Cypress Semiconductor (CY) Thurman John Rodgers on Q4 2015 Results - Earnings Call Transcript

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Cypress Semiconductor Corp. (NASDAQ:CY)

Q4 2015 Earnings Call

January 28, 2016 11:30 am ET

Executives

Rahul Mathur - Vice President-Finance

Thad Trent - Chief Financial Officer & EVP-Administration

Michael Balow - Executive Vice President of Sales and Applications

Thurman John Rodgers - President, Chief Executive Officer & Director

Dana C. Nazarian - Executive Vice President-Memory Products Division

Hassane El-Khoury - Executive VP-Programmable Systems Division and Software

Badrinarayanan Kothandaraman - Executive VP-Data Communications Division

Joseph T. Rauschmayer - Executive Vice President-Worldwide Manufacturing

Analysts

Blayne Curtis - Barclays Capital, Inc.

Betsy Van Hees - Wedbush Securities, Inc.

John N. Vinh - Pacific Crest Securities

Vijay R. Rakesh - Mizuho Securities USA, Inc.

Rajvindra S. Gill - Needham & Co. LLC

Craig M. Hettenbach - Morgan Stanley & Co. LLC

John William Pitzer - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Doug Freedman - Sterne Agee CRT

Suji DeSilva - Topeka Capital Markets

Charlie Lowell Anderson - Dougherty & Co. LLC

Harlan Sur - JPMorgan Securities LLC

William Stein - SunTrust Robinson Humphrey, Inc.

Ryan C. Goodman - CLSA Americas LLC

Operator

Good morning and welcome to Cypress Semiconductor's Fourth Quarter 2015 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. Rahul Mathur, Vice President of Finance at Cypress Semiconductor. Sir, you may begin.

Rahul Mathur - Vice President-Finance

Thank you, Oliver. Good morning and thank you for attending our Q4 conference call. All information discussed in our press release and on this call is based on preliminary, unaudited results and we encourage you to review our 10-K once filed.

I'd like to remind everyone that during the call, management will be making statements that should be considered forward-looking and as such, they entail certain risks. Such statements are based on the information available to us as of today. We undertake no obligation to update these statements and our actual results could differ materially. Please refer to our earnings release and SEC filings for a more detailed discussion of these risks.

The order of our call today will be as follows: CFO Thad Trent will provide a financial overview; EVP of Sales and Applications Mike Balow will provide some data on sales and end markets; and President and CEO T.J. Rodgers will provide an additional overview before we end with Q&A with our executive staff.

One note before we start. Cypress will conduct our Analyst Day this year on March 3 starting at 2 p.m. Pacific Time at our corporate headquarters in San Jose. We look forward to sharing more details with you in the coming weeks.

I'll now turn the call over to Thad Trent.

Thad Trent - Chief Financial Officer & EVP-Administration

Thanks, Rahul. Before discussing results for the quarter, I wanted to touch briefly on the gross margin outlook we provided for Q1.

We will continue to keep utilization in our internal fabs below natural demand due to excess inventory we had at the time of the merger. While this provides pressure on gross margins and EPS, this is an effective way of generating cash flow in order to accelerate our share repurchase program. We expect utilization and margins to improve later this year, but expect lower utilizations for the first half.

Now let me turn over to the results for the quarter. Our non-GAAP revenue for Q4 was $456.4 million, at the higher end of our guidance for the quarter. We saw more demand than expected at the end of the quarter from our customers in Asia-Pac and we believe that the semi market remains soft but appears to be relatively stable.

We continue to monitor our customers closely and track weeks of inventory in the channel. While we saw this climb to 8.3 weeks at the very end of Q4, we saw strong sell-through in the first few weeks of January and we're now at 7.3 weeks in the channel. This is in line with our target range of six weeks to eight weeks of inventory.

So now let me talk about the results by division. PSD was $157.8 million as we saw the seasonal weakness we expected in our consumer and microcontroller business. As a reminder, the previous quarter had roughly $5 million of mobile touch business we divested in August. It's important to note that our automotive microcontroller business grew quarter-over-quarter, and the legacy Cypress automotive business has grown almost 30% year-over-year.

MPD was $259.4 million, roughly flat quarter-on-quarter, even in a challenging macro environment as we saw better than anticipated sales in the Asia-Pac. DCD was $17.5 million, roughly flat quarter-on-quarter. We continued to see strong design win momentum for our USB Type-C product, but the revenue ramp is still difficult to predict.

And our Emerging Tech Division grew 67% sequentially to $21.7 million for the quarter as we ramp our three startup businesses in this division. Emerging Tech doubled year-over-year and was profitable in the fourth quarter, as expected. Gross margins in Emerging Tech increased from 10.1% to 28% in Q4. As we continue to grow the Emerging Tech, we expect continued improvements in gross margins and profitability. So, overall, the industrial and automotive segments represent 55% of total revenue versus 52% in the same quarter last year.

The Q4 non-GAAP gross margins was 39.8%, in line with our expectations of 40% to 41%, as we outlined last quarter. Excluding the Emerging Tech, core gross margins were 40.3%, down from 42% in Q3, as we continue to reduce our factory utilization as a part of our lean inventory initiative.

We expect utilization in our fabs in Austin, Minnesota, to drop from roughly 60% to approximately 50%. We've been aggressively burning through excess inventory since the merger, reducing our net inventory by $145 million, or 37%, to $244 million currently. We still have in excess of $60 million in inventory to drain as we drive toward targeted inventory levels that will burn through throughout the rest of the year. We expect utilization will improve through the back half of 2016 as we increase utilization to match natural demand and continue to migrate products into Fab 25 from outside partners.

Our non-GAAP operating expenses for Q4 were $129.5 million as synergies continue to ramp faster than our original plan. In the quarter, we recognized $34.4 million of synergies for $137.7 million on an annualized basis. This is broken down into $26 million in cost of goods sold, $104 million in operating expenses, and $8 million in interest and tax.

To date, 1,283 people have exited the company since the merger closed, and this is ahead of our plan. We continue to make excellent progress in taking costs out of the combined organization and we're confident we'll achieve our $160 million synergy target by the end of this year.

Our non-GAAP OIE and minority interest was $3.3 million and tax expense in Q4 was $3.1 million. This resulted in non-GAAP net income of $45.5 million or $0.13 per share at the midpoint of our guidance. And our non-GAAP diluted share count for Q4 was 362.2 million shares and we ended the quarter with 332 million shares outstanding.

During the quarter, we repurchased 5.7 million shares at an average price of $9.99 as part of our $450 million buyback that we announced last quarter. After our press release last week confirming our Q4 guidance, we opened our trading window a week earlier than normal. So far in Q1, we have repurchased an additional 4.6 million at an average price of $8.18.

Turning to the balance sheet. Cash and short-term investments totaled $228 million. Our cash from operations was $42 million and our non-GAAP EBITDA was $73 million for the quarter. In Q4, we increased our cash by $100 million through a term loan A and subsequently in Q1, we have also increased the capacity on our existing revolver by $90 million to $539 million total.

Let me give you a couple other numbers for your models. Our ending net inventory, as I mentioned, was $244 million. That's $35 million lower than Q3. Our accounts receivable at the end of the fourth quarter was $293 million, resulting in a DSO of 63 days. Our CapEx was $9 million. Depreciation was $21 million for the quarter.

So now turning over to guidance we published on our press release today. We continue to experience a soft market with limited visibility based on our short lead times. We entered the quarter with 74% of the quarter booked. The book-to-bill was 0.95, slightly up from 0.92 last quarter. So we expect Q1 non-GAAP revenue in the range of $410 million to $440 million, in line with normal seasonality.

We estimate consolidated gross margins to be 36% as we continue our lean inventory initiative. As always, gross margin will vary with utilization, product and customer mix.

As many of you are aware, Q4 was a 14-week quarter for us. As such, we incurred roughly $5.5 million of additional operating expenses related to this extra week. So, one less week of expenses and additional quarter of synergies, offset by the return of various fringe expenses, will result in Q1 operating expenses between $124 million and $126 million for the quarter. And this remains at or below our targeted model of 30%. We expect approximately $148 million of annualized synergies or an incremental $2.5 million in Q1.

The net interest expense will be approximately $5 million and minority interest benefit of approximately $500,000 associated with our subs. The tax expense will be approximately $3 million. CapEx is estimated to be $20 million and depreciation of approximately $21 million.

We anticipated the fully diluted share count to be 358 million shares and this includes 12.4 million shares related to the legacy Spansion converts. As a result, the non-GAAP earnings per share is expected to be in the range of $0.04 to $0.08 for the quarter.

So to wrap things up, as a part of our commitment to returning capital to shareholders through our dividend and stock buyback, we've taken drastic steps to turn our inventory into cash, which will cause short-term pressure on margins and profitability. Looking forward, we believe there is significant leverage in our model as we increase utilization and improve our gross margins.

So with that, I'll now turn it over to Mike for more color on the markets and customers.

Michael Balow - Executive Vice President of Sales and Applications

Thanks, Thad, and good morning. We entered the first quarter 74% booked, in line with previous quarters. As I mentioned last quarter, we continue to see good demand across our embedded automotive and industrial markets, which has grown to 55% of our revenue.

In the automotive space, we saw a number of new design wins for our new Traveo MCU products, and in many cases, we were also able to package our memory products with our microcontrollers. We've also had some significant wins with our sixth-generation automotive touch products for next-generation vehicles.

We have a number of active engagements for USB Type-C controllers, which is just now starting to generate incremental revenue for the Corporation. Though the revenue ramp for Type-C has been difficult to predict, we feel we're well positioned in this space once the ramp occurs.

Interest for our BLE products has remained strong, fueled globally by consumer, wearable and industrial customers. We offer both a standalone BLE solution along with a module that offers a low-touch option and quick time to market.

In the U.S., design activity remained strong across all segments. We continue to see strong automotive numbers and are engaged in a number of new automotive designs for both MCU and memory products. We have a number of USB Type-C designs taking place with several of our large computing customers.

Our APAC sales in Q4 were better than anticipated mainly due to higher memory demand. Type-C USB and BLE design activity remained strong throughout the region. China continues to be unpredictable due to a lack of longer-range visibility. Our Japanese revenue declined as we anticipated due to the seasonal decline in consumer markets, particularly console gaming. Japan's auto market is strong and we saw cross-selling-enabled touch wins in the automotive industry. We also saw market share growth in instrument clusters, ADAS and infotainment.

Like in the U.S., design activity in Europe remained strong and revenue came in as expected in Q4. European economic stability is supported by domestic demand and we see opportunities for growth in the coming years. Key European industrial and telecommunication companies are reporting positive book-to-bill, and we continue to have tremendous success in the automotive space.

In summary, Q4 was slightly better than anticipated. Q1 appears to be seasonally down from Q4. We continue to see design win momentum and are pleased with the engagement at our targeted customers.

I'll now turn it over to T.J. Rodgers, our President and CEO.

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay, the elephant in the room is revenue. I want to make a few comments at a high level.

If you look at the combined company, the mathematically combined company, back in 2014 and what we can infer from from the first quarter of 2015, although it was cut in half by the merger, the revenue base of the combined companies, and the one I will use in the future, was $1.977 billion annual. And this last quarter, if you look at our forecast for Q1, actually, it's $425 million, times four, is the run rate based on Q1 of $1.7 billion. And I want to go over how we got from $1.977 billion to $1.700 billion.

First of all, there was the TrueTouch divestiture that you know about. That took $90 million away from the $1.977 billion. We exited some lousy margin business, and I'm talking sometimes single-digit gross margin business in NOR. That was $80 million. And the rest of it, $110 million, is a combination relative to the $1.7 billion of seasonality and a weak market.

So you should consider $425 million in Q1, which has been our forecast, which we have very high visibility into, as being the base for the Corporation for Q1. And then we will have seasonal improvement off of that because Q1 is a low quarter. And that would be the model for the year. And I believe that is where we are going forward.

The primary loss other than the choices we made about TrueTouch and low-margin NOR is $110 million. And I've analyzed that left, right, up and down. We have very, very good data, line item data and we've analyzed it by geography, by region, by market segment, by product line. And basically that $110 million decline has no one root cause that I can tell you, we lost this deal or the market for such and such went down.

What I told my board was there is no red on our analyses, which are fairly complex, there is no red, red line or red number. It's a lot of pink all over the place. So that generally is that it's a general decline we suffered between a run rate of – a pre-merger run rate and our current run rate, which is $1.7 billion Q1 annualized.

Next topic: inventory. This has been a topic we've talked about since the merger. We have excess inventory. Our policy is to run six months of inventory and then write it off. And we're burning it up. And we – that is, we are making wafers at a lower rate in our fabs than we are selling them to our customers in order to consume inventory.

That gets to be painful when the market gets slightly soft, as I've just described in the last section, in what is our revenue? Because then you start talking about loading your fab, where fab is only loaded to Fab 25 and off (15:45) and only loaded 60%. And as you well know, when you under-load a big machine like that, that that has double-digit million dollar impact on gross margin, which flows all the way through to the bottom line.

We've decided to actually increase the under-loading to 50% under-loading, which will have an impact on our gross margins. That's the reason we're forecasting 36% gross margin in Q1 and low numbers for Q2 and Q3 as well in order to burn through that inventory. We will recover gross margin simply by filling the fab back up to the rate at which we're consuming inventory, even at the low quarter one level.

We decided to do that, even though reporting – forecasting 36% gross margin is painful, because the alternative for getting cash in order to do our buyback, which we're committed to – these prices are very attractive, and we're going to take stock out of the market. The alternative for getting cash to do our buyback is to borrow money and the price for that money – and that was our plan we told you about – the price for that money right now is 6%. And it's up from about 4%, which is what we baked into our plans when we said we were going to do a buyback. So, we're in effect going to turn wafers into stock and we're going to bring stock back without borrowing money. And that's the plan and we're eating it on gross margin and we apologize for that announcement this morning.

I want to talk a little bit about the reality of our business, namely, our new products. We introduced 12 new products last quarter, so we had a great quarter. And our R&D engine in the combined company is very big and very robust. Traveo is our trade name for microcontrollers that run the dashboard, it's called instrument cluster. In the big and new cars, the instrument cluster is a picture of a gauge, not a gauge per se. I think if you've seen the ads on television for the Lincoln, they show the gauge with a needle coming up as a graphic. What's the guy's name? Mr. Cool, in New York?

Thad Trent - Chief Financial Officer & EVP-Administration

Matthew McConaughey.

Thurman John Rodgers - President, Chief Executive Officer & Director

So, that's what we make. We are the dashboard for BMW. We are the dashboard for Toyota. We are the leading cluster, instrument cluster provider in the world, and these are complex, big microcontrollers with high performance. And there's a lot of automotive stuff in it given safety things and other automotive requirements and it is not just a microcontroller.

So, that's the background. The announcement is, we've introduced our first 40-nanometer product on that. So, this node requires relatively high processing capability, and we're moving that to 40 nanometers. We're going to bring out a family of six or eight products over the course of the year.

I won't go through all 12 product announcements. I'll talk about the ones that should be interesting to you because they matter in the market in a way that you can relate to.

Having said that, the next word I'll use is transceiver, which appears to go back on what I just said. Transceiver is something that receives and transmits data. In this case, it's a transceiver for a standard called CXPI. CXPI is a Toyota-supported standard, and it's the way electronic parts of your car talk to each other. Therefore, there's a lot of it in every car.

The current network standard is called LIN, a Local Interconnect Network. There are many LIN chips in every automobile in the world. That's changing over to CXPI, so there's a change in the way cars communicate. They do the same thing, but this is a better bus, more secure, better bandwidth, et cetera.

And we brought out our transceiver, which transits and receives data. But more importantly, our microcontrollers, our automotive microcontrollers are the first one in the market that talk to CXPI, and therefore, can help you enable and get a design win. For us, it was a microcontroller and an automotive design win because of CXPI enabling and the transceivers to support it elsewhere in the car.

Okay, Bluetooth. Everybody knows Bluetooth in their car hooks up your cell phone to your car. There's a new standard for Bluetooth called Bluetooth Low Energy. That's where the world is going. We use the acronym BLE, for Bluetooth Low Energy. In effect, you can have anything. The last thing I saw was a athletic shirt which can measure your pulse and other things. And it can communicate with your cell phone and you can track your workout accurately on your cell phone. Short form by that rather bizarre example, is that the connection of IoT – things to the Internet – the most popular connection is the thing, whatever it is, connected with the BLE radio to a cell phone, which is the standard way you talk to a cell phone, and the cell phone into the cloud.

Okay, so Bluetooth Low Energy's going to be a big deal. And our form of Bluetooth Low Energy has the radio, which is a complex radio built into a PSoC, a programmable system. So the feature is, you can program the Bluetooth to do anything you want – hook it up to anything you want, do calculations if you want and move either the log data or the compiled data, the calculated data, into the cloud, through a cell phone.

Okay, we brought out the first Bluetooth 4.2 BLE, screwed up in the beginning on their 4.0 and 4.1 standards, and they didn't have the level of security, privacy that they needed, and the data throughput was a little low. So Bluetooth 4.2 has come out, and we're the first company to have a hardware that meets privacy, security and data throughput standards that are required really to have a radio become ubiquitous in today's world of hacking.

If you go on the Bluetooth website, you'll see a bunch of companies claiming to have it – they have it by virtue of putting firmware on a chip without the hardware to support it. They're inefficient solutions. This is the first Bluetooth 4.2 chip in the world.

That – okay, two more. Type-C USB is going to be the USB going forward. It is a standard that is agreed to, believe it or not, Apple and Intel and Google. And that means it's going to be that way.

Type-C Bluetooth has a thing called Power Delivery, which means anything you hook up can transmit power in a negotiated, computer-controlled way. It can do data, up to 5 gigabits per second, and shortly, 10 gigabits per second. It can do a screen – so you can hook up your cell phone, for example, to a monitor, and light up a monitor with the data in the format that the monitor understands.

USB Type-C is a paradigm shift and therefore it's ramping slowly. All USBs have always ramped slowly and that's because even though they're simple for you to use, they're very complicated to make and put into products because they require a communication system to be established, which is not only your node communicating data, but your software in the receiver grabbing that data and giving it to the receiver being, say, a cell phone or a personal computer.

We are the leader in USB Type-C and we brought out our fourth-generation chip. So while our competitors are struggling to make their first-generation chip work, we are certified by the USB-IF. As a matter of fact, the hardware that you certify USB Type-C on when you go to what are called plug fests is actually our hardware. That is a great story from a design win point of view and it's not a big money story yet, but that will turn into a money story for us as we go through the year and certainly next year.

There was the CES show in Las Vegas. We won one of 10 best technologies. Back on the topic of Bluetooth, there is a thing called the Beacon. So if I take a Bluetooth chip, one of the modes, there are 12 or 13 modes that are standard at the Beacon. And the Beacon does just what the word implies: it beacons out data. So for example, I could put a Beacon in a Walmart store on some product and say there's a 20% discount on this and if you have the app on your cell phone, as you're in the store, your cell phone will grab that data and it'll tell you what aisle in the store to go to and what the discount is if you have the Walmart app. And that's a hypothetical example. I don't know if Walmart has an app. But that's one thing that Beacons do.

That's a Bluetooth story and in itself, it's not new. What is new is the product that won the top 10 in CES, and that is a Beacon, you really don't want to have to power it. You don't want to plug it in. You don't even want to have a battery on it because if you have 1,000 Beacons, you don't want to go around once a year, even with a one-year battery life and change 1,000 batteries.

So what you really want for Beacons and other things, just sit out there and beam back temperature data, for example, something you set in your attic, or something you set outside to look at temperature and humidity and weather stations, you want a self-powered Beacon that takes some data, whatever the sensor is, and beams it back to your cell phone.

Now we have PMICs, power management integrated circuits, that use Energy Harvesting for power. So for example, you take a tiny solar cell made on thin film and use the power from that – which even works indoors, doesn't have to be outdoors – to power the Beacon. So you can have a Beacon at a weather station and you can set it anywhere, including inside, and get the data from it and not have to have a battery. It'll use the ambient light in the room to do it.

We also have PMICs that use heat. Basically if you attach a power source to something that's hot and the heat's transferred from the hot thing to the rest of the world, we'll take part of that, we'll harvest the energy flow from that. And vibration. So if you're somewhere where there is a vibration, something moving, then you can harvest that energy.

So we won a Top 10 at CES for a heat or light or vibration-powered Beacon, which allows you to take a Bluetooth chip which draws very, very little energy and power a node in Bluetooth Low Energy. It doesn't even need a battery. And that's a big deal. And that's why we got the award. I apologize for the number of seconds it took to explain it.

And those are the primary products that I wanted to talk about today. We're ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. One moment, please, for the first question. Our first question comes from Mr. Blayne Curtis. Sir, your line is now open. Please state your company name.

Blayne Curtis - Barclays Capital, Inc.

Hey. Thanks. Barclays. And thanks for taking my question. Maybe if you just talk about when you – I mean this move to reduce inventories and buy back stock makes a whole lot of sense. So just curious when that came about. And then as you look into next year, how does that impact the trajectory of your gross margins? You talked about Q3. What's the right kind of exit rate of the year to think about as this normalizes back? And is this the trough in gross margins in Q1?

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay. Answer the questions in order. First, the idea of using wafers to fund the buyback instead of cash that we borrow came when we looked the loan papers in the eyes and saw that 6% interest on $100 million was one – you know $6 million is a penny-and-a-half per share per year. And then somebody lamented we've got that much money sitting in wafers that are built and ready to go for good product.

And then the next thing was let's sell the wafers. And then the next thing was, well if we do that, we'll under-load our fab even worse and as opposed to spreading out the pain over time. And we made the decision to bite the bullet. So the answer is within the last two weeks, we made that decision not to borrow the money and pay interest on it, but to squeeze it out of inventory.

The impact on gross margin, we have other initiatives to work on gross margin. And we're working very hard in gross margin and confidently although the number doesn't show it. We will be impacted in gross margin for the rest of the year. And in the first quarter of next year, we should be above, back above the 40% mark.

With regard to burning inventory, we've got $60 million to burn and probably even a little bit more, given some unvalued inventory that you don't see in our balance sheet that we also can burn. And that'll take the rest of the year. I expect our exit rate in the fourth quarter to be above 40%, but that means the exit of the quarter. Therefore, the average for the quarter is still going to be impacted even in the fourth quarter. We're not worried about gross margin. This is what happens, a 3-point hit or a 4-point hit, when you run a fab, a big fab like Fab 25 at half capacity. But it's worth it. Better than borrowing money.

Blayne Curtis - Barclays Capital, Inc.

Thanks for that, T.J. And then just as a follow-up on gross margin, the Emerging Tech business actually had a huge positive upside in December and the margins were actually 28%. So just curious. Is that a sustainable level? What drove, out of the three businesses, was one the primary driver there? And then is this the right gross margin to think about for that business? And also, is it getting to the size that you would think about doing something with it?

Thad Trent - Chief Financial Officer & EVP-Administration

Yeah, so this is Thad, Blayne. So, we expect that to continue to grow. Our projections are it'll grow nicely in 2016 as well. The margins long-term for the entire group, the three businesses there, the model's really to get those into the mid 30%s to high 30%s. But it's going to take time to get there as we ramp the Deca production. So I think in the short term really over the course of this year, you're going to see margins somewhere in the 25% to 30% range. And where we're seeing a lot of the growth is in our foundry business. And then obviously, Deca is one of the areas that we expect to see significant growth going forward over the next several years.

Thurman John Rodgers - President, Chief Executive Officer & Director

So we have three startups that were started five-ish years ago, all of which were to fill in the hole in old Cypress, the shrinking SRAM business is leaving, we needed to grow above and beyond just new products. So we started DecaTech which makes chip scale packaging and other integrated wafer-level electronics in an auto line where we're using SunPower technology which is the world's lowest cost wafer technology, applying it to this other problem.

There's another company called AgigA Tech in San Diego. They make very large, non-volatile memory systems. So in effect, they have an energy supply, again has to run off of the grid because they're storing data in computers nonvolatilely. And the energy supply moves data back and forth between the main memory of the computer and NAND Flash. And the systems are all designed so that you can crash and do multiple crashes and have really ugly things happen to your computer, but that data will survive. They're up now to a run rate in excess of $8 million a year. It's starting to take off.

And the third one is the Foundry business that we make some relatively bizarre things in our fab where we use our wafer-making expertise to make things for customers where we can get, in effect, retail prices – what are retail prices for chips rather than just selling wafers. I'll name one thing we make. We make niobium superconducting wires. And those things are used in supercomputers that we don't make and we have a bunch of customers like that. And that's a good business for us that is growing and actually profitable.

So, those three businesses, the good news is we've been investing as much as a nickel a quarter. If you go back two years, we'd report semiconductors off and you'd get an EPS from that and then subtract off $0.04 to $0.05 per quarter for the investment. We've got a couple hundred million dollars in these startups.

And the good news is they, as a group, and I'll give you one data point and I'm not going to track EPS for them in the future because they're startups and they have their ups and downs and therefore I'm not going to get on the EPS treadmill with you. I'll just give you one data point. They made $0.009 per share last quarter. And therefore, they're not making the money we want them to make when they grow up and get real, but they're not dragging our EPS anymore.

So right now, you as investors own a $130 million automated robotic plant in Manila that can do wafer-level electronics. And that plant is just starting at a rate of about $10 million a year to produce. So that's the good news and it should be in the worst case the hole filler for us as there are now two memory businesses that are in declining markets. Flash and SRAM need something to compensate for them. Having said that, we're going to have to – what was our gross margin with and without ETD?

Thad Trent - Chief Financial Officer & EVP-Administration

Without was 39.8%. With was 39.8%, without was 40.3%.

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay, so we're 40.3% as a chip company, which is most of our revenue. Down below 40%, 39.8%. To me, 40% is the magic number. Didn't want to go below it. So they're starting to impact because they have a different model. A manufacturing factory might have a model of 30% gross margin and when it's at maturity, 10% OpEx and 20% profit.

So when you start mixing semiconductor gross margin with these factories, now that they are big enough to show up on the revenue side, they're big enough to have their impact in weighted average gross margin. So we're going to report – we've done this, but we're going to report a semiconductor and total gross margin to you in the future, so you have visibility into the fundamental health of our semiconductor business. That's our startup story. It's actually a good story. It's buried in the quarter that we just reported. But it will produce good news for us going forward.

Operator

Thank you. The next question comes from Ms. Betsy Van Hees. Ma'am, you may ask your question. And please state your company name.

Betsy Van Hees - Wedbush Securities, Inc.

Wedbush Securities. Good morning. And thanks so much for all the transparency. It's very, very helpful. And congratulations on a good quarterly performance in a very tough macro environment. With the revenue guidance that you guys provided of down 7% at the midpoint, how should we be looking at the divisions? Are any divisions going to perform better than that, worse than that? That's my first question. Thanks.

Thad Trent - Chief Financial Officer & EVP-Administration

In general, I would say that you're seeing softness across the board. MPD's going to decline a little bit faster than the others. But in general, when we look forward, it's general softness across all the products. So again, as I've been saying, the market is soft, but remains stable.

Thurman John Rodgers - President, Chief Executive Officer & Director

It goes back to my comment earlier. If you look at our breakout of business unit, we have 13 business units by geography, five worldwide geographies. So you're looking at 60 numbers. There's no red bullet there. It's a lot of pink all over the place. Having said that, USB is going to grow in the face of even market adversity because of the Type-C thing I just talked about. The memories in a good market will be flat because there is a market decline still in SRAMs. It's been mitigated, but it's still there. And there's a market decline in NOR Flash.

So, there, what – the name of the game is to increase market share, maintain and increase gross margins and have the least impact on the business. So the next question would be, why don't you just spin it out? The answer, it's a very profitable business and the cash cow that funds everything else.

And half of the company – by the way, although there's no sex appeal in memories, if you're trying to make something in a car that works, that dashboard has to light up with pictures on it. And those pictures sometimes are one billion bits. So you need something that can quickly put a bunch of data and fill up your dashboard, and that's NOR Flash. And you need, in the communications world, your voice goes through our SRAMs. Guaranteed our voices are going through one of the Cypress SRAMs right now. So do your emails.

So although the sex appeal in these memories is not there, they're profitable, cash flow positive, and absolutely a cornerstone of a package that we offer to our customers, which is much more powerful today than it was with Cypress alone.

Betsy Van Hees - Wedbush Securities, Inc.

Thanks, T.J. That was very helpful. And with the semi market being soft, but steady, and the fab utilization rates dropping down to 50%, is that what you are baking into the guidance for the remainder of the year at that 50% reduction in the fab, that the market's going to be soft but steady as you burn through that $60 million in inventory? Are you expecting improvements in the back half of the year better than what would be normal seasonality from a macroeconomic recovery?

Thad Trent - Chief Financial Officer & EVP-Administration

Betsy at this point, it's tough to predict, right? I mean we have limited visibility. I think everybody in the market overall is a little clustered up right now. So as we're looking at internal plans, we're assuming a 50% utilization going through the first half of the year and then we'll start cranking that thing up as we burn through this inventory later in the year. And obviously if demand comes back strong, we've got the capacity to increase the utilization and support customer demand very quickly. But right now, we're assuming the macros remains soft and we'll wait for it to turn around and then we'll crank back up our fabs.

Betsy Van Hees - Wedbush Securities, Inc.

Thanks, Thad. appreciate that. And once again congratulations on the good performance in a tough quarter.

Thad Trent - Chief Financial Officer & EVP-Administration

Thanks.

Operator

Thank you. Next question comes from Mr. John Vinh. Sir, you may ask your question. Please state your company name.

John N. Vinh - Pacific Crest Securities

Yeah, Pacific Crest and thanks for taking my question. Just a follow-up question on the inventory burn. T.J., what utilization are you assuming for your gross margins to exit the year at 40%, and should we assume that there's an opportunity for gross margins to continue to improve as we go through 2017?

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay. Complex question. I believe 50% will our lowest utilization. If you want to ask about utilization and gross margins -when we put our utilization back at 60% plus, I believe the gross margins will get above 40%. I mentioned earlier that we have a lot of initiatives to improve gross margin. The most impactful ones on the gross margin, the weighted average that you look at, come from memory. Dana, talk about your gross margins.

Dana C. Nazarian - Executive Vice President-Memory Products Division

So, it's -

Thurman John Rodgers - President, Chief Executive Officer & Director

Introduce yourself.

Dana C. Nazarian - Executive Vice President-Memory Products Division

Yeah, this is Dana Nazarian, Memory Division VP. So, what T.J. said is affecting me the most. It's a decision we made on the loading, and I think, it's a good long term decision. Aside from that we've got at least 40 initiatives inside the division to improve gross margin. Most of them on flash, but not exclusive to flash. The combination of cost reductions, new products which bring better gross margins, more proliferation of our HyperBus products which service mostly the automotive industry that give us higher gross margins, and the litany of turning the crank initiatives.

And then finally, we're being a little selective in which markets we serve. We're maintaining our revenue and improving market share, but at the same time staying out of low-end consumer products which damage our gross margin.

John N. Vinh - Pacific Crest Securities

All right. Thank you. My follow up question, T.J., is obviously we've all noticed that you've been buying back a meaningful amount of stock. If you look at the last time you bought stock was 2008, which was the bottom of the cycle. You know, we obviously don't appear to be at the same point in the cycle this time around. Can you just walk us through kind of your mindset and rationale which led to you repurchasing stock in the market?

Thurman John Rodgers - President, Chief Executive Officer & Director

You mean me, T.J., or me, Cypress?

John N. Vinh - Pacific Crest Securities

You, T.J.

Thurman John Rodgers - President, Chief Executive Officer & Director

Oh. So, I'm all-in on Cypress. I've got, other than my house and my winery, pretty much all of my assets are in Cypress. My advisers wring their hands and cry about diversification. So I'm on the wrong end of the diversification thing right now. But I am – have been buying. So if I wanted to buy at $9 and change, I sure want to buy at $8 and change. And I will continue to buy opportunistically. For me personally it's a deal and it's a deal about cash flow. So when I have an opportunity for an option to come due, et cetera, you'll see me buying. So I'm still in that mode right now.

John N. Vinh - Pacific Crest Securities

Great. Thank you.

Operator

Thank you. Our next question comes from Mr. Vijay Rakesh. Sir, you may ask your question. And please state your company name.

Vijay R. Rakesh - Mizuho Securities USA, Inc.

Mizuho. Just had a couple of questions going back on the utilization. Back last year one of the things you have talked about is pulling in Fujitsu, or bringing Fujitsu into Fab 25. How is that going? And why hasn't that been accelerated? Also, I guess in terms of fab consolidation on the Minnesota fab, wouldn't those two help your utilization to the back half? Can we get more color there? Thanks.

Hassane El-Khoury - Executive VP-Programmable Systems Division and Software

Hi, Vijay. This is Hassane, VP for PSD. So we are still on track and have made a lot of progress moving the old Fujitsu microcontrollers into Fab 25. But as you know, most of our customers in industrial and automotive, there is latency between moving the material to Fab 25 and ramping towards customer qualification. So we are today in that phase, if you want to call it. So we sampled. Now we're going through the qualifications along with the customers and as customers start to approve the qual and the Fab 25, we will start ramping production, moving it slowly there.

As far as old Cypress products, those products have already taped out and qualified in Fab 25, and they are in the same phase right now that we are working with customers qualifying. And that will start ramping as customers close their quals.

Vijay R. Rakesh - Mizuho Securities USA, Inc.

All right. Thanks, Hassane. And just back on the automotive industrial side. Given the pipeline of design wins in automotive, if you can give more color there. What do you expect that industrial automotive markets to grow in 2016? Thanks?

Hassane El-Khoury - Executive VP-Programmable Systems Division and Software

So, first of all, let me give you some color on the design wins. So our design wins are focused primarily on, if you want to talk about, three applications across all the products that we have. The three applications are primarily the instrument cluster, so the dashboard where we have a leading market share.

Second is body electronics, so a lot of the comfort, convenience, as well as the body control modules. So not a lot of what you, as a driver, touch and feel, but a lot of what runs the actual car. And the third, of course, very important which has seen a lot of growth that Thad talked about earlier is the TrueTouch or human machine interface. That includes both TrueTouch and CapSense. So I'm talking touch screens, track pads, and CapSense buttons. So these are the three primary components or applications that drive our automotive.

Within those applications, however, we have the TrueTouch, we have the MCU, and of course we have the flash and SRAM memories, and the PMIC. Now, if you look at aggregate between all markets – all these market segments and the growth we will be looking at about 5% and that up and down is, you have very strong growth in the ADAS market, as we all know it. So the Advanced Driver Assistance, self-driving cars to radar that will slow down your car. That will see higher growth than the one I quoted and that's more driven by some of the components. For example, you won't see a touch screen in there. And then the body electronics is a little lower than that. But overall across that market, we're about at 5%.

Vijay R. Rakesh - Mizuho Securities USA, Inc.

Great. Thanks a lot.

Operator

Thank you, sir. The next question comes from Mr. Rajvindra Gill. Sir, you may ask your question and please state your company name.

Rajvindra S. Gill - Needham & Co. LLC

Needham & Co. and thanks for taking my question. A question on the cap structure and your thinking around that. As you, kind of, look at the debt – total debt to capital, it's now 20% of capital versus 10% maybe four quarters ago. I wanted to get a sense in terms of how far the company is willing to go in terms of levering up to support the dividend and the buyback.

Thad Trent - Chief Financial Officer & EVP-Administration

Yeah, Raji, we're comfortable putting on more debt. The issue we've got is the rate that we can get that debt at, right. And as T.J. mentioned, at rates north of 6% it just doesn't look attractive. Our leverage ratios today are just over 2. We're comfortable going up higher because we're confident in the cash flow that the business creates long-term. That's why at the higher rates we don't want to take the debt and we're going to change wafers for stock. But if the markets were to cooperate and rates were to come down, then we would be back in there potentially taking on more debt if that makes sense. But we're comfortable taking on more because the EBITDA that we start to throw off later in the year is significant.

Rajvindra S. Gill - Needham & Co. LLC

So assuming you could get maybe more favorable rates than everybody gets, I mean, what do you think – how far would you go in terms of the ratio – the leverage ratio and also in terms of your total debt to capital?

Thad Trent - Chief Financial Officer & EVP-Administration

Well, I mean, we're comfortable going over 3. Pushing up into 3.5 if we needed to. It's just a matter of again that's back to the rates. But we're comfortable with the debt level we're at and we're comfortable taking on more if the markets cooperate.

Rajvindra S. Gill - Needham & Co. LLC

And last question, T.J., on the revenue you kind of nicely talked about the core base business now of around $425 million and then seasonality will come into play. So it seems that this year could be a much cleaner revenue picture than, say, last year because of the TrueTouch and the NOR revenue. Can you talk a little bit about the – your sense of a normalized seasonality given what you've done in the business the last year and a half?

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay, so first of all let me confirm two points. The current run rate is $425 million times 4, $1.7 billion, and seasonality we're in the lowest quarter typically in the year, so seasonality is upward from there. And so I agree with that, and I also agree that this year we'll give a clean revenue picture. You could argue and I certainly have internally that this little story I gave you of 1977 dropping down to $1.7 billion could have been better predicted. Fact is we merged on March 13 and all of that wasn't clear to me at that time, and by the time, it got clear it was mid-year and we'd already had a $500 million quarter and felt that's where we were going.

So yes, this year is going to be clean. It will represent who we are and what kind of revenue we can generate. Will it be – and it will – our current plan is slight growth over last year. So we don't see shrinkage this year. And that plan is the Cypress-style plan. I spent 50 hours looking line by line, business unit by business unit at our revenue, and I am feeling more confident that we will be able to tell you what we're going to do, and do what we said this year.

Operator

Thank you, sir. The next question comes Mr. Craig Hettenbach. Sir, you may ask your question, and please state your company name.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Yes, thanks, it's Morgan Stanley. A question on the NOR business, you commented about just kind of focusing on the better profitability pieces there. Can you tell us where you are along that process? How much pruning, maybe, is left? And then also, a broader question or just the health of that market competitively, how you see pricing shaping up?

Dana C. Nazarian - Executive Vice President-Memory Products Division

Sure. This is Dana. Let's see, you asked a few questions there. First of all, in terms of, you used the word pruning, I would say we're pretty much done with where we're going to focus our efforts, and that being in automotive, industrial, communication, and the high-ended consumer. I consider Q1 to be our low point in the year. The previous caller asked about seasonality, that affects me the most in Q1. Typically Q1 is more than 10% down from the median of the year. And then, your second question was, refresh my memory.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Just the competitive environment. Kind of what you're seeing there?

Dana C. Nazarian - Executive Vice President-Memory Products Division

Yeah.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

And there's – some companies are de-emphasizing the space, others are still a little bit more cut-throats so you just want to get a sense of how the market is shaping up.

Dana C. Nazarian - Executive Vice President-Memory Products Division

It's a mix and it depends on what market you're in. Fortunately, in the markets that we're focusing on, the embedded systems, the high-reliability systems that are required for communication in automotive, it's not as cutthroat. Where you see the cutthroat is in consumer markets typically in Asia-Pacific. So it varies widely by the market segment. And I would say, as a general statement overall, pricing remains pretty stable and typical in the competitive memory market. Nothing extreme going on right now, I would say, at 50,000 feet.

Thurman John Rodgers - President, Chief Executive Officer & Director

The NOR Flash market has declined if you look at the macro, go look at some database and you'll find the NOR Flash market has historically declined over the last five years at a compound rate of about 13%. If you look at the part of the NOR Flash market we're in, which is the high-tech, high-reliability, high-density end, the premium end, that market has been declining low single digits.

We've gotten rid of our dependence on what I would call the consumer side, and the stuff we now make is important. Like I said, when your dashboard lights up with a 3D thing that actually looks like a needle on a gauge with a shadow, that takes a lot of bits. And those bits have to be AEC qualified. That is, they have to go through automotive qualification. And we make a lot of bits that run at high temperature, that have high reliability and endurance. That's a couple buck part and it's needed and more of them will be needed. There's a thing going on that McConaughey had with the Lincoln Navigator on the dashboard is now getting replicated down through in all cars, even the low-end cars are going to start having that kind of electronics in it.

That's where we want to play. I'll just give you one example of the market we got out of. The same thing, lighting up a display, on a low-end machine of some kind with a little display, and let's say 15 megabits of data, that chip in a A10 package, 16 megabits of data without automotive qual and without super high reliability sells for a nickel, $0.05. That's the business that's gone. Good riddance. It's a totally different animal from the side of the market we play in. We make the highest quality and reliability automotive-grade products in the world and we make the highest density products in the world. That's where we're going to focus.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Got it. Thanks. And as my follow-up, appreciate the color on your views on the USB Type-C market. What type of signposts will you be looking at in terms of inflections where you've seen a lot of the design work but from a visibility standpoint or customer adoption, what type of things are you looking at?

Badrinarayanan Kothandaraman - Executive VP-Data Communications Division

Okay. So like T.J. said...

Thurman John Rodgers - President, Chief Executive Officer & Director

Introduce yourself.

Badrinarayanan Kothandaraman - Executive VP-Data Communications Division

My name is Badri and I run DCD. Like what we talked about, we are being designed in at many of the top PC OEMs. And as in other new USB technologies, ramps do take time. Having said that, I expect the ramps starting in the second half of the year.

Thurman John Rodgers - President, Chief Executive Officer & Director

The USB Group is one of our internal growth groups that is going to, we think, the sum of all of it is slight growth, and they're offsetting some of the memory shrinkages we've talked about.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Got it. Thank you.

Operator

Thank you, sir. The next question comes from Mr. John Pitzer. Sir, your line is now open. You may ask your question and please state your company name.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Yeah, it's Credit Suisse. And thanks for taking my questions this morning. I just want to go back to the gross margin and maybe I've misheard you in the past, but I think you've kind of given us a rule of thumb that every 10-point move in utilization is about 100 bps change to gross margin. But clearly a move from 50% to 60% is having a much bigger impact into the March quarter. Am I just wrong about the rule of thumb historically? Or is there some break point as you get to 50% where the impact's larger? Or are there other factors of play on the gross margin line for the March quarter?

Thad Trent - Chief Financial Officer & EVP-Administration

The rule of thumb is still there, but when you start getting down into that 50%, the impact is a little bit larger, and especially at these revenue numbers. If you think about it, between the front end and the back end and the manufacturing overhead at these revenue levels and at that 50% utilization, it's about a 2 percentage point impact to margin. In that, the 1% that we talked about is then the Fab 25 in Minnesota, caused a scandal. And it didn't include the backend and the other manufacturing overhead pieces that you've got to absorb.

Thurman John Rodgers - President, Chief Executive Officer & Director

The rule of thumb is the linearization of the actual curve. And the actual curve is quite curved. And lower you go, the more curve it's got.

Thad Trent - Chief Financial Officer & EVP-Administration

Yeah.

Thurman John Rodgers - President, Chief Executive Officer & Director

If you take it to the extreme, if we made one wafer in Fab 25, it would be a $50 million wafer.

Thad Trent - Chief Financial Officer & EVP-Administration

It'd be a little bit lower than that.

Thurman John Rodgers - President, Chief Executive Officer & Director

So it really is the standard – the standard deal is the incremental wafers or incremental cost, incremental labor, all of which – and incremental chemicals and gas. And they're low. But right now we've got a large facility and half loaded. And it's a bunch of millions of bucks that aren't amortized right now. In a way it's a bit of an opportunity for us because it forces us, the water level's gone down and the rocks are showing. And we're now looking at improving and making our fabs more efficient. We are – you heard about other initiatives. The Fujitsu moved. We're moving Fujitsu wafers into the fab. What percent completed is that?

Hassane El-Khoury - Executive VP-Programmable Systems Division and Software

Internal qualification is 100% completed. We're waiting for the customers to qual.

Thurman John Rodgers - President, Chief Executive Officer & Director

So, we've got all the Fujitsu parts into Fab 25. That's good news. The bad news is they're automotive customers and these guys, they know how to qual. And they do a lot of it for a long time. We also have, we have mentioned this today, we are moving wafers out of Fab 4 which is under loaded into Fab 25. So that will be relatively good for Fab 25. And we anticipate by the end of this year that we will no longer own Fab 4. And that will end up obviously having a positive impact on margins. So you're right. It's a complex question. But the overwhelming factor is loading at an extraordinarily low level of 50%.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

That's helpful, T.J. I appreciate the color. And I guess on my follow-up is just a couple questions around the Type-C market. I think in your prepared comments you've talked about design wins with PC OEMs. As you envision the ramp in the second half of the year, what's happening PC versus handsets? And then, T.J. relative to your leadership position in the strong IP, just help me understand because when TrueTouch was sort of the potential growth engine for the company you talked about a very strong IP position. But you had a really difficult time monetizing that in the market, and ultimately, I think did the right thing with the divestiture. Help me understand why you think your IP or leadership position in the Type-C market will lead to a different monetization than what we saw with TrueTouch.

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay, so let's talk about TrueTouch for a minute. We sold our TrueTouch biz, and got $100 million in cash. And a significant fraction of that $100 million was that bulletproof IP position. Having said that, once you're in the market, the dynamics of the market don't necessarily give you higher gross margins for higher IP position. And the TrueTouch market is the cellphone market. It's brutal. You're dealing with, I'll say, hypothetical Asian cellphone manufacturer. They take your product and they actively encourage small companies to make it at 20% gross margin.

So when you have a company, it's got a president, 20 design guys, and then they can buy wafers cheaply because the large unnamed Asian company helps them do it, they can come in with pricing that in effect cuts your gross margins. Now, you can go sue them in unnamed Asian country, but fact is, by the time the lawsuit is over, you've gotten nowhere.

So, in the TrueTouch market, basically is a – it turned into a crappy cellphone market. We were selling sophisticated touching systems, which by the way, the automotive guys with the signal and noise we have and the other IP we have love. And the little junk companies can't get into automotive, because they can't make stuff that's good enough. So you'd want to have controls in your car. So that was the dynamic there, and we decided to exit. In effect, it was a 40% gross margin business, and when you're making complex systems, you need to run north of 50% gross margin to put something on the bottom line. That's why we divested.

Could that happen, second question, in USB Type-C? It will happen, but in USB Type-C, we have an extremely low cost structure. We have not built up a large organization with huge overhead, like we had in TrueTouch. We don't have to have large groups of salespeople. The other part of the Asian model that was the killer is, any time you're dealing with a cellphone manufacturer where you can get a multi-million-unit per month cellphone order, they just say, we want five guys in our plant all the time. And so, in five or six cities in Asia, you're supporting 10-person groups to cater to, and even design for, these manufacturers.

That's not true. When you're dealing with PC makers, you can name the premium ones, HP, et cetera. They've got competent engineers. They don't want you meddling with their designs. They're usually typically proprietary. So you don't have to go do the design win for them in Type-C. So I don't anticipate – we've also been in the USB business since 1998, and we were one of the first companies to introduce USB chips and I've been through USB 1, 1.1, 2.0, 3.0, 3.1 and now Type-C power delivery version of 3.1. So we're pretty good in the market and we have established a quality brand. So there are no promises in our business of course, but the dynamics in this business are such that the overhead is not going to eat your lunch when the margins get thinner.

We also have Fab 25 in Austin, Texas. And I'll tell you, that is a powerful fab which can compete with any in the world, especially – with these little companies, one of the things they have to do is they have to buy wafers from foundries. So we will have a high-quality product made at world-class cost and we won't have overhead eating our lunch. So we're hopeful about Type-C not going down the same path as TrueTouch did.

Michael Balow - Executive Vice President of Sales and Applications

This is Mike Balow, John. I'll add one more point to that, what T.J. talked about. I think fundamentally the difference between TrueTouch and Type-C is TrueTouch was targeted at one segment, mainly at the handset. Type-C is really being adopted across a wide range of segments. I visit customers all the time from set-top box guys to TVs to people doing toothbrushes to the automotive industry, all looking to adopt Type-C for a variety of reasons. One being the power delivery, being able to charge.

If you think about a set-top box, you may have one cable now going from a TV into a set-top box where you can run your voice, video, and data along with power on that one cable. So I think the segmentation is going to be a lot different, and we'll be in areas that aren't quite as cutthroat as the cell phone industry.

Thurman John Rodgers - President, Chief Executive Officer & Director

I'll also tell you, internally it's not clear to us that when the cell phone is going to turn on and how much, so the projections we have internal that are baked into the numbers we give you don't include anything in cell phones. That would be an upside.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Guys, the color is helpful as always. Thank you.

Operator

Thank you. Next question comes from Mr. Doug Freedman. Sir, your line is now open. You may ask your question and please state your company name.

Doug Freedman - Sterne Agee CRT

Yes, Sterne Agee CRT. Thanks for taking my question, guys. When you talk about raising capital via squeezing the balance sheet or your working capital down on the inventory side, is there also an opportunity to do so on the accounts receivable number? Is that a possible source of cash for you?

Thad Trent - Chief Financial Officer & EVP-Administration

Doug, so we typically run our DSOs somewhere between 55 days and 60 days on average. We'll continue to run that at that level. Those are kind of our standard payment terms with our customers, and kind of the impact of that sell-through through the distribution model – most of our customers are on 30-day to 45-day payment terms, so that when you do the calculation it kind of rolls up into that 55 days to 60 days. But where you'll see the benefit is obviously the increase in revenue over time, and that'll fall through to the cash flow line. But I don't expect the DSO to change significantly.

Doug Freedman - Sterne Agee CRT

Moving on to another topic, talking distribution and inventories there. Can you offer some comments around what you're seeing in terms of distribution inventory carrying? Is there any chance your distributors are going to want to stock a little bit more inventory? With your take-down in inventory, is there any risk that you see that, just the inventory carriage just moving in the marketplace?

Michael Balow - Executive Vice President of Sales and Applications

This is Mike Balow. I'll answer that question. What we're seeing really across globally with distribution is very normalized levels. In fact, distribution, if anything they're watching I think their inventory a little bit closer. But we're seeing everybody behaving very normally globally right now inside of distribution.

Thurman John Rodgers - President, Chief Executive Officer & Director

Another comment on distribution. In the future I do not expect that distribution inventories growing and shrinking are going to have the impact in the industry in general and certainly in our company as it's had in the past. For the last three years, we've been feeding on inventory, and if you forget the excess inventory issue and go look at our working inventory, today Cypress Semiconductor aggregate quotes a four-week lead time with 99.5% on-time delivery. It's extraordinary. So 99.5% says you can count on getting what you asked for, and four-week lead time is really fast. And even the flash, which we haven't quite gotten to that level yet, is shipping over 99% on-time delivery with a 5.6-week lead time, which is low.

So the bottom line is when distributors can get what they want when they want it, they're going to do what's good for them, which is not to put their money in that inventory, and they're going to have high turn rate in their inventory. And that makes us attractive as a supplier to distribution. That's the right way to run the world. If you had a semiconductor company and a semiconductor-consuming company in your conglomerate, you would make them work that way. And it's the games between companies that cause these inventory levels to fluctuate.

Our goal is to make it very small and not be a factor. And that's really more of a customer thing than a financial thing. If you're easy to do business with and they can always get what they want when they want it, you're going to take market share, particularly in memory. So I don't think inventory and distribution, I know we used to talk about that a lot, is going to be a factor for us going forward.

Doug Freedman - Sterne Agee CRT

Great. Thanks for that color.

Operator

Thank you, sir. Your next question comes from Suji DeSilva. Sir, your line is now open. You may ask your question and please state your company name.

Suji DeSilva - Topeka Capital Markets

Hi, guys. Topeka Capital Markets. You've given your top-10 customer revenue metrics in the past. Can you give what that is? And more importantly, do you expect that concentration to increase in the future or remain stable?

Thad Trent - Chief Financial Officer & EVP-Administration

So we have no 10% customer. Our largest customers are around 5%. I don't have the – do you know, Mike? Do you know what the top 10 make up as a percentage of total?

We'll have to get back to you on that one, Suji. Sorry, we just don't have the data in front of us. But you know, our largest customer is 5% or less.

Suji DeSilva - Topeka Capital Markets

Right. Now do you expect that concentration to increase with some of the auto guys coming in? Or should that stay relatively stable?

Thad Trent - Chief Financial Officer & EVP-Administration

On the top 10, yes, that concentration will increase. In fact we've put together internally a program to make sure on the top 10 that that's going to increase. So we're very tied into the top 10 and we're looking at ways to significantly grow that revenue.

Suji DeSilva - Topeka Capital Markets

Terrific. Thanks. And the other question – I'm sorry.

Thurman John Rodgers - President, Chief Executive Officer & Director

(1:10:22) automotive, take a $1.7 billion company, 10% is $170 million. We have no customers approaching $170 million. We do have big and important customers in the $30 million to $100 million range, multiple of them, but it's highly unlikely that an automotive company would ever get to 10%. It's more likely that you get 5% or 6% in five or six major manufacturers and have a higher fraction in automotive than having a spike. The spikes you're talking about typically are when you score in some super-high volume consumer product and they're a supernova. They flash for a while and then they burn out.

Suji DeSilva - Topeka Capital Markets

Great, thanks. And the other question I had was around remaining divestitures. You talked about the historic ones you've done. And it sounds like the portfolio is in a position now where it's kind of in a go-forward state with what you're going to go forward with. But are there any candidates remaining that are potential divestitures? Or are we past that at this point?

Thurman John Rodgers - President, Chief Executive Officer & Director

I'm sitting here thinking so I could be careful and not say something dumb. Right now portfolio is where we want it to be. You know there's 13 business units here and in the business units among them have what we call product families that are below the level of visibility you have. So from time to time I'll threaten a business with get your stuff together or I'll sell you. But no, there's not a business unit among our 13 that's in trouble right now that we would be substantially better if we divest it.

If I go back to the TrueTouch divestiture, sure we got a bunch of cash and that was the eight minutes of gratification. Then we had to go resize the entire company, do for every organization that supported that group. So the layoff isn't just getting rid of a division, it's getting rid of X percent of your sales force and X percent of your corporate marketing people, et cetera. So right now at $1.7 billion we're real lean and we've got a plan for each of our 13 business units. That's what I've been doing for the last week and will do all of the next week, and they're all solid right now.

Operator

Thank you. Next question comes from Mr. Charlie Anderson. Sir, you may ask your question and please state your company name.

Charlie Lowell Anderson - Dougherty & Co. LLC

Yes, Dougherty & Co. Thanks for taking my questions. Thad, I wondered if you could remind us on typical Q2 seasonality and then also sort the long-term growth rates of the overall business. I think you've offered that in the past when you did the merger. Any updated thoughts there would be helpful.

Thad Trent - Chief Financial Officer & EVP-Administration

So the typical seasonality going into Q2 is typically up 6% to 7%. So if you think about it, Q1 is down 6% to 7%, Q2 goes up 6% to 7%, Q3 is up and then Q4 is kind of the low point of back down again.

Operator

Thank you, sir. Next question comes from Mr. Harlan Sur. Sir, your line is open. You may ask your question and please state your company name.

Harlan Sur - JPMorgan Securities LLC

Hi. JPMorgan. Morning. On the pickup that you saw in the APAC region exiting the fourth quarter, I know it's off of a soft base, but can you just tell us what end markets you guys saw the strength? And has this better trend kind of sustained here through the March quarter?

Michael Balow - Executive Vice President of Sales and Applications

Yes. This is Mike Balow. It was really across a number of sectors for us in APAC. It wasn't one particular industry. Memory certainly came in a lot stronger than we were initially anticipating. Microcontrollers did very well in APAC, and looking forward, yes, we continue to see APAC being pretty strong. It's still a little but unpredictable with APAC, but for what we're forecasting at least into the next quarter, we see that momentum continuing.

Operator

Thank you, sir. The next question comes from Mr. William Stein. Sir, your line is now open. You may ask your question and please state your company name.

William Stein - SunTrust Robinson Humphrey, Inc.

Great. It's SunTrust. T.J., thanks for explaining to us the decision to convert wafers to cash. I'm sure that even before you made that decision, you evaluated that as an alternative to raising debt even when debt was in the 4s. I'm wondering, I suspect that the typical reason why companies decide not to do that is the concern around when you ramp up. Did the company lose some capability or did something not go as smoothly as expected? Is that correct and what are you doing to ensure that that doesn't happen in the back half of the year when you ramp production? Thank you.

Thurman John Rodgers - President, Chief Executive Officer & Director

Yes, I'll make a comment and I'll turn it over to Joe Rauschmayer who runs manufacturing for the corporation to talk about re-ramping. Yes, we've known since the day we merged, since before we signed the documents that we had some inventory we needed to burn because of the difference of the reserve policy between the two companies.

What we did in the beginning was we asked what was a comfortable rate where we could ramp down Fab 25 to that rate and hold it and then how many quarters at that rate it would take to burn the inventory off we wanted to burn. What changed was we decided to go below that. We decided to go all the way down to 50% capacity in order to burn faster to get through this period, so we don't have to explain that. So we're doing that now. We will do some cutting to make the fab right size for that level. And then re-ramping?

Joseph T. Rauschmayer - Executive Vice President-Worldwide Manufacturing

This is Joe Rauschmayer. I'm responsible for manufacturing. So at 50% utilization, we actually have the opportunity to run all our technologies at some level, so we don't ramp down to zero on any one particular technology or capability that we have. In addition to that, over the years we've developed very strong startup and shutdown procedures for equipment and technologies as we do that in the fab for maintenance and things like that. So we've gone through many, many startups before without a hitch over the last several years.

Operator

Thank you, sir. Our last question comes from Mr. Ryan Goodman. Sir, you may ask your question and please state your company name.

Ryan C. Goodman - CLSA Americas LLC

Hi. CLSA. Thanks for taking the question. Just one more on the utilization on the margins. Just curious if there was anything else beyond the utilization that may have surprised you during the quarter. Maybe in terms of mix with the margins. I just would have thought that a decision to take the utilization to 50% in Q1 would be more impactful to Q2 and then it didn't seem like there was any surprises in the utilization in Q4, so a little surprised that the Q1 margin was coming down so much. So any thoughts on that?

Thurman John Rodgers - President, Chief Executive Officer & Director

First a financial comment on that. The impact on your company is not like a weighted average. What happens is when you change your manufacturing, you change your manufacturing costs, and then at the end of the quarter you write your inventory to the new cost. So the impact is fairly immediate. Second question was?

Thad Trent - Chief Financial Officer & EVP-Administration

Other things influencing the Q.

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay. So what else hit gross margin, so had the question twice.

Dana C. Nazarian - Executive Vice President-Memory Products Division

A little bit of softness in pricing in Asia Pacific in memory.

Thurman John Rodgers - President, Chief Executive Officer & Director

Hassane?

Hassane El-Khoury - Executive VP-Programmable Systems Division and Software

Normally for PSD it's primarily driven by mix. There's not a silver bullet for what the changes in gross margin would be.

Thad Trent - Chief Financial Officer & EVP-Administration

And then also keep in mind you've got the Emerging Tech ramping at a lower gross margin as well, which has a dilutive impact.

Thurman John Rodgers - President, Chief Executive Officer & Director

Yes. Emerging Tech's revenue got big enough that the weighted average took a 0.5 point out of gross margin.

Thurman John Rodgers - President, Chief Executive Officer & Director

Okay. I see no more questions. I thank you for joining our fourth quarter report and we have the opportunity now to have a fresh start at $1.7 billion run rate and move forward from there. Thank you.

Operator

That concludes today's conference. Thank you for participating. You may now disconnect.

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