on the way out.

There will be a couple of more transactions over the year, but right now just streamline the company further, but right now we are in the middle of some negotiations and I prefer not to comment.

That makes sense. Okay just one other question on royalty stream you are going to get from NEC. I imagine it’s fairly small at this point. But what's your sense as to how that royalty business can grow looking into the future?

Shahin Sharifzadeh

Shahin Sharifzadeh, I run the manufacturing and technology, I am responsible for the IP business, mainly the HHNEC.

T.J. Rodgers

Shahin is the guy who engineered our successful ability to sell process module technology in SVTC and caused us not just to shutdown fab 1 and suffer write-offs and layoffs [told] us to put money in the bank. So we have asked him to replicate his success in technology licensing go ahead.

Shahin Sharifzadeh

Yes, first phase as you said is reminder of the first year we were basically discussing and negotiated an NRE deal. But in long-term our plans and the contract with HHNEC to get it streamed in terms of royalty on per wafer basis, so we expect royalty stream to continue the next 3 to 5 years at the minimum.

Glen Young - Citigroup

Okay, all right thanks.

T.J. Rodgers

Just to calibrate you, the SVTC business at the time we sold it was $40 million a year with high margins. We expect over a three year period to do as well in this other licensing business.

Glen Young - Citigroup

That’s helpful thanks TJ.

Operator

Thank you. Our next question comes from Mr. Doug Freedman, you may ask your question and please state your company name.

Doug Freedman - Amtech Research

Amtech Research. I guess if I could start with the convert that was just issued. Are there any restrictions on that convert that will prohibit you from recognizing or selling any of your interest in SunPower.

Brad Buss

No. There is obviously there is a lot of fundamental changing type of stuff in there. But we obviously put that together to make sure all of our options are always holding.

Doug Freedman - Amtech Research

Okay.

T.J. Rodgers

The convert had this non-standard timing of 2.5 years such that, as it expires and it settled prior to the November 2009 date when the tax restrictions on our fabs divestiture options open up further more if we do something earlier which is always considered, if we do something earlier along different lines. The party coming in would simply have to payoff the convert. You could either look that there is a non-event or you could look at it as a down payment because of prices either way.

Doug Freedman - Amtech Research

Alright, terrific. Any chance that, not sure if you mentioned that utilization in the quarter and what you think it might do in Q2 of your internal given that you are starting to move so much stuff off the foundries.

Shahin Sharifzadeh

This is Shahin Sharifzadeh, again. Talking about the fabs, our utilization in Q1 was in mid 80s we expect it to probably to be in 80s low 80 numbers. With the maximum products that we have we load up our fabs and keep them utilized.

T.J. Rodgers

So the reason for our softness in the gross margin and in that [lane] is about staying soft and that means in the mid 40s where we aspire to be in the low 50s, is primarily that we are in a mode where the unit volume, not the pricing but the unit volume is not quite selling up fab for making each way for a little bit more expensive which impacts gross margin. We've also got as I said earlier, the greatest initiative where our growth will come out of the Chinese foundry at very favorable cost, but right now we’re making only a few wafers a week there in production and we’ve got 10 guys sitting around and watching the wafer. So the effective wafer cost coming out of there is high. A small increase in volume will bypass this problem very rapidly.

Doug Freedman - Amtech Research

Alright, terrific. Your outlook on the memory sector, I know that there was some work going on to try the end-of-life some specialty DRAM products that were very low gross margin? Can we get an update on how that’s going?

Ahmad Chatila

Hi this is Ahmad again. It’s going very well. As T J said, we have to take care of certain customers this quarter, but definitely by Q3 the number will be zero for that business.

Doug Freedman - Amtech Research

Okay terrific.

T.J. Rodgers

I mean we have two goals there; one is knock that inventory right off, and second thing is we do have customers they do buy other things from us, so we want to make sure that they have a successful ramp over to another supplier and we don’t leave them high and dry in their production.

Doug Freedman - Amtech Research

One last one for you if you could talk about diversification of PSoC, I know you mentioned a few big design winds there T.J. in the preamble? How is that going and, how do we think about the CCD business as far as the GM gross margin situation? It looks like you came in a little bit low where I was expecting it?

T.J. Rodgers

Well you and me both. Let me have to talk about GM in the future first with the Norm Taffe who runs a division, and then I will talk about PSoC diversification second.

Norm Taffe

Hi this is Norm Taffe running Consumer Computation Division. So on the gross margin side, part of the issue is as for as gross margin not coming up as much as we expected in CCD is related to what TJ accounted for earlier which is, as we ramping Grace a lot of the impact of cost that ramp before we can see it on the bottom line affect that gross margin.

We do expect the gross margin and CCD to grow sequentially for rest for the year, in part as we begin to supply significant quantities of Grace at lower pricing, PSoC in particular will have increased its margins. And then secondly PSoC continues to become a bigger and bigger portion of our sales, which has a further impact on the overall division gross margins in a favorable way.

T.J. Rodgers

With regard to diversification there are two dimensions of that. One is diversifying the markets we are in with the products we have got. I talked about the consumer product, the Smoke Detector, give another example of a big product is [Hebei] China.

Chinese have taken a normal bicycle that sells for $250. They put a small electric motor on it, that’s capable of running a bicycle at about 20 miles an hour. They put in 4 small lead acid batteries to create a 48-volt power supply, and then they put on brakes such as when you brake the bicycle it actually generates power and charges the batteries.

So that very ecological, economical form of transportation has taken off to the 10 million unit on its way to 50 million unit volume in China. We have achieved a 21% market share by basically programming our PSoC chip to be a 3 phase electric motor controller that controls the power transistors that connect the batteries to the bike. So there is another example of diversification.

If I had to name a place with PSoC it’s going to be the biggest hit in China. Because they are all about time to market and cost and PSoC is ideal for that since we create products by changing software and not by changing assets and running for silicon and debugging products.

Another example of diversification is turning on is we read about light-emitting diodes, [Creed], Lumileds and how light-emitting diodes are more efficient in creating light from electricity. You have read about some cities. I don’t agree with the philosophy of this that some cities who have decided to ban incandescent lights because the light-emitting diodes in fluorescent lights are now several times more efficient in luminance of light produced per watt of electricity consumed.

The advantage of light-emitting diodes is that you have colors, you can have red, green and blue. And therefore by driving colors separately, you can create custom colors, for example, you can create a warm white light which is difficult for fluorescent lights for example to have that cold kind of bluish steely cast to them, or you can create a light where you can move your finger on its lighter that change its color and lights already used like that out of Philips in Europe.

So, the point is the light-emitting diode companies are taking off and if you ask how do you drive a light-emitting diode, the answer is, you put eight ominous string and you run about 1 amp of your current through them, for a light that’s intended to produce light. You see up to 3 strings like that to use in three colors.

But we have already programmed PSoC to do that function. We already have software where you literally can put your finger on a touch screen and touch the screen on a color in a rainbow pattern that’s on the screen, and cause the LEDs to create a custom color exactly what you want. We are expecting that to take off.

So those are two examples of how we are getting hold in the businesses that are extremely interesting for us, because PSoC can solve problem quickly before the other guys can make a hard-wired chip to get into the market. That’s one vector.

The second vector, PSoC proliferation is, I talked earlier about taking the datacom division and stirring the talent. Considering we found that division towards our primary focus, datacom is also working on a PSoC chip, we call it Power PSoC, where we are still transistor people, so we are putting high-voltage multi-ampu transistors into PSoC.

And by the end of this year we will have just that that will allow us to control power directly without using extra components. And this will be particularly valuable in the Chinese market where single chip now can run the whole computer and power control first mount systems is got a motor in it. So we are just starting to learn about this stuff we are spending a lot of time on it. The unique this is there are only 7 PSoC’s that’s all of our. And all of the stuff comes from these chips that are so versatile they are sucking in all of these new and interesting markets. So, that’s why I have said earlier the focus of the company is changing from internal development of processes and chips to external leaning about markets and applications and getting into new businesses.

Doug Freedman - Amtech Research

Alright, if I could just ask that question in other way, when do you think you will have no larger than a 10% customer in the PSoC business?

T.J. Rodgers

It was there now are we not?

Brad Buss

We are not quite there yet, but we are getting pretty close there. At one day in a point I can't give is this quarter when we expect to set a record for PSoC in a traditional down quarter in Q2. Our top two customers will be less than 25% of our business. And a few and maybe a year ago, we had a much higher concentration and we continue to see that, that concentration goes up, all those customers continue to be strong for us, the rest of the business is growing faster.

Doug Freedman - Amtech Research

Terrific, great thanks guys, and keep up the good work. Thank you.

Operator

Thank you. Alex Guana you may ask your question and please state your company name.

Alex Guana - UBS Warburg

Exactly clear to me where did the upside for the quarter come from and with regard to the base stations softness you are expecting, is there any particular geographies, standard or customer that’s causing the disappointing results or is it widespread, thank you.

T.J. Rodgers

Big picture the upsides came from two of our three divisions on the semiconductor side, CCD and DCD both of which is better than we expected. The softness was in synchronous RAMs for base stations who want to elaborate further on that. That was pretty much across the board geographically and by customer base.

Brad Buss

That’s correct.

T.J. Rodgers

What we see in base stations is they are kind of complicated and they use high end products. So, the model is more like Cisco making routers and Nokia making cell phones. And what they do is they tend to buy their [com] in advance because their (com) is big and complicated. They go on a large deployment and then all of a sudden the dynamics in the end market change and they stop deploying. So that market is on and off. And what's happened across the board is not one company, it's basically they slow down deployment of cell phones, base stations in the market with six months now.

Chris Seams

And they got a little -- everybody got a little ahead of themselves with the market share they were all aiming for.

T.J. Rodgers

Yes, this one of those deals we have five players, each one of which is going to take 30% market share and then you end up having to rationalize at the end.

Alex Guana - UBS Warburg

Okay and then to ask it again though, specifically within DCD, what was it that was causing the strength in the quarter, especially with base stations being soft?

Dinesh Ramanathan

So we saw some recovery from Q4 in our com business and in the specialty memory business and we also had a pop that came in on the CPLD front from some last time buying activity.

Alex Guana - UBS Warburg

Okay. And they you mentioned there the com, is there any indication that like some other players are seeing, we are seeing a bit of further strengthening in the core com, you know aside from the wireless base station?

Dinesh Ramanathan

No, we are actually seeing it fairly flat.

Alex Guana - UBS Warburg

Okay. And then with regard to the Antioch that you are expecting the bigger things from late in the year. How many design wins are we talking about there that drive your expectation right now. How many numbers of SKUs for different customers?

Dinesh Ramanathan

So, it's less than a handful. It's probably the right way to put in. Now we are engaged with pretty much all the top tier handset vendors with this product and we are seeing good traction at all of them. Our focus for last quarter and this quarter is to try and get as many design wins as we potentially can, because that’s what ends up sustaining the growth for the revenue going forward.

Alex Guana - UBS Warburg

Okay, and with CCD obviously very impressive results on the PSoC side, with regard to USB. How is that performing right now? I know you mentioned some optimism on the WirelessUSB side. But say just core USB 2.0 what are the expectations there?

Norm Taffe

Again this is Norm Taffe, so common to USB. USB is doing quite well actually grew in Q1 which is little bit unusual for it. It grew slightly over strong Q4, it is on the high speed side we have some very big wins in handsets which haven’t gone to production level we expected it, yet but I am really just slipped down. Actually USB because driven by that incremental to the strong base business. I can answer we expect substantial growth. And the positive surprise we’ve seen is an increase in the uptick on wireless is needed both you and -- T.J. mentioned. That is now looking like it will well exceed plan and grow substantially this year and contribute a lot more than we anticipated.

Alex Guana - UBS Warburg

How does the Wireless USB opportunity compared to the handheld opportunity?

Norm Taffe

Wait a sec, I will try to comment on it. So its cross the decision, I think from a scope side it's not as large, quite as large as the Antioch opportunity is probably any more of the half the scale of the Antioch opportunity. But it does represent reasonably substantial size business coming forward.

T.J. Rodgers

So, somebody comment one of the reasons the USB business is very strong, is that we’ve made the world aware through Antioch, which is just not starting to ship that they can move in and out of cell phone faster Antioch also connects to flash cards and those other utilities like that. The cell phone guys are so eager to start moving data faster. They took our USB chip, which is programmable and we could customize in the cell phone and we have actually started moving USB in the cell phone that’s the outside we are seeing USB right now it's going to continue.

I think Dinesh understated the value of Antioch. Yes it is a handful, but it is a handful of core R&D designs that we proliferate in the multiple products at two major handset manufacturers both the phone have customized there firmware and software to accommodate Antioch i.e., pretty sticky design wins at a very high level. So yes it’s five or six, but there are five or six segments.

Dinesh Ramanathan

Yeah they are all black complex.

Alex Guana - UBS Warburg

How does the data rates compare between Antioch and what USB would enable and the cost points maybe you can help me understand how the operators look at which one they want to implement?

Dinesh Ramanathan

So, this is Dinesh again. So, the traditionally most of the cell phones have had low speed USB or full speed USB interfaces on them. And they are in the 12 megabit per second transfer rates. High speed USB, which is also referred to as USB 2.0 gives you 480 megabits per second Data Rate Transfer. What we’ve done with Antioch is includes the USB 2.0 functionality, some DMA functionality, some hardware acceleration functionality. We essentially have a microcontroller inside the Antioch chip that controls the way the data traffic gets setup and the DMA functionality that gets setup between USB to the baseband processor, USB to SD cards, USB to CE-ATA drive. So, essentially the functionality and the kind of bandwidth that you get with Antioch kind of chip is, as we said before, 10 times faster than what you will see in traditional systems.

T.J. Rodgers

So, the answer to the comparison of the two chips in the feet is that there is the same, the FX2LP chip which sells for…

Brad Buss

A couple of bucks.

T.J. Rodgers

Couple of bucks gives you the high-speed USB pipe and gives you a microcontroller and a general purpose interface integrated into the phone quickly. The Antioch chip includes all the functionality you just heard, it sells for more than that. But it takes several quarters of design end activity because you actually have to change the system software to get the full benefit from Antioch. So, it’s a 1-2 play for us in cell phones.

Alex Guana - UBS Warburg

Okay, thanks very much.

Operator

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

Sandy Harrison - Signal Hill

Hi yes, Signal Hill. TJ, just to back up on one of the other comments you had in your prepared remarks about some of the NVRAM you are doing, just real quickly in the elevator side, what is that in difference to Flash?

T.J. Rodgers

Okay, that’s a very good question. Elevator, I am not good at it.

Sandy Harrison - Signal Hill

I had to ask you otherwise my colleagues would throw an axe at me, so…

T.J. Rodgers

A Flash transistor stores data by changing the threshold voltage used in detectible. The active changing threshold voltage on the single transistor or 2-transistor parent Flash takes milliseconds, it’s very slow, the best, it takes microseconds, so it’s 1000 times slower than high-performance memory. Then, once you program the memory, store the data and reading the memory is a nanosecond kind effect.

Sandy Harrison - Signal Hill

Sure.

T.J. Rodgers

But Flash is an asymmetric kind of product where reading it is okay, but putting the data in it is extremely slow, it depends on the download time kind of the thing that you are talking about. Okay, static RAM, a normal static RAM, a normal static RAM is a six-transistor cell, and a typical high-performance static RAM will have an active time of 10-nanoseconds or even 5-nanoseconds. And you basically could read or write any bit in five nanoseconds, so it's extremely fast.

But when you turn off the power, static RAM data goes away. So you either choose slow and permanent or you choose fast and volatile. The non-volatile static RAM we have got is a 12-transistor cell, so it's the six-transistor static RAM, a real honest guide to static RAM that works just the way it does, along with six more transistors attached in two non-volatile depth into the static RAM. And what happens within the cell with 12-transistors, when the power goes off, static RAM transfers its data to the other six transistors and programs in two of the transistors, the whole data.

Sandy Harrison - Signal Hill

Okay.

T.J. Rodgers

And therefore the static RAM acts like a static RAM and you never touch the non-volatile bit until you have an event, powered on event in which case you transfer, for example in a 4 million bit RAM, 4 million bits of data in 1 shot from the static RAM to the non-volatile RAM.

The other point that's very important is that you don't know when the power is going to go off. So you can't say, okay, the power is going to go off in 10 milliseconds, please transfer the data for me. So what you have to have is a memory that can stay alive and do that transfer after the power gets cut off, and the way that happens is on this product you buy a capacitor, modestly priced, but relatively large capacitor and you stick it on one-tenth of the of the chip. And the chip and their circuitry powers up that capacitor. And when the power goes off in the machine, the capacitor takes over becoming the effective power supply. It lasts for only a fraction of the second, but it has enough power in that capacitor to go transfer all of the data from this volatile static RAM to the non-volatile shadow RAM you might call it.

Sandy Harrison - Signal Hill

Gotcha.

T.J. Rodgers

It's got the best of both worlds. It has got performance of static RAM, you can't do what I described even in flash memory. In flash memory, you shut off the machine and you write into a DVD.

Sandy Harrison - Signal Hill

Elusive.

T.J. Rodgers

So this memory is certainly like the highest level functionality, what you pay for is for all transistors and they are willing to pay for it, because it's the Black Box, that tells you what happened when your machine was on. It's a source of data. So when you recover a machine and for example some of the bank accounts in it, you can find out what was the wrong with the machine, what port went bad and what crashed in what order. Literally a Black Box.

Sandy Harrison - Signal Hill

Got you. And then you talked little bit in your press release about your involvement with the power line, home power line. What's the opportunity you see there and how would you participate in that.

T.J. Rodgers

You are talking about the Berkeley Company with the big installations of --?

Sandy Harrison - Signal Hill

No. The home power lines, which is basically doing communication over the plugs, home plug. I am sorry home plug using power line to do networking?

Dinesh Ramanathan

Hi, this is Dinesh Ramanathan again. So that, at the data communication division, we are looking at a product that actually comes out into that particular space, primarily to transfer high definition television signals over it.

Sandy Harrison - Signal Hill

Okay, got you. And then lastly Brad, you guys were talking on your last call about standstill of doing anything until the June timeframe? Is that still place or is there some triggers that get it going a little sooner?

Brad Buss

Yeah I mean that was the outer window. And I think as we see in the K, we have laid out, there is a period of time when they had filed the S3 to the end of it. So basically, all of those roadblocks are done.

Sandy Harrison - Signal Hill

Okay. Got you. Alright thanks guys.

Operator

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

John Barton - Cowen and Company

It's Cowen and Company. Thank you. You made comments about ramping production high in SRAMs at UMC. What is the future of the Texas and Minnesota fab? Will they be used to do Asyncs. What is the potential way for those, where do those fabs go in future?

Brad Buss

The Minnesota fab has become a PSoC fab. Right now, we're actually capacity limited, because the 100% of the capacity in that fab can't make PSoC. We will make technologies in that plain of 90 nanometers and less. And we will enhance our technologies and we will make or evaluate products. They are on our intent there, that plain has very low cost is to keep it completely full, and use our external foundries to buffer the internal capacity. So that we don't have [unfill] capacity.

Our Texas plant is a six-inch plant. We built it in 1986. It has got extraordinarily good cost, but it is a six-inch plant. And with the advent of our deals with the Chinese foundries, that plant, although competitive, is not as competitive as the best foundry prices we can get. But when I mentioned structural changes earlier, that was the reference I was making.

John Barton - Cowen and Company

Okay. On the topic OpEx, I think I heard Brad, you say is down $6 million sequentially. Are you referring to a consolidated income statement and then PJU statement about no more R&D. Is that geared specifically to the semiconductor business or again what's the consolidated income statement, what's the semi business?

Brad Buss

Yeah, John, the $6 million, I mentioned is the other slide in the SVTC. So, our margins are going down 1.3%, but I'm also losing basically the similar amount in R&D. So, net-net from an operating model perspective, it's pushed. I do expect the R&D consolidated to go down by at least $6 million and it's parked on the semi side. Obviously because some part doesn't have any R&D budget.

John Barton - Cowen and Company

And then going forward, flat at their levels with some small growth from any side of the house? Is that the way to think about it?

Brad Buss

I think, probably yeah. I mean, flattish probably for some part and I think really flattish really for us. I think to T.J's point, so much more of our focus is on limited number of takeouts in products and we're able to exploit one of the base technology around PSoC and a few other things, that I think we are going to have lower absolute dollar levels of R&D. For a while, barring us to moving into some other new ventures, of which, we always do a couple.

T.J. Rodgers

Yeah, I want to one comment just so Cypress people don't freak out. We haven't completely eliminated process R&D. What we have done is make the fab component for the wafers you buy and experiment in it. They are very expensive, variable costs. We still have process R&D in the company and that process R&D, we are currently focusing on as an advanced very low cost technology for the next generation of PSoC. So they are not working on the smaller RAM cells, Moore's Law stuff anymore. But they are working on low noise transistors, operational amplifiers, high capacity (inaudible) area capacitors, conductors, FIQ, etcetera.

So we are still doing process R&D, but it's a variable cost now for us. Not a fixed cost with the fab.

John Barton - Cowen and Company

On the SG&A line, some visibility there, we appreciate it. One of the things that's going to bounce on the back of my head T.J. is your comments about more management involvement with pushing design wins, lot of focus there obviously with the newer product lines. Does that mean we need to expand the number of apps, if you feel that guys how should we think about that SG&A line going forward?

Brad Buss

It's going up. The primary reason for it's going up is been increased sales cost. So SG&A is up due to apps. We are absolutely design win limited in our revenue growth, and one of the few areas in the company that right now if you ask what are the plans for this year and the answer is don't spend any more money, get bigger and get more profitable. And the one exception to that, where we are going to spend more money, is we are going to add applications engineers in to the field, so we can get more design wins thereafter.

John Barton - Cowen and Company

Okay. And then one last question if I could Brad, just more comments on tax rate as you look at it. I think you said 8% of the consolidated level? Is that full for the year and how about next year?

Brad Buss

Yeah John, the 8% versus semiconductor. And I think you can use that for Q2 and the full year. And then for SunPower it's around 12.5 for Q2 and you can use that for the full year. So again most of you are building separate models in that aggregating, which I would encourage you to do and I think you should use the metrics that way versus just [stabbing] at one degree (ph).

John Barton - Cowen and Company

Thank you. I love your model.

Brad Buss

Yeah, thank you.

Operator

Thank you. Tore Svanberg you may ask your question and please state your company name.

Tore Svanberg - Piper Jaffray

Yes good morning, Piper Jaffray. Couple of questions. First of all just looking at my math would your operating margin be about 4.5% for your semiconductor business, here in the last quarter?

Brad Buss

Well, I didn't quite catch the whole statement?

Tore Svanberg - Piper Jaffray

Yeah, the operating margin for semiconductor business was it about 4.5% this quarter?

Brad Buss

I don't have that right in front of me, but it's probably fairly close.

Tore Svanberg - Piper Jaffray

Okay. That's fair, and that, just so I understand it, is going to be about flat next quarter?

Brad Buss

Yeah, I'd expect the semi business will go up, PBT and the semi, they are going to go up probably will be kind of flat to downish based on the follow through that the end of getting.

Tore Svanberg - Piper Jaffray

Okay, and just so I understand the gross margin for the semiconductor business is 45, 46% going to be the bottom for this year.

Brad Buss

That’s sure my hope and expectation yes.

Tore Svanberg - Piper Jaffray

And then as we move throughout the second half, what sort of improvement should we expect that we’re talking about, 20 basis points per quarter here or could it be as much as 100 basis points a quarter?

Brad Buss

Yeah, I mean, I guess a lot is just going to depend on the mix within the absorption issue. So, I think, I see it’s moving up into the right throughout the next couple of quarters. I think probably a little, Q2 is just kind of that transition quarter and then I think as we execute for it’s generally a very strong quarter, loading through there, a lot more of the proprietary products are on, and I think we are a lot closer to the model.

Tore Svanberg - Piper Jaffray

Very good and finally, CCD earnings contribution is certainly getting better, but still quite small. When do you think, we could start to see at least a nickel there, would it be sometime this year or will we have to wait until [alloy]?

Norm Taffe

This is Norm Taffe. T.J just looked to me on then one. My expectation is that it will be sometime this year. In fact, I think we have a pretty good shot in Q3 and certainly by Q4 to see that much to the bottom line.

Tore Svanberg - Piper Jaffray

Excellent, thank you very much.

Operator

Thank you. Mike Masdea, you may ask your question and please state your company.

Michael Masdea - Credit Suisse First Boston

Yeah, Credit Suisse and I guess the question is on the foundry side. Some of the deals were inking right now than at time when utilizations were lower there, what's the risk that we are talking about gross margin pressure down the road with some pricing issues in the foundry? And on the same line with SRAM doing so well right now and moving more like the foundries, the risk with that entices some of the competitors that have looked away from this, to look backward.

Ahmad Chatila

This is Ahman. This risk is limited because we are balancing the amount of foundries we are dealing with, and we have contractual agreement with them. We treat them fairly in the down market, they will treat us fairly in an up market, that’s how we should see it.

T.J. Rodgers

Our deal with UMC on 65 nanometers will make very small chips that are very fast, meaning they will have premium pricing. And frankly they can make even with their profit embedded RAMs for us at 65 nanometer node, every bit as cheap as we could make them for ourselves. So I don’t see a negative impact on being in the foundry business on high performance sync RAMs.

With regard to lower performance, more prices with sensitive asynchronous RAMs on nodes that are less advance in 65 nanometers. We will make those inside that is a tough business, the solution there is less about gross margin which we think, a typical number might be in the 35 to 40%. There the solution is to reduce OpEx. We’ve already taken our Asynchronous Static RAM business in transferred the entire division, not just design but the entire division, marketing, business unit manager to Bangalore, so we can achieve in OpEx of less than .

Michael Masdea - Credit Suisse First Boston

Less than 15%.

T.J. Rodgers

It’s 15%, and I think it’s in high teens right now, so that we can still put 20% on the bottom line or something approximating that even with 35 to 40% of gross margin.

Michael Masdea - Credit Suisse First Boston

Great thanks on the wireless USB is that a standard or proprietary technology and is there any issues around that at all?

T.J. Rodgers

Wireless USB technology is proprietary, it goes in the 2.4 gigahertz band which is an industry standard band. There are many radios that operate in that band. The government in its wisdom think about all the bandwidth is wasted on the AM radio stations, all the garbage bandwidth with the government has taken all of communications of the wireless USB and other competing products and put them all in a 2.4 gigahertz band right there with microwave oven. So we are in a band that doesn’t require licensing, doesn’t get FCC interference too much needed minor license. That’s why we developed a very, very robust solution, and our solution can be sitting next to one that we’ve really chosen.

Michael Masdea - Credit Suisse First Boston

Comes next to wireless LAN or..

T.J. Rodgers

Wireless LAN which also operates 2.4 gigahertz and the microwave oven, and at that running we have a torture test and still communicate and not lose data. So it is proprietary in a public space, it is on license, and we think we have got upside in particular using that radio link as one way to get out and offer restructure (ph).

Michael Masdea - Credit Suisse First Boston

Great, thanks a lot. A real quick one. Brad may be, inventory, did you say if you think it's going to go up or down next quarter. I assume you are going to bring it down a little bit but..

Brad Buss

Yeah I think it should go beyond a little definitely. I mean I think we are working through some of the inventory and I mean as I mentioned there are selective parts. A lot of the key [part] rest but we are going to start building profiles. I think we have limited some of our potential revenues in the past and we want to make sure we are not there. And when you got a proprietary product, as you well know, you have got to have the inventory to service the revenue. So, we’ll balance that but net-net I think we definitely should look down.

Michael Masdea - Credit Suisse First Boston

That’s the semi sided, overall is it the same sort of trend or do you expect that to go up?

Brad Buss

Well I don’t know. I guess I would ask you to ask the meaning on this. The PowerLight stuff is so [fluent] with their growth rate, I am sure that number is going to be involve around.

Michael Masdea - Credit Suisse First Boston

So, Tom Werner what going happen to our inventory.

Tom Werner

Inventory go up because our business is growing substantially in North America and there is a shipments from our Asian operations for North America.

Michael Masdea - Credit Suisse First Boston

Great, helpful thanks a lot.

Operator

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

Adam Benjamin - Jefferies & Company

Thanks, Jefferies. You guys had talked in prior quarters about it seems some benefit on SRAM, as some your competitions kind of pulled away from that market. Where do we stand on that, have you seen kind of the full benefit at this point or do you expect to see some more benefits throughout the rest of this year?

Ahmad Chatila

Yes, it is we see benefit, of course, because you can see on our pricing its pretty stable as we have not seen the full benefit. We could not deliver all the products that the customer wanted, because one of our major competitors exiting and they are really large in the segment that they are exiting. So, they had to, they force to extend their last time buys on that business. But the full benefit will only be seen in the next few quarters, maybe in 2008. But right now, the pricing is pretty stable for I would say [cost] of margins.

Adam Benjamin - Jefferies & Company

Okay, so with the combination of stable pricing and the move to TSMC, we should expect gross margins to still continue to hang in the 40 level. I know historically they’ve really bounced around up and down. But is 40 reasonable?

Ahmad Chatila

40 is very reasonable, but I just want to remind you what Brad said about Q2 on correcting the inventory situations, on loading the fab a little bit less that I would like to, and just going to go down couple of points. But in the long run 40 is a reasonable number.

Adam Benjamin - Jefferies & Company

Okay. And then just focusing on CCD gross margin actually, you guys are getting a benefit there as the mix of PSoC comes in. Can you give us an idea of the delta on the gross margin roughly between PSoC and USB in timing?

T.J. Rodgers

I’ll give you a rough idea because I don’t want get into too much detail. Right now PSoC is running a couple of points better than like the USB business, and actually less than the clock business. Overtime the PSoC margins will continue to improve and will actually several points or actually more than a handful of points higher than the overall margins.

Adam Benjamin - Jefferies & Company

What's going to happen to your margins next quarter?

T.J. Rodgers

Actually I just see the quarter of revenue division. Division margins are going to increase around one to two points and PSoC will increase at a greater rate than that.

Adam Benjamin - Jefferies & Company

And then Norm you mentioned improving throughout the rest of this year as well?

Norm Taffe

Correct.

Adam Benjamin - Jefferies & Company

Great. Thanks a lot guys.

Operator

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

Louis Gerhardy - Morgan Stanley

Morgan Stanley. Got most of my questions, but just on the backlog did you say it was 235 and if that’s the right number is that down just because some of these businesses you are exiting?

Chris Seams

Louis this is Chris. That was semi-only backlog at 235. The total backlog of the company is 379 was somehow in PowerLight that’s become such a large number, we are choosing to give semi-only numbers. 235 is up quarter-on-quarter above $30 million.

Louis Gerhardy - Morgan Stanley

Okay great. And then Brad can you just comment on the net interest income and other income for the June quarter?

Brad Buss

Yeah it will be down a little bit obviously it could be without the convert that’s gone. So, I would look at it to be -- are you talking consolidated too?

Louis Gerhardy - Morgan Stanley

Yeah.

Brad Buss

That will be probably down around $1 million, $1.5 million. And like I said you got to just make sure you factor in the bond cost and everything too.

Louis Gerhardy - Morgan Stanley

Yeah.

Brad Buss

I can work with the off-line with you and your models if you’d like to..

Louis Gerhardy - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Chris Stanley you may ask your question. Please state your company name.

Chris Stanley - J.P. Morgan

Thanks. J.P. Morgan. Just a few quickies guys. Can you give us the book-to-bill by segment please?

Brad Buss

Yeah I’ll give it to you by division. CCD led the pack of 1.21, Memory and Imaging Division 0.9, Datacom Division 1.02.

T.J. Rodgers

For the first order of the company’s book-to-bill was 1.03, pretty much all of our business is we’re above 1, and the softness in unit volume in RAM stays in with book-to-bill below 1, but the growth in the other areas offset it to take company above 1.

Chris Stanley - J.P. Morgan

Got it, thanks. And, then on the SG&A on a consolidated basis did you say you expect that to move slightly up in dollars throughout the rest of the year?

Brad Buss

On a consolidated basis?

Chris Stanley - J.P. Morgan

Yes.

Brad Buss

I think it will be, I would say flattish to slightly up kind of 1.5 million, 1.75 million is probably pretty normal between what we are adding to TJ said and then really more on the SunPower side.

Chris Stanley - J.P. Morgan

That’s helpful. And then on the option expense it popped up a little bit in Q1, how are you guys looking at that for the rest of the year?

T.J. Rodgers

Sorry I didn’t catch the last part.

Chris Stanley - J.P. Morgan

What’s your estimate for option’s expense for Q2 and the rest of the year?

T.J. Rodgers

I say around 13 million - $14 million.

Brad Buss

Consolidated and that’s not taking anywhere purchasing accounting stock from the PowerLight side but the regular 123-R stock.

Chris Stanley - J.P. Morgan

Great and then last question for TJ. What are your thoughts on MRAM?

T.J. Rodgers

MRAM? Oh boy. Okay, well I said $53 million of MRAM and it's funded. At the time I funded we had MRAMs working with economic deal. As Motorola has been industry like 15 years or Freescale now. We knew they were in a raise to get to markets they have got into market. They have funded I didn't fund because I thought we couldn't make it. It was because I was already aware of the non-volatile technology I told you about earlier the ones that requires only silicon and no exotic magnetic materials, but 1.2 the MRAM bit got more and more expensive as we saw these problems. It also got slower. It was never ever, it can be a really fast solution that could replace datagram. And it got relatively high in power, because a little magnet gets switched by putting in the current and the power was non-attributable.

So, I looked at the market getting smaller because the capability of MRAM going down I look at the cost of the MRAM going up and being less profitable into the market they could be in, so when I have to lay down the last $10 million to get rid of a single bit reliability problem which is the last problem we had. We chose upon and it was more market based and technology base. Having said that I would like to extend my congratulations to Motorola it's not often is to Freescale, not often that we get [speed] bringing in technology to market. They had more resources but they got there congratulations to them and I hope they prove me wrong in the technology I think more technology is good for our industry.

Chris Stanley - J.P. Morgan

Okay. Thanks guys.

Operator

Thank you. Our next question comes from [San Kamaladevi], you may ask your question, please state your company name.

San Kamaladegi - B. Reilly and Company

B. Reilly and Company. I had a follow-up on the non-volatile SRAM product line, when do you expect to have a 4 megabit chip out and when would you expect to have the architecture embedded in the PSoC?

Ahmad Chatila

Hi San this is Ahmad. Silicon actually is in the fab we just picked up last week, we expect samples in Q3. And we are right now thinking about how to combine it with PSoC into one chip. As many customers are extremely interested in it as a black box. And TJ said it’s really a very, very good technology, and it's proprietary.

San Kamaladegi - B. Reilly and Company

Okay in the 4 megabit chip on a standalone basis you guys have a timeframe for that?

Ahmad Chatila

As I said the silicon is in the fab right now, and sampled in Q3.

San Kamaladegi - B. Reilly and Company

Go it, and just on a broader level, how big of a business do you think the non-volatile SRAM on its standalone basis can be?

Ahmad Chatila

It’s was the total available market from our assessment for this chip is around 400 million a year. It’s been taken by fair electric RAM as well as SRAM not the battery, battery RAM companies like SG and Dallas Semiconductor make. 400 million, there is no reason why it can be $40 million business for us in two years. And it is definitely like in the 70% to 80% gross margin range even when price decline in the longer. It's very, very good business for us.

San Kamaladegi - B. Reilly and Company

Okay, great. Thanks.

Operator

Thank you. [Caitlin Wolford] you may ask your question, please state your company name.

Caitlin Wolford - Trellus Management

Trellus Management. Thanks and just like beyond the record with a congratulations to TJ, and rest of the management team for the dollar made a marvelous that we have seen over the last four years with Cypress, and my question I guess is in regards to the transition some of the SRAM business over to UMC on 55 nanometer. Is that an acceleration of the fab light model or a desire to keep a foot in the SRAM market and on top of that if I looked out a year from now what might be Minneapolis loading look like between these PSoC and I think SRAM?

T.J. Rodgers

Okay. Let me answer that one. First of all little bit on target. We’re still ramping some of our 90 nanometer process. For example, 300 megahertz, $100 semi to megabit, that's 90 nanometer product. So, we’re dealing, we’re ramping 90 nanometer new product as we see, we won’t take out the first 65 nanometer product until end of this year. So, we're talking about products at UMC that will sample and begin to shift in 2008 will become in line after that point in time.

Minnesota therefore, is very important for us to have Minnesota's 90 nanometer capability, loaded and running. So, that for two year, three-year scenario is where we're at. UMC is not precipitous and as I said earlier, it has got to do with the fact, we're now liking the Sync-RAM business and we don't want to leave it. We want to continue after the 90 nanometer tranche and that's what the 65-nanometer will be. So, it's not a quick change it's the next step in time.

Caitlin Wolford - Trellus Management

There is not a situation that one could envision where suddenly there is a transition of capacity out of Minneapolis and it's not loaded enough at that point, I guess would be my question causing some margin issue out there in the future, that's all I was worried about.

Brad Buss

We're going to grow and since we are relatively fixed in line with growth therefore means more wafers not smaller lines on the same number of wafers. As we grow, we will load Minnesota the last 15%, and our plan is to keep it absolutely loaded, after that point in time. But, growth beyond that will happen outside.

So, no, the Sync-RAMs, they are different from RAMs, where their commodities, they need volume, they're really different animal. The quality cycles are very long sometime happier, even more. And once you get a RAM designed in, it's sort of stuck as a difficult to move kind of product. We shipped synchronous SRAMs, today made in 0.25 and 0.15 micron technology and significant volume. So, you think of SRAM is being kind of a fundable product, which is true for asynchronous commodity SRAMs. It is not true for sync-RAMs, these are kind of platform products, that if designed in have decade long life span.

Caitlin Wolford - Trellus Management

Okay. With that said, is it reasonable assumption then maybe at the end of 2009, that that your SRAM business out of Minneapolis is 20% or 25% of production or does it completely fall-off out there in a couple of years?

Brad Buss

It will be 25 plus percent in production, still I would say 2009, and five-years from now, you and are on this phone call together, will be talking about Minnesota. We intend to fill up the fab with our PSoC and related CCD products. But the SRAM business is a nice cash cow for us, and we will be making them for long time.

Caitlin Wolford - Trellus Management

Okay, great congratulations again you guys, thanks.

Brad Buss

Thank you.

Operator

Thank you. And our last question comes from Rich Newman you may ask your question. Please state your company name.

Rich Newman - First Capital Alliance

Yes, First Capital Alliance. I know we are trying to address the (inaudible) the under valuation of Cypress, core ex-SunPower Holding through the buyback. And you mentioned you had 3 or 4 million shares left on the original 28 from the converts sale. But if you recall, you also mentioned about $300 million more you had available subsequent to that by stocking the open market. Is that correct?

Brad Buss

That's correct.

Rich Newman - First Capital Alliance

What is the source of those funds?

Brad Buss

Source of the 300?

Rich Newman - First Capital Alliance

Yes.

Brad Buss

Well current cash on hand and obviously cash that we expect to generate. It was never our intention to do the 300 all at once.

Rich Newman - First Capital Alliance

Okay. And as you gave this under valuation, do you feel that it's better to wait overtime, given SunPower's prospects, or do you feel it's obviously we are chasing SunPower up here, the sooner we buy at the, the better it is as long as the SunPower keeps running. How we are determining what’s appropriate and what’s well from a timing standpoint during the next lets say six months?

Brad Buss

Let me answer that question. In the last meeting I had relatively long discussion about three options for monetizing the SunPower that we had considered at length. And since I get the question a lot I had that transcripts put on the website and I will refer you to that.

What I can say is I think if you look at the $600 million convert and buyback, we are acting making Cypress shareholders better off using the SunPower asset that we got. And we remain in the active mode thinking about ways to make Cypress shareholders better off. And let me just leave it at that fake level that no options are out to bounce, and we are thinking about to bring home that $3 billion in the balance sheet.

I can tell you and this is a new statement that I haven’t said before. But in November 2009, we will have available to us the typical options for distributing SunPower shareholders. It won’t be doubly taxed and therefore economically peaceful. And right now my current thinking is that, that date for certain would be a date in which we would monetize SunPower for our shareholders.

And that’s not to say we are only doing that and we’re only waiting for that. We are evaluating all of our options as time goes on. And let me just clarify another point just so you are aware. On the ASR that we did, we colored that ASR already. So the average price that we are buying at is quite a lot less than what the current market’s trading that. So that buyback we have actually done quite well and the price is moved up quite a bit higher than what our average cost would be when that was complete.

Rich Newman - First Capital Alliance

And you’ve mentioned in the past that the PowerLight lock up was a restriction that precluded to you potentially from monetizing the SunPower stake and I thought you mentioned earlier that that was coming up in June. However, earlier in the call you suggested that maybe that’s already been by the Boards, is that correct?

T.J. Rodgers

The lock up was conditional, there were certain things that had to happen or not happen when we quoted the June timeframe. That was the most conservative, that is the latest data which are lock-up today, and the fact is the lock-up has ended.

Rich Newman - First Capital Alliance

Okay., very good. Okay, well good luck, hopefully this will work our way because the Cypress [Corsa] seems to under value. Thank you.

Brad Buss

Thanks a lot.

Operator

At this time, we are showing no further questions.

Brad Buss

Thanks everyone and I look forward to seeing you next quarter.

Operator

Thank you. This does conclude today's Cypress Semiconductor conference call. Have a nice day.

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