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Executives

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

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

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

Cathal Phelan - Chief Technical Officer and Executive Vice President

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

Dana C. Nazarian - Executive Vice President of Memory and Imaging Division

Tim Olson -

Badrinarayanan Kothandaraman - Executive Vice President of Data Communications Division and Executive Director of Cypress India Limited

Analysts

Doug Freedman - RBC Capital Markets, LLC, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

John Pitzer - Crédit Suisse AG, Research Division

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

Ruben Roy - Mizuho Securities USA Inc., Research Division

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

Steven Eliscu - UBS Investment Bank, Research Division

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

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

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

Jeffrey A. Schreiner - Capstone Investments, Research Division

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

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

Cypress Semiconductor (CY) Q1 2012 Earnings Call April 19, 2012 11:30 AM ET

Operator

Good morning and welcome to Cypress Semiconductor First Quarter 2012 Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. T.J. Rodgers, President and CEO of Cypress Semiconductor. Sir, you may begin.

T. J. Rodgers

Good morning. We're here to report the first quarter and answer questions, and we'll have the standard meeting: Brad with the numbers, Chris with the market, me with some random stuff and then your questions. Thank you. Brad?

Brad W. Buss

Thanks, T.J. Thanks everybody for joining us to go through our first quarter results and our look towards Q2 and beyond.

As every -- standard stuff, these are preliminary unaudited results. We encourage you to take a look at our 10-Q. Obviously, lots of risk factors especially after going through Q1, and obviously, we're making a lot of forward-looking statements that we don't plan on updating unless it's material.

And we've got our full GAAP to non-GAAP recons in the release, as well as on the web. And we also have redone our segments, which is pretty detailed in the press release, and we've also taken 3 years of history for those of you that want to go back far. And that's all on the website as well. So if you want to go change your models to reflect the current organization, you can do that.

And I think it's fairly straightforward, but let me just put a couple of things in perspective on the segment change, something we've been obviously talking about for a while. And it really kind of aligns us into the 3 core areas of the company focused around our memory products; our USB and our programmable products, which includes our PSoC 1, 3 and 5 and all the derivatives; and then all of our user interface products.

One thing that's different is we moved the trackpad and the ONS from Emerging Tech. They've kind of graduated, so to speak, and they're now part of PSD. Automotive went from memory to PSD, and timing is now in MPD. So pretty detailed in the press release, take a look through that. Very strong alignment to what we're doing, and now the Emerging Tech group is purely our 3 wholly-owned subs: Cypress Envirosystems, AgigA and DecaTech. And then, any other little and startup things that we do will go in there as well.

So I think it's very clean. It's very straightforward. You can get a good feel for the drivers of the company. And like I said, all the history is there. So we're very aboveboard in what we're doing there, and we thought it made sense to do it at the beginning of the year to start the year off right.

Okay, so if we look at Q1, obviously, the pre-announcement was not something we were pleased with, or you guys, but it was really limited to a couple of the factors we described in the release. So we ended up at $185.1 million. It was the middle of our revised guidance. Unfortunately, it was a sequential decrease of 24%.

And basically, all the divisions, major product lines and channels performed consistent with the revised guidance. MPD decreased 9% as we expected, mainly due to inventory adjustments and lower demand from the major SRAM wireless customers. DCD actually increased 6%, and that was driven, believe it or not, by some increases in West Bridge, offset by normal seasonal declines in USB, and we're going to see that business coming back nicely in Q2.

PSD declined 38%. And as we said, it was pretty heavily centered around the touch end of it. We had a lot of end-of-life going on in the tablet end of it, that most of you knew, that was a pretty big drop. We had 1 or 2 specific customers that had some end market challenges that impacted us pretty heavily. And then, you had a little bit of seasonal decline there. Again, we feel very comfortable that they weren't any specific share loss issues related to us, but really more customer issues.

And on the positive side, like we said, we expected Q1 to be the bottom. And we've seen very strong designs, bookings and revenue metrics for Q2, and we'll talk about that in the next section.

If you look at it by end market, we saw sequential decreases across all market, with the largest impacts in handset, obviously, because of the touch end of it, communications and computation. Really, we didn't see no major surprises by any of the end markets. All of our channels decreased sequentially, driven mostly by distis and again, within Asia and Europe, as we talked about before. We continue to have one 10% customer, and again, that's consistent with the same customer in the prior quarter, and we're glad to see that customer there.

On a GAAP basis, we had a net loss of $12 million, about $0.08 per diluted share. And on a non-GAAP basis, we had $20.5 million in net income. That allowed us to get $0.12 in fully diluted EPS, which exceeded the guidance, really due to better GM and tight OpEx. The buybacks that we did in the quarter were later in the quarter and really had no impact on that EPS end of it, and we'll get the benefit of that in Q2.

If you look at the core semiconductor business, which excludes the impact of our Emerging Tech division, we actually had $0.15 in EPS and a PBT of almost $0.15. So I was pretty excited to see that in what was a pretty bad and trough quarter. So obviously, you can tell that the Emerging Tech has cost us about $0.03.

The non-GAAP gross margin was 55.7%, better than my guidance. And it was really due to just the product and customer mix and we had a slightly better performance from our factories. As we saw the bookings rebounding in the quarter, we were cranking up some starts. And again, it's very important, if you look at our semiconductor gross margin, again, which excludes the Emerging Tech division, it was 57.3%. And that was actually up from the prior quarter. So again, I was very pleased to see that. And just to put it in perspective, we've had our ninth consecutive quarter with our consolidated gross margin above 55%, so a very strong testament to what we've done, the products we have, the fab-lite strategy, and we only see gross margins being able to trend up going forward.

The average utilization in our fab for Q1 was around 73%, the lowest in about 1.5 years. It was down slightly from the 75% in Q4. And I think we'll move utilization back up to the high 70s, 80% range in the next quarter. The wafers from our foundry partners were pretty much flat, around 24% of the total. And that's down substantially, and I would expect to see that increase as we fill up our fab and revenue increases throughout the year.

The average corporate ASPs were roughly $1.32, down slightly, really just due to the mix of products as we had a lot less touch and SRAM, which are very beneficial for the ASP number, and I'll expect to see that move back up. We did a great job on managing OpEx. We came in at $82.1 million, around the low end of where we expect it to be.

You guys know we're very tight on OpEx. We had very light variable comp expenses because of the quarter, and we had slightly lower sales costs. We're down about 160 people as we planned in the quarter. And just a little side note, we're at the lowest headcount in over a decade. So I think we're managing that very well, and I think you're going to see some good leverage in Q2 and beyond as we continue to get a very high fall-through from the incremental revenue.

OIE was about 100k. We had very minimal interest income on lower cash balances, and there really is no interest expense related to the line of credit drawdown we did until Q2, and I'll take you through that.

The GAAP -- non-GAAP, I should say, tax expense was 700k, and we still expect taxes to be around 2.5% to 3% for the year, which is consistent with our cash tax rate.

So on the balance sheet, cash and investments were around $109 million. It decreased about 4 -- $58 million from Q4, and we used $98 million to buy back 6.1 million shares. So we basically have about $222 million left on our authorization to spend, and we'll continue to be opportunistic in deploying that.

91% of our cash was onshore, and really, I don't see any issues in bringing offshore cash onshore because we have a very strong current period NOLs that we can use to offset. And I'll think you'll see cash from ops and free cash flow continue to grow nicely with the revenue through the balance of the year.

Net inventory. Again, I think another very good management item here, even though you did see it increase, up to around $98 million, most of that was due to the wacky noncash-based, stock-based comp. And if you take out that and you take out some end-of-life inventory that we have, our operating inventory is around $81 million, which is 89 days. I'd expect to see the inventory increase in dollars slightly, days to go down this quarter. And I think we're doing pretty well in that area.

If you look at the disti part of it, about 71% of our revenue gets fulfilled through distribution. Amazingly, their inventory decreased by almost 16% in dollars this quarter, so that's the third consecutive quarter distis have taken down inventory. We expect that to be the bottom. We expect to see them turn up slightly.

We still continue to have very low lead times in general. So they don't have a huge incentive, so I don't think any of the increase we're seeing in revenue for Q2 is really restocking-related. We think it's going to be more demand driven. So obviously, our deferred income went down pretty heavily from $150 million to $127 million. And that's been the lowest for quite a while, and I'd expect that to move up.

So basically, I think you all know we don't recognize any revenue until the disti sell-through. So if and when they start taking on inventory, we won't have false revenue until they resell it.

AR is in very good shape. Aging is excellent. We took down the $50 million from the SVB [ph] line late in the quarter, really just to replenish the cash because we spent a lot of money on the buyback. We had $50 million outstanding. The interest expense is about the 345k a quarter, so you need to take that into your models going forward, and we'd expect to repay that through normal cash flow over the next few quarters. And we also are looking at other longer-term debt alternatives to potentially take advantage of the low rates that are out there.

CapEx was $10 million. Our friends at Deca are ramping up, and then, we finished off some of our additions that we're doing here. Depreciation for the quarter is $10.7 million. That's up again because of some of the new adds and because of Deca. I don't expect any real big depreciation bump after that.

Shares were -- came in at 154 million on the weighted basic, 174.5 million on the fully diluted. And again, that's the lowest share count fully diluted we've had in 3 years. So we've made very good progress with that, and we have more to come. So we took out 4% of the outstanding shares with the buyback in the quarter. And like I said, you won't see the impact of that until really Q2, but we did end the quarter at 151.7 million basic.

So guidance. Okay, you saw on the press release, we had a pretty nice book-to-bill, 1.33, majority of that in Q2, a lot of it in Q3. And Chris can give more color on that. So we're obviously glad to see that especially with lead times being pretty low.

We're 85% booked for Q2, and that's up from where we were at 65% in the prior quarter. So we're hoping to have conservative revenue in the range of $200 million to $207 million, that's up 8% to 12%. That's more than twice the normal seasonality. And again, I think, we'll see as good or better growth rates in Q3. I'd expect all divisions and product lines to increase sequentially, with the majority of the growth coming from our touch business, which I think will grow north of 25% sequentially in Q2 as a lot of the design wins for cellphones, tablets and eReaders begin to ramp.

Gross margin, I expect to move up a little again, sort of the 56% to 57% range, and obviously, that will vary with manufacturing, product mix, et cetera. OpEx continue to remain very tight in the range of $83 million to $84 million, bumping up a little bit really just with the variable costs associated with revenue.

And then, OIE, flat to around 100k because, again, we've got the interest cost in there of about 345 that I mentioned, and I would think a minority interest benefit of about 300k due to our sub.

Tax, around 3%; CapEx of 8% to 10%; Depreciation, around 11%; and the fully diluted share count to be around 169 million to 170 million. And obviously, that's going to fluctuate with option exercises, the stock price and any repurchases. If you roll this up, it should get you at a range of around $0.17 to $0.28 in fully diluted non-GAAP EPS, quite a bit higher than where I think the Street's at now.

And that's an increase of 42% to 66%, sequentially. And a much higher rate of growth, obviously, than sales. So you're seeing the leverage come back in Q2, and I think you'll see that continue in Q3. So real happy where we're starting off and more excited for the next couple of quarters.

So I'll turn it over to Chris.

Christopher A. Seams

Thanks, Brad. Let me start off with a few of the normal indices. In terms of where we ship to by geography, with the weakness in the end segment of handsets, we shipped less to Asia in the quarter, it went down to 54%, but still the majority of our shipments.

North America hung in there at 20%, and Europe and Japan, both grew to 12% and 14%, respectively. With -- obviously with the decline in revenue, units were down -- they were down 20% quarter-on-quarter, down to 140 million.

As Brad said, the all end segments declined for us in the March quarter, the largest being in the handset segment. That is going to be the largest rebound segment for us in the June quarter, and we expect all end segment to grow in the June quarter.

As I stated in last quarter's call, we thought we'd reach a bottom in bookings and backlog exiting December. That held true throughout the quarter. The stronger bookings and the increasing backlog drove our bookings up. They were $230 million. As Brad said, the majority of those were in the current quarter, second quarter, that we're in.

But we did get some significant bookings even into the third quarter of the year. Those bookings are up 70% from the December quarter, that drove our 6-month backlog up by 33%. It stands at $234 million as we entered the quarter. As Brad mentioned, our book-to-bill was well above unity at 1.33, with those bookings and backlog. By division, PSD led at 1.53, so very strong; MPD was at 1.17; and DCD was at 1.25.

As Brad said, we enter this quarter much stronger booked, 85% versus where we entered last quarter. We do believe that the strength in the bookings and the backlog is indicative of true end demand, and we really don't see much replenishment at this point.

Even with all those bookings, we've done -- our operations team has done a really good job keeping our lead times low. And as Brad said, we've got capacity yet to grow throughout the year. And cancellations and pushouts and expedites were all at about historical normal levels.

So with that backdrop, let me hand the call back to T.J. for a few more details on the quarter.

T. J. Rodgers

Okay. Not in any particular order. The first one is the most important. As you've noted, and told us strongly with our share price, we had a first quarter revenue that dropped. It was down 24% sequentially, 21% year-on-year. We had to re-forecast, and then, we made that re-forecast. The reason for that is a 1-quarter gap in our revenue for our new PSD4 product. We introduced it, and I described it 2 quarters ago. I'm still very happy with the chip. And it's still, I believe, the best chip in the market.

Last quarter, we told you that we were getting traction, and we were. We now have over $150 million in our design pipeline in the various phases. The bad news is that when you introduce a -- when a product starts getting traction in work week 52, that means in work week 13, the end of the first quarter, you don't have revenue yet. And next quarter, we will be able -- we've had some revenue, million dollar range. But next quarter, we will have significant revenue and that will be behind us.

The lesson learned is that there is a cadence to the cellphone markets. The cellphone guys show their new stuff in Barcelona every year in February. And if you want to be in the new stuff, your hot new chip needs to be available in the middle of the summer. And we've all dedicated ourselves to the fact we're not going to make that mistake again.

Gross margin. Our gross margin for our core semiconductor business is 57%. And that is pretty good, I think, because we had a down quarter in revenue, and normally, your overhead eats you up, and your gross margin suffers from it, but we were only down 0.4%. Also, in down quarters in the industry in general, there's sort of a general pricing pressure, not any specific area.

And with all of that happening, we maintained 57.3% gross margin in our semiconductor business. Now we reported overall, 55.7%. And the difference is being weighted down by the subsidiaries, in this case, DecaTech, and the reason for that is a one-time change. As DecaTech was a development-level company, its plant was an R&D plant. And they were developing new technology, and it reported expenses in it in the R&D line.

This quarter, we shifted those expenses to manufacturing, a requirement of accounting, because their manufacturing is starting to ship revenue. So for a while, they got a great big factory running a small amount of product, and it's going to ding our reported gross margin for the whole corporation. So if you want to look at the health of the underlying Cypress for the next 6 months approximately, the core semiconductor is a more accurate index, and we report both.

As Brad said, we bought back 6.1 million shares. That's 3.9% of outstanding. It cost us $98 million. Our last 2 stock repurchase plans have been $1 billion, $600 million versus $400 million. The $600 million is done. We ate into the $400 million with this buyback I just discussed. We have $222 million left. Our share count is the lowest it's been in 3 years. I guess I'm bragging a lot today.

The reason for that -- the reason I'm proud of that is that we have still the overhang from the SunPower spinoff. It's still a dilution force we're swimming upstream against. And once that's behind us, and it almost is behind us, and if you want to understand that, I took the trouble to create a graph in the Annual Report, the President's Letter I write. And there's a graph in there talking about the 2 forces that tend to increase our share count.

One was Moore's Law, which we put behind us a few years ago, and there is a curve in there showing how the shares that we sold, dilution therefore, to follow Moore's Law has been going down. And the second is the SunPower spinoff, where investors got $2.6 billion in stock, and insiders in Cypress got extra stock options to true them up because they weren't -- they didn't get the SunPower spinoff. And as those stock options created a bunch of stock options, I think it was like 70 million, right? And they're almost bled out now. And when that source of dilution disappears, the 2 big sources, Moore's Law and SunPower, will be behind us, and the buyback you've seen we've got, we'll be able to take shares out of the market, not fight new shares, and then take a few more shares out of the market.

We've reorganized. And in the press release, I've gone through carefully, an SEC level description of the new divisions. For this purpose, I'll just give you a very high level description. Memory Products is that which you should know and love. It's our 4 business -- it's our 4 SRAM business unit plus some other related business units. Data Communications has been kept with the same name, even though it's a little bit of a misnomer. It has been stripped of all other businesses other than USB.

Cypress is the world leader in USB. We had not focused enough on USB in the last few years. If you look at the cover of the annual report, it shows 3 curves or 3 product lines that in effect, are the company. And they're all characterized by having shipped to lifetime billion units, that is 100 million units a year for a decade. And our USB line, if you look at it, flattened out a little bit for lack of attention. So we now have a division, and it runs only that.

The last one is the Programmable Systems Division. And you can think of that as primarily all of PSoC and all the PSoC-related products. So on one side, it's platform PSoC and all the little designs going through distribution, competing in the microcontroller market, et cetera. On the other side, it's CapSense, TrueTouch, all the touch technology.

Since those 2 businesses are both PSoC, we report them together, but they're very, very different. They're dynamic.

And internally -- and we will not report these separately, but internally, we still have CCD, Consumer Computation, which is the touchscreens and touch buttons. And then, we have the Platform PSoC Division, which internally we also call PSD. We're not going to report those. They're a little bit of out askew internally. The touchscreen guys get big revenue and big margins using PSoC, and the base PSoC guys crank out these extremely expensive chips.

So it's a little -- you would see one division being extremely profitable, one division being mediocre in profitability. And that all goes together as PSoC, and that's why we're not going to keep explaining the dichotomy between those 2 divisions. So PSD, you can think of is, it is Programmable Systems Division. Over time, we may put other programmable products in it. But you can think of it as PSoC Systems Division.

And then we have Emerging Technology, which has been simplified the way Brad said. Our revenue for ETD in the first quarter is $1.7 million, that's a reset. That's what's left in there after we graduated some things and put them in our divisions. And we will try to move forward from there.

If you look in the press release, which is now -- revenue is now stated in the new division, you can see the drop in PSD from $132 million last quarter to $81.5 million. So that -- the drop, $50 million, it includes some general drops plus the hole in the touchscreen market that I've already described.

Highlights through the quarter's business. We announced that our TrueTouch controllers are in the so-called floating touch navigation feature on Sony Mobile's new phone called Xperia. And that sounds like marketing blurb, but there's actually an underlying technology in it that matters. This is called hover technology. And what it means is if you have a touch phone, you have to take your finger and touch the glass and then you make a contact, CapSense senses it and does what you asked.

For hover, you can get your finger near the glass, you can get your finger a few centimeters away from the glass, and you're already being detected. PSoC is very good at doing that because programmable system-on-chips can change what they do realtime. And it turns out when they're detecting your finger being near it -- and by the way, if you think about automobiles, where you get your hand near the door lock and the door lock unlocks, that's the same kind of technology we have in automotive.

PSoC is in one mode where, basically, the entire touchscreen acts like a big sensor and is looking kind of like a radar for something out there. And then, when you put your finger actually on the screen, PSoC shifts to be a totally different system and start running rows and columns like an ordinary touchscreen. So we actually flip modes, which is impossible if you have a fixed function microcontroller. And that allows for touch, so who cares?

One application is pretty obvious. You now can put many more icons on the phone. You can have them be small. You can have them be annoyingly small, smaller than the fingertip of a person with an average 9-millimeter finger. And when you get your finger near the screen, the screen says you're getting close. And underneath your finger, it will magnify the icon. So you can have more accuracy of touching, that's one application.

Another one that I think is very important and it's not -- yes, it is here, gloves. When you have a glove on in cold weather, you don't want to strip off your glove to touch your cellphone, but you want to take a call outside. In effect, your glove separates you from the phone, and you're hovering above the phone. And that's a feature that Sony Mobile wanted for the Nordic countries, and any cold-weather country, and it allows that.

So okay, we're in phone 21 from company 34. What's really behind that is hover technology, and that does matter. And it is a leg-up, and it is a fundamental technology advantage of the programmable system-on-chip over fixed microcontroller.

The second bullet in the quarter highlights is also important. We call the technology SLIM, Single-Layer Independent Multitouch. I had the Vice President of Design of one of the largest cellphone manufacturing companies in my office 6 months ago. And I was getting squeezed on for price on our touch chips. And I was talking about our road map and how we're going to get time [ph] off and all that kind of stuff.

And the guy said to me, "Look, you can take a time [ph] on, it doesn't matter. What I need, I need you to simplify my sensor. My sensor is more expensive by a factor of 3 than your chip. Right now, my sensor has got rows down on 1 layer, columns down on another layer and an insulating layer between the 2 layers. And that took everything up. It's like a 2-layer printed circuit board, with vertical traces in 1 direction and horizontal traces in the other layer. And if I can get down to 1 layer, I can get -- I could make my sensors simpler, that would save me $1.50, that's more than the entire cost of your chip," he said to me.

So we started work figuring out how you could get high accuracy 10-finger touching down to the single-layer. And we've created and patented a pattern. I'm not saying others won't be able to get to the market with their invention, but we're there. And basically, it's a single layer. So if you think about it like a printed circuit board, it's one piece of green stuff, FR4 with one copper on it, and you run your finger on it, it'll track your finger. And it simplifies and gives you an economic value pitch to your customers, why you should buy ours instead of theirs.

We've been certified for Windows 8. We think that's going to be an important technology. That was a bunch of work.

In the USB, we've -- like I said, we've got a new focus on it, and we've got a bunch of information on USB this quarter, bunch of events that have happened in USB. USB 3.0, of course, is the 5-gigabit per second, 10x faster than USB 2.0, the USB that's on everybody's machines today.

We've connected with Microsoft. Microsoft has a tool called SuperSpeed Microsoft reference USB, SuperMUTT. Who cares? Well, it turns out that's kind of the reference USB platform. And to qualify at Microsoft, you got to kind of plug in to their platform and work. And we're the USB chip in that platform, so we become part of the so-called golden tree for Microsoft. We're also part of the so-called golden tree for the USB developers forum that certifies whether or not chips are USB compatible. So that's a feather in our cap for the architectural capability of our chip and our performance to the USB spec, which is a very complicated spec.

On the other side of the -- on one side of the USB is a pipe that runs 5 gigabits per second. On the other side of the USB is a parallel interface, meaning many wires side-by-side that hook up to something. And our interface to hook up to the other thing. It could be a microcontroller, could be an ASIC, could be a field programmable gate array image sensor, which now wants to stream over USB.

Our connection is not just about -- our connection is what's called a General Programmable Interface. GPIF, that's our acronym. And what it means is we've used PSoC-like programmability such that the GPIF can be programmed to talk to what you hook it up to. So you can program it one way to hook up to an image sensor. You can program it another way to hook up to an ARM processor. You can hook it up another way to hook up to an Intel processor. That's the kind of flexibility, I believe, that caused us to get the win at the Microsoft SuperMUTT.

Tokyo Electron Device has developed a USB 3.0, a board, with us. This is for Xilinx FPGA. So you've got an FPGA demonstration kit, you're trying to put your design on it, and you want to blow some data into it fast. You want to blow through the machine to see if it can do what you want, for example, process a data stream from an image sensor or you want to program the thing. And the connection they've used in their board for Xilinx is our USB 3.0 chip, meaning the very large number of people that use Xilinx and use their board will sort of see our USB 3.0 chip as the way to get into a Xilinx chip.

Finally, the focus is being done by Badri Kothandaraman. I announced 2 quarters ago that he was moving from San Jose -- he's a 16-year employee, moving from San Jose back to India. And he was going to run our India center where we have 450 people. We've done a second thing now. As we've made the USB division -- the PCD division rather, simpler and made it USB-only, we've moved that business to India. That means our expenses will go down. All of our OpEx will go down. That division will become much more competitive, and that will be another force that will push our USB.

Those are my business level announcements. I have one more announcement, which goes in the good news, bad news category.

We held back the press release that's going on the wire as I speak. Norm Taffe, he's our Executive Vice President in Consumer and Computation, and Norm has decided to leave us. I argued against it, but he's got a startup opportunity outside of semiconductors. He wants to try some different -- try a different business. And he will be phasing out, helping us doing the transition during the next quarter. That's the bad news. The good news is we have the bench strength to replace him. Cathal Phelan, currently is our CTO, will be replacing Norm.

Just a bit on Norm. He's sort of a prototype of what I expect of the best and brightest at Cypress. He came in here 23 years ago as a new college graduate from Michigan. He was an apps engineer. He worked his way up through the ranks, promoted each few years, and he became the Executive Vice President of CCD. The business, when he took it over, was $12 million for touch. Last year, we reported $400 million, so he succeeded in that. And given that he's not going to go compete against us, I wish him all kinds of luck in his new startup endeavor.

Now replacing him, Cathal, a little bit on him, a good story. He's from Trinity College in Dublin. He's Irish. He also came to Cypress and worked his way up through the ranks. He started at the bottom. He was so outstanding and moved up his way through the ranks so fast, I actually called him into my office, true story, in somewhere around, what, 2000?

Cathal Phelan

'99.

T. J. Rodgers

'99. And I said, "You're smart. Are there any more guys like you in Ireland?" He said, "Plenty. There are not enough jobs, and we have very good schools." And I said, "I want you to go back and bring a dozen with you," and he did. And they're scattered all over our company right now. One of them designs the Synchronous Static RAMs that are the leadership product for us in our SRAM division, for example.

Cathal invented, actually, the Quad Data Rate RAM with some engineers at Micron, that is now [indiscernible] RAM, that is used in routers throughout the world to -- for data control. He managed our USB division from an embryonic state. We had a few internal USB chips. He acquired 3 companies and built us into the #1 USB franchise in the world.

Then in 2006, I announced to you that he left. The venture guys got him. He became CEO of a company called Ubicom. In retrospect, that turns out to be fortuitous. What he built there was a 12-way multi-threaded proprietary CPU. Meaning, a CPU that can be working on 12 tasks in parallel. The interesting thing about is it was a realtime CPU that worked in home networks, and it did sell for $5.

In other words, an incredibly complicated system that had to be completely integrated and be in a low-cost environment. I guess that works in cellphones. He was gone -- again, 12-way multi-threaded CPUs are very hard to make and very hard to break into the market. That venture didn't work out.

I kept in contact with him. I got him back 2 years later. I convinced him to be the CTO because he knew a lot more about systems at that time. And he ran not only our architecture group but all of our intellectual property and patents. And he helped me with internal startups, and he helped do the long-term planning. He holds 37 patents, so he's a real engineer. So I've got good bench strength there. He's going to take over in CCD.

Now, I've lost my CTO. And fortunately below him, he had IP and architecture. The architecture alone [ph] was done by a guy named Jose Augusto de Oliveira, and I asked for his resume this morning. He is a Philips guy, born in Brazil. And his career at Philips, starting in '85, Development Engineer, Research Scientist, CTO of a team, CTO of a division, Manager of Embedded Systems, Fellow and Chief Architect for Business Units, Consumer Systems, VP and Senior Fellow Chief Architect and Platform Group Manager, Chief Architect and Innovation Manager for the Consumer Business, VP and Senior Fellow Computing Architecture of Technology, Competence Manager. In other words, he assessed groups through their competence. He's a really high level guy. We were very lucky to get him.

I guess I'll tell the one story. At one time, I had 2 vice presidents who had Brazilian wives. And there is a -- they met. And they sometimes went to Brazil together, and that's how we connected with Augusto. And I kept hearing about this guy, and they kept working on him to leave a very high level job at Philips. Come on over here, earn some money and have more fun.

And then we got him in 2007. So I'm not going to go backwards in the CTO job either. I got him to step up. And there's another guy below him, Dutch guy that probably is going to step up, and we're going make it right through this thing without a hiccup.

I'm now done with my comments. Did I miss anything? Norm?

Norman P. Taffe

I just want to make a quick comment. Obviously, it's kind of a very emotional day for me. I've been at Cypress, literally, half of my life, and it's been an amazing experience. I want to thank the entire Cypress team throughout the world. I don't think there is a smarter, harder-working group of engineers anywhere in the world.

And also, of course, I want to thank T.J. for giving me a bunch of opportunities, particularly the one over the last 7 years, working directly for him. And I can tell you, and everybody that has worked for T.J. can attest, he relentlessly drives you and everybody on your team to do more than you ever think possible.

And in the hindsight afterwards, you realize how important it really is to your own development and then to what you're proud of and to your success. So that's just been a wonderful experience. So it's kind of -- it is certainly a difficult today.

I do also want to reiterate something T.J. said. I am going to still be here and make sure we have a smooth transition at CCD into the very capable hands of Cathal. I actually worked for Cathal years ago. And I worked with him for -- on the order of 15 years, while I start pursuing a business opportunity unrelated to semiconductors. So I thank everyone for the opportunities I've had here, and it's been a fantastic experience.

T. J. Rodgers

Thank you, Norm, we love you buddy. I know you're going to miss the office. So we're ready for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Doug Freedman.

Doug Freedman - RBC Capital Markets, LLC, Research Division

RBC Capital Markets. And to start off, I guess, my first question really has to do -- you guys have reorganized some of these businesses. And if I look at the mix of business as we exited last year, you had a majority of the business coming from the CCD division that had your touch business. Do you think you can get back to the point where your -- now your new name Programmable Systems will be a majority of the business? There seems to be better balance. How should we think about those ratios? And then I have a follow-up.

Brad W. Buss

Yes, definitely, Doug. I think you'll see it be the predominant division in the second half. I mean, the growth in PSD, because of touch, because of PSoC 3 and 5, the trackpads are in there now, is going to be far greater than any of the other divisions. And I'd expect it to be around that 50% mark, at least, in the second half.

Doug Freedman - RBC Capital Markets, LLC, Research Division

And when you look at that, I mean, can you comment on how long it will take you to get back to sort of that past revenue peak that, that business had?

Brad W. Buss

That -- I mean, I think, close in the second half, definitely.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Okay. And when I look at -- let's just talk a little bit about one of the things I think is confusing to the Street sometimes is your book-to-bill ratio. You guys booked $240-plus million this quarter, yet your revenue number is less than that. You're guiding to, call it, $203.5 million in the middle there. Can you talk to us about what goes into the way in which that works and why you're not shipping more this quarter given that bookings? Do you have a bookings outlook for this quarter, to see bookings continue to grow again, just to give us an idea of the magnitude? And then one other thing, I have a question for T.J. I noticed here, there was a form filed recently that you exercised a pretty large chunk of options. I didn't see a sell ticket along with that. Is that safe to assume that, that's an investment that you're making in the company and -- an exercise and hold transaction?

T. J. Rodgers

Okay. Let me -- I'll answer both questions. Our book-to-bill ratio -- we look at bookings within the next 6 months. So you can have bookings that go in the third quarter that counts in the book-to-bill that won't count for revenue for the second quarter. And typically, in the second quarter, when supplies start tightening up and the high volume guys start looking to the third quarter, which is their big quarter they'll start booking ahead. So that's where you're seeing it. On the stock thing, yes, I exercised a hold. So in a deal we did this week, I exercised 500,000 options, say, $4.8 million. That included what I had to pay for the options, plus my tax. So I had to write a check, an after-tax check for $4.8 million, and I'm planning on holding it. This is a move that's very similar -- a few years ago, I did a move where I wrote an after-tax check for $3 million, and bought 1 million shares of stock that's in Cypress 308 [ph] . And one of you, I forget which one, said, "Well, how good are you at picking stocks?" And that one worked out for me. Right now, it's interesting, if you have a bunch of options, which I do, because of the SunPower spinoff, you exercise the options when they're low. Normally, people exercise options when they're high and then sell them to take the profit. And therefore, the higher the stock is, that's, the more people exercise options. I'm the opposite way around, I want to hold it, so I wait until our stock is getting hammered, and then I buy it, so I pay the minimum amount of taxes and then I hold it. So I now have 6.5 million shares. And if you look at my financial objectives, 6.5 million shares times $0.44 per year in dividends is like $3 million a year in dividends, and I pay no taxes on that, the way our dividend is structured. So that's equivalent to me to $6 million in income per year. So I make more on my dividend than I do, by a bunch, in my salary in the company. So for me, getting those stock in my account, and starting to get the dividend is basically the way I will support myself and not have to worry about money. The flip side is, you will see me sell in the future. And when the stock is high, at some time in the future, you'll see me move stock from my account into a -- what do you call, a [indiscernible]. So I'm giving it to charity, in advance, to an unnamed charity. And the way that works is it goes in at the high price, and I get credit for a deduction for that. But -- and the capital gain is forgiven. So basically, I don't get taxed on the capital gain. I move it into charity, I get credit for an income tax deduction for the higher value of stock. Therefore, I'll be doing that from time to time, giving to charity, and I won't pay taxes anymore. I'll use that method to eliminate my taxes. And then, that's -- I'm a Director of Dartmouth College -- a Trustee of Dartmouth College. I've funded 2 professors, et cetera. So we will -- I'll use that path to give away money, and the other path to guarantee income, that's my strategy. That's why I did a weird thing like buying a bunch of shares when the price is low.

Operator

Betsy Van Hees.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Wedbush Securities. I was wondering if -- I know you talked about Q3, and you said it would be as good or better. So I was wondering if you could help us, remind us, what seasonality is. And if you could give us a little bit more color behind that. That's my first question.

Brad W. Buss

Q3, Betsy, can range from 6% to 9-ish percent, depending on where Q2 was. And I think we'll be much better than that. Again, take that with a grain of salt. We've got good bookings. We have very good design visibility. But you do need the customers to come through, and they can be tricky as we saw in Q1, right?

Betsy Van Hees - Wedbush Securities Inc., Research Division

Yes, and...

Brad W. Buss

We're very optimistic, and barring a big demand roll-off, we feel very good. And like Chris said, we don't really see any restocking going on yet, and that could be another positive buffer, if and when that comes.

Betsy Van Hees - Wedbush Securities Inc., Research Division

And then you guys commented that the growth would primarily be from touch, eReaders and tablets. And so when can we expect to see the SRAM business come back? And what were the things that are kind of holding it back this quarter?

Dana C. Nazarian

Betsy, this is Dana. So I think Q1 is going to be the low watermark for the SRAM business. It was broad production and spending in both wireless and wireline communications. And it wasn't any one big customer, it was several. But the book-to-bill is up in the SRAM market. A small amount of it had to do with some inventory corrections. And I expect Q2 to be higher than Q1.

Betsy Van Hees - Wedbush Securities Inc., Research Division

And then, another question regarding SRAM. If we look at how business is tracking in the back half of the year, we've got seasonality. And then, what about Samsung as they exit the market?

Dana C. Nazarian

Yes, my business is less seasonal than, say, the touch business. But we've been gaining on the order of 3% to 4% market share per year, every year, for the last several years. With Samsung exiting, it's hard to say. We expect it to be perhaps a little bit higher than normal this year. Although Samsung doesn't stop shipping until the end of the year. So a lot will depend on how quickly customers move away from Samsung and move to other suppliers. I will tell you that a good number of customers are deciding not to do expensive last time builds and tie-up their invested capital and inventory and instead looking to Cypress and other suppliers to service them.

Operator

Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

Barclays. And Norm, give you a couple more final questions on touch maybe to start off. You obviously saw -- the tablet, that was a one-time effect. You also, in Q1 had some customers that maybe lost some share themselves. When you look at the growth in the Q2, is that those customers coming back? Do you have new ramps? Or -- and then, if you could also touch on pricing as well, that'd be helpful.

Norman P. Taffe

Yes, thanks for that first, and then, secondly, relative to the business, it's a combination of 2 as far as the growth. There's definitely some new business ramping up, I think, certainly in the eReader space, but also some of our customers gaining back some share in the handset space. Those 2 both are contributing to what we see as -- for CCD itself, on the order of 25% or more growth in Q2. So quite a bit off the bottom. So from that side, we see a lot of growth opportunity there. I forgot, what was the second part of your question?

Blayne Curtis - Barclays Capital, Research Division

Pricing.

Norman P. Taffe

On ASPs, we have continued to see pretty strong pressure, actually, in the last couple of quarters and going forward. On the other hand, the good news is that we've been keeping with cost reduction, so we've held our margins up. In fact, CCD, actually, if you see the gross margin going down last quarter, it's because our touch business became a less percentage of the business. So we've been able to stay up and keep our margins up. But we are seeing continued price pressure as this becomes much, much more of a significant portion of the handset market.

Blayne Curtis - Barclays Capital, Research Division

Okay, maybe a question for you, Brad. The margin is moving up with utilization when you look at Q3. I mean, obviously, there is some variability there. But if you do, are able to guide better than that normal seasonality, is there any reason why utilization would be back, not back up to normal levels and therefore margins could get back to those more normalized levels?

Brad W. Buss

Yes, I'd expect margins to tick up. Again, we'll get a utilization benefit. We'll have more going through the foundries. And then, again, I think the mix of the products, like Norm talked about. Touch is a very good margin product for us. And as that continues to grow, as does the SRAM, that's all beneficial for us. We don't really have any margin tiered [ph] product line anymore. But a customer within a product line or are heavily weighted within a certain product family can have impact. But I think we're up and to the right in both of those metrics. And then, more importantly, I think the incremental GP from the revenue gain and the margin gain, the vast majority of that is going to drop through to the bottom line because you're not going to see any big expense ramp in the second half. I mean, all the big spending in touch, in PSoC, the USB 3.0, is really behind us. And then really, the only guy pressuring up, and that's minutive, is Tim in the Emerging Tech area.

Blayne Curtis - Barclays Capital, Research Division

Got you. And then, finally, you mentioned that DecaTech is finally into volume production. Maybe if you could just provide an update there, if you're still thinking about the same milestones as you laid out in Analyst Day, that would be helpful.

T. J. Rodgers

Yes, Mr. Deca is here, so we'll let him talk.

Tim Olson

Blayne, it's Tim Olson. I'm President and CEO of Deca Technologies. Yes, the outlook is the same as we mentioned in the Analyst Day. We are in qualified production for the first customer. We've got a handful of other customers that are going through the qualification process. In our business, we need to rely on the semiconductor companies that we're qualifying to achieve approval from the handset OEMs. So the precise timing of ramping up production is a little bit dependent upon those qualification cycles, but we still look for a strong finish to this year and a very nice ramp in early '13.

Operator

Ian Ing.

Ian Ing - Lazard Capital Markets LLC, Research Division

Lazard Capital Markets. First question is in touch, with Gen4 shipping, could you talk a little bit about -- give us an update on the Windows 8 Metro opportunity? It looks like you may have missed some of the very early reference designs. And then, what are the implications on blended ASPs going forward with some things like eReaders, tablets, notebooks, et cetera?

Norman P. Taffe

This is Norm. So to address the Windows 8 opportunity, I think, from our perspective, we focused our Windows 8 on when we had Gen4 available. We felt like we could bring the best single-chip solution to market. Now T.J. pointed out earlier on that we've been onboarded by Windows 8. And then the part we introduced, at the beginning of this year, 1036, actually gives us a single-chip Gen4-based solution to tablets that are perfect for Windows 8. So we do see a lot of design activity. We are not pursuing what I would call one of the multichip early entrant implementations of Win 8 tablets. We don't think those are going to last very long. And as this thing ramps, it's all going to go single-chip. And in that perspective, we think we are ahead in terms of Win 8 demand.

Ian Ing - Lazard Capital Markets LLC, Research Division

And for a follow-up, in your re-characterization of the segments, is there any implications in terms of aligning your field staff and go-to-market strategy by applications? For example, I noticed that memory and timing are in the same segment now addressing networking, et cetera.

Brad W. Buss

No, I don't think you're going to see anything. It's really more a shuffling of the management oversight of some of the product lines and then just how we report and manage internally. So you're aligned very tightly with how we manage things internally, but I don't see any of that changing dramatically at all. We'll get some better synergies, i.e. with the trackpad and the ONS being part of the touch group, right, when we're calling on a customer, the people calling on it, the people supporting it, are well versed in all of the same products.

Norman P. Taffe

Ian, I just realized I didn't answer the second part of your question about the ASPs relative to the other products. You bring up a good point. We're certainly seeing ASPs pull upward a little as we regain or rebound in the eReader and tablet space. But also just as we see a shift towards design to the higher end with Gen4, so that stabilized on ASP and we see that continuing going forward.

Ian Ing - Lazard Capital Markets LLC, Research Division

And my last question is for Tim or T.J. So for DecaTech, I was at the TSMC symposium in San Jose this week. They talked a lot about chip on wafer on silicon where TSMC also does the silicon interposer plus all the back-end manufacturing test and assembly. How do you see that competitive environment? It looks like you would work more with like an Amkor as part of the supply chain. And how do you feel these competitors playing out?

Tim Olson

I'll take that question. This is Tim again. Deca is a foundry. Our expertise is in a specialized way to use wafer processing borrowed from SunPower and some background from Cypress. So our focus is really on the foundry services. TSMC, obviously, as the leading device foundry, has stepped into the packaging, interconnect, a little bit of assembly space. Our initial focus is going to remain on the foundry side of it, not on the assembly side of it. So yes, we will be cooperating with other partners, whether they're customers, internal factories or outsourced assembly companies, in terms of assembly type activity. But that's the focus at this point.

T. J. Rodgers

A little more color on that. The world is heading towards silicon interposers, common language is the silicon printed circuit board. If you think about the printed circuit board, it's got 2 primary problems when you try to mount chips directly to it. The printed circuit board shrinks and stretches over temperature much more than silicon and it tears off the interconnect, the solder bolts that connect it. And obviously, if you put silicon on silicon, that problem goes away. The other thing is that the lines and spaces on a printed circuit board are crude by integrated circuit standards. And therefore, you can't get too many wires by a couple orders of magnitude on the board that's on the chip. So with regard to capability, not our current intent, we can make silicon interposers. That's another product. It's something we do in a foundry. In our advantage, if we choose to go in that business, we'll be the -- we will make it with SunPower Technology. And SunPower can make a wafer for $5 with metal on it and diffusions in it, as opposed to using what everybody else uses, including TSMC and Amkor, which is in fact the fab line where they probably use the last generation fab equipment, but nonetheless fab equipment. So their cost per square millimeter of silicon is about a factor 10, hence DecaTech, that's exactly why it got named that way, than ours. So we're looking at that business right now. And if we choose to go in it, we'll manufacture the product, and we'll be the cost leader.

Ian Ing - Lazard Capital Markets LLC, Research Division

So by a factor of 10 cost advantage, you're talking about?

T. J. Rodgers

Yes, SunPower, literally, makes the wafer. That's the 6-inch silicon wafer, for $5, including all metal and the silicon and 3 masking steps and 3 diffusions and a silicon nitride passivation. And the advantage is that you simply cannot use normal fab equipment. I didn't know that when I bought SunPower. Actually my theory for buying SunPower way back on the swap [ph] had fab 4 -- fab 2, rather, in Austin, Texas becoming obsolescent. And I figured I'd give SunPower free fab, and then they can make solar cells down there, and they'd be very competitive. And they came back to me and said, after careful analysis, we don't want your fab. How come? Well, it cost you $3 to spin on photoresist for one mask layer. We have to make a wafer for $3. So your fab, even if the equipment is free and the people are free, costs more to spin photoresist on for one masking step than we can afford for the entire wafer. So the secret of SunPower really is to invent equipment or modify equipment that is meant for printed circuit board to make silicon 10x cheaper per square millimeter than a normal fab and then use that wherever it made sense.

Operator

John Pitzer.

John Pitzer - Crédit Suisse AG, Research Division

It's Credit Suisse. Brad, I just want to make sure I understand the bookings dynamic. Just given the strength of bookings in the March quarter, is the ratio of what's kind of shippable in the next 3 months versus sort of 3 to 6 months out kind of a normal level? And if it's not, is there a reason why you're not capturing more of the March bookings upside in the June revenue guidance? Is that just a function of sort of customer product ramps? Or if you could help me understand, that would be helpful.

Christopher A. Seams

John, it's Chris. As I said, about a portion, a strong portion of our bookings went into Q3. The ratios, roughly 3/4 of the bookings we got in the quarter went into Q2 and the remaining 1/4 went into Q3. If you look at those from a historical perspective, those are both indicative of what I would say, a healthy growth trend. Meaning if you look, we actually keep the trend of the last 16 running quarters of what that number is at the start of a quarter relative to each other. And both of those, I would put it nominally above average. So we're slightly strong but not out of hand, and it's definitely indicative of growth going forward. And 85% booked number going into the quarter falls on the upper end of the distribution but just above median. So that's how I'd characterize it.

Brad W. Buss

And the thing that we're happy with, John, is the fact that the lead times are still really low, really, across all the product lines. That's a very good sign. And to your other comment and a lot of it is, because we have a lot of design visibility, right? When you have new products ramping and new customers, you tend to get a decent look even if lead times are short. So that's why we have fairly decent confident obviously in the quarter being that heavily booked, plus again with the designs we know that are ramping, feels good.

John Pitzer - Crédit Suisse AG, Research Division

And then, Brad, I thought I heard you say earlier in the call that you thought by sometime in the second half, you could get back to sort of prior peak revenues in the touch business. For one, is that what you said? And I guess, two, just given the growth in the market and kind of the breadth of new design wins you guys have and the fact that we're moving from smartphones into things like Windows tablets, why wouldn't that kind of just be a slam dunk, that by the second half you'd be kind of retesting prior peaks?

Brad W. Buss

I thought Q1 was the slam dunk until we had to revise the guidance, too. But no, I think if we look at design activity, right, which is the key in, within another month, you're basically done for the year, right? In touch -- and then you're subject to how well customers do, how well programs ramp. And we are optimistic in all of those areas that you talked about. But I think it's too early to call when and how they roll out and how successful they are. I mean, we are very bullish on Win 8, but we don't think it's going to be a tsunami this year, right? You'll have a handful coming out, where are price points. But it's hard to judge for this year. But I think as every order goes, the momentum is better, and I think the design picture gets much clearer. So I mean that's -- hopefully, we're going to be conservative, but there is a lot to figure out. And it's the end customers, right? There's a real shakeout on the winners and not-so winners and you need to make sure you're in the right guys and we feel very comfortable with the breadth that we have that continues to grow every quarter. And we are adding some new guys into the fold this year. And again, we just don't have the history with them, and hopefully history is on the right side.

John Pitzer - Crédit Suisse AG, Research Division

And then guys, this my last question around kind of the IP portfolio in touch. Clearly, big market opportunity, ebbs and flows about competition or new competition coming into the space. You guys clearly have a strong portfolio of technology within this space. At what point does that become critical to help win designs with customers, one? And two, are there going to be opportunities this year for you guys to kind of flex that IP muscle in a more public way?

Cathal Phelan

John, this is Cathal. And as the CTO, I look after IP and our portfolio in IP. Our portfolio is very strong, as you say. And I think it's important today, with every sale that we make, customers ask us about, "How strongly positioned are you?" And they are aware of what is going on in the market and what can go off. And I think that will continue in this space, and you'll see more activities as the year goes on.

T. J. Rodgers

The dynamic making that important is not obvious. The very big customers, obviously, have leverage on semiconductor companies. And the agreements between us and our customers, the sort of overall corporate agreement, are starting to include clauses that demand indemnification. And one of the clauses for indemnification is that if you get me -- if I buy your chip and you get me in IP trouble and I get sued, you have to indemnify me. And you have to really think twice if you're a cellphone company and you've got some Korean copy jock company that's selling touch chips. And you want to put one in the phone and then sell 20 million units. You have to think real hard if you're going to sign that contract. So the pressure is not -- that's the reason the pressure's there as we speak, because there are risks that high-volume manufacturers have to take on, through the IP indemnification, very common in contracts as we speak.

Christopher A. Seams

John, let me add -- this is Chris, one last comment. That's either the first or second question out of the sourcing group's questionnaire when they have a discussion with us about why we should be one of their preferred suppliers in the touch arena. And they very much care about it.

Operator

Raji Gill.

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

Needham & Company. Norm, just some questions on TrueTouch, if I can. Any insight on what TrueTouch was in Q1? Clearly, that rolls up into CCD, and CCD was down about 40%. So any insight there?

Norman P. Taffe

I think the roll off is consistent -- that number is consistent with the touch drop. So I don't think that overall, CCD was down 40%, as was touch.

Brad W. Buss

Yes, CCD -- the touch was down very heavy. It's definitely the lowest point we're expecting from the year. And like we've said, we expect it to grow 25% plus in Q2, and we expect a very strong growth again in Q3 when more of the design starts hitting. So if you look at the. . .

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

So in the 10-Q, you had mentioned, I think, TrueTouch would be flat. And I'm just trying to understand very simplistically how you get to flat just based on units and ASPs. I would assume that the second half would be up well over 160% versus the first half, so a huge ramp in the second half. And so maybe you could provide a little color in terms of where the units are going to come from given the fact that there is some ASP pressure. Is it new customers? And to that point, since you only recognize revenue on a sell-through basis, clearly they're building for those orders. There is a risk that those might not come through. I'm just trying to understand the huge second half versus first half in TrueTouch.

Brad W. Buss

Raj, I didn't understand your comment on the Q. Maybe you can send me what you think you're referencing there. But this year, specifically, was very heavily back weighted as we said at the beginning because of the timing of the Gen4 stuff, plus with the hole from the tablet fall off that we had well known, right? And then some of the newer customers whether they're cellphones, eReaders or tablets, are heavily back-end loaded. So the back half is going to be very, very much back-half loaded, much more than normal years because of that Q1 trough. So if you go into the report that we sent out last night -- or this morning, you'll see a PSD drop quarter-to-quarter of $50 million. And that drop is 40% of, what I would call, normal seasonal and 60% the one-time event I described. And when we say we're going to recover in the second half of the year, it means that drop we expect to recover and get back such that PSD is the same size or bigger than the SRAM group by the third and fourth quarter.

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

Will TrueTouch be flat or up this year? Or what are your expectations?

Brad W. Buss

Are you talking about year-on-year 2012 and 2011?

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

Correct.

Brad W. Buss

We will be down year-on-year, but we will exit the year at a rate that's similar to what we did last year. And the reason we will be down is we will not be able to catch up for the first quarter. We're not going to fill in that hole. But the exit in the third and fourth quarters, the size, the rate, will be back to normal.

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

Okay. And just last question, I guess. You had mentioned eReaders and some tablets. What about on the smartphone side? Are you seeing any incremental new customers on smartphones? Clearly, your business is based on which horse you're tied to. So are you tied to some of the good horses? Any color there would be helpful.

Norman P. Taffe

This is Norm. Absolutely. We are ramping 2, what I would call, new as far as substantial smartphone guys, 2 of the top guys that I would say we haven't had a huge percentage before. And you're going to see that mostly in the back half, some in Q2, that are going to be significant. We think they're the right guys, although, frankly, all the top 8 generate significant revenues. So none of them are guys we don't want to support. And certainly, we've always had a long relationship with probably the top guy, and we are continuing to get share there. And I will say, what Gen4 has done for us has allowed us to complement our traditional strength in the low to medium end. We're now getting much more of the designs at the top end, kind of the flagship models that I would say we didn't get in the past. And that is making us more important to the big guys, as well as contributing higher value designs.

Christopher A. Seams

Yes, I think, just to add on that, I think with Gen4, Gen3, the SLIM, we have a full portfolio from the high-end to the bottom end, the single chip for all the tablets and phones that the end customers like, right? And we are going after the low end very aggressively as well and having very good success there. And I think between the high-end and the low-end, we see strong success there. And not only with Gen4 but with Gen5. That won't be too far down the road either.

T. J. Rodgers

So I didn't mention it earlier because I was trying to conserve time. But we've been in the high-end smartphones for a long time, and the features we brag about and our competitors, we trade off back and forth with something new. One of our efforts is to try to get to the 80% of the phones that aren't smartphones, 80%, right. And so the enabling customers use the single-layer sensor, which is cheaper. We also introduced a chip last quarter called the TMA140 that I didn't talk about, but it's basically a chopped down chip that's cheaper than our smartphone chip, and it's meant to go to single-layer sensor, and the combination of the 2, will is put us down to the point that you can start putting a touchscreen, maybe not the super I-4, iPhone 4 quality touchscreen, but nonetheless, a touchscreen with gestures on phones that are really cheap. And one of our upsides right now is to try to break into that market and really crank some volume.

Operator

Ruben Roy.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Mizuho. Question for Norm or T.J., I guess. I just wanted to follow up a little bit more on the pricing discussion, low-end versus high-end. And I'm wondering, when you guys talk about ASPs and strong pressure over the last quarter, couple of quarters, and strong pressure coming up, are you seeing a similar pressure at the high-end to that at the low-end? I'm just wondering, we're seeing low-end ASPs kind of trickle-down below $1 here, and that seems like it's a pretty massive decrease over the last year or so. How -- is that a similar drop at the high-end?

Norman P. Taffe

One thing I want to, maybe, clarify, too, I think, I may have overstated. Just to give you a sense, ASPs we're seeing are 3% to 4% a quarter, not tremendous, but it's not a huge drop, maybe I might have overstated that. Relative to low versus high-end, I think you're seeing the low come down. Right now, I see kind of the same level but I don't think it will continue at a certain level. At a certain level, all markets kind of level off. And I think that's happening already in the lower end. I think the high-end came down actually more last year. We didn't participate quite as much in that, but we were very well positioned with Gen4, and we see that as giving us upside. I'm not sure it will for some of the other guys relative to the position they had in it. So I kind of see it similar across the board. I think obviously, offsetting that decline is the fact that smartphones and then, as T.J. said, the feature is going into lower end phones as well is the fact that the volume is going up relative to the ASP.

T. J. Rodgers

Also, I want to make one other -- I want to disconnect one other connection that's not correct. Low-priced cellphone, low priced touchscreen shifts for cellphones don't necessarily equate with low margin. For example, we sold -- how many Kryptons have we sold?

Norman P. Taffe

A couple hundred million.

T. J. Rodgers

A couple of hundred million Kryptons, we sell it all day long for $0.59. And Chris is wincing here. And we have reasonable margin on it. Now it will only track -- you can only poke icons. Can you do -- you can do pinch gestures?

Norman P. Taffe

Absolutely.

T. J. Rodgers

You can do simple gestures, so you have a subset of gestures. And it's a very small chip, and it can go into the cheapest phone in the world and be cost effective. So low price -- how many touch chips do we have?

Norman P. Taffe

A family of products, really. I'd say a dozen.

T. J. Rodgers

So we've got a dozen products. And they're all different designs, and they go from tiny chips that are very efficient to manufacture to some really high-end chips. It's a lot like the SRAM business, where over time, you start differentiating and you make a really cheap one that's good enough for some application, you make the super one that's got the latest feature and you're continuously filling in holes in the portfolio. So cheap, low priced, doesn't mean low margin in the cellphone business.

Brad W. Buss

Yes, I think the next billion units that don't have touch, our margins will be as good or better. Because it's again, more older technology, higher volume. And we will be pumping volume up the kazoo through the foundries, and that will lower our price on them, but also will help benefit us in the other products that go through there as well. And it's a lot less handholding as well from an applications end of it.

Ruben Roy - Mizuho Securities USA Inc., Research Division

That's very helpful. I'm just wondering, do you think your incumbency in some of these OEMs will be helpful as touch goes into a wider array of lower-end handsets? I'm asking that because, obviously, there's more competition coming online, and I'm just wondering if as you look out to the back half of this year and as design wins for next year start being competed for, if you think you need to manage the business differently given that the pricing is dropping and there is more competition?

Christopher A. Seams

Ruben, it's Chris. Incumbency frankly is underrated. It is extremely valuable to customers that have limited engineers to work on a project list that's always too long for them. And what we provide for them with incumbency is reuse from project to project and generation to generation and a solid support staff that they can rely on, frankly, to do part of the engineering for them. And the very hard thing, as many companies have learned, to put that support system and that reusability together. It's very important to a customer.

Operator

Chris Danely.

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

JPMorgan. Nice bounce in the order rates here, it sounds like lead times aren't extending right now. But if we have 2 big quarters coming up, could you see any extension in lead times with your products or with the competitor products?

T. J. Rodgers

I'm worried that if we get slam dunk orders, we'll be scrambling to respond. Manufacturing is a flywheel, and it takes a while to get it to go at a higher RPM. But that's one of the reasons our inventory went up 6% is that we got the flywheel started, getting faster early, building things that we know will move in the hot quarter, in the third quarter.

Brad W. Buss

Yes, we have a pretty advanced die bank strategy. And I think with the foundries, we're ramping the foundries up again. I think we're in good shape. I think they'll extend a little, Chris. I don't think they'll go crazy, but like T.J. said, if you get slammed hard all at once. And that's why we're trying to make sure people book out, right?

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

And so to clarify, for this quarter, you feel pretty good. If there is any extensions, it would be like in Q3 or could that even happen in this quarter if the orders continue to go up?

Brad W. Buss

Probably by mid this quarter, we have a pretty good feel. So that's when they'll start booking in pretty heavily for the next quarter.

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

Sure. And then it sounds like if you compare your sales versus the end market, I mean clearly, inventory has come down a lot out there. What do you think it's going to take to get the channel to start rebuilding inventory?

Brad W. Buss

It's a mixed bag. I mean, I think Chris can talk about some of the supply shocks that lately are making people think differently. But I think as lead times start going and people are having issues with more of the advanced nodes, that gets them freaked out in their planning and management groups, and that tends to trickle down to us that aren't on the leading edge. Meaning, let's be clear, we see no issue with factory capacity or foundry capacity because of the nodes we're on. But it does get guys worked up, and it does trickle down. And as other competitors start pushing their lead times out, it trickles all the way through the MRP. So I think it's coming.

T. J. Rodgers

Your question is along the lines of, as you look at your business and map your capacity on your business, when are you going to raise inventories in order to meet the business? And the question implies a mentality, let's say in distribution, that doesn't exist. Think about financial markets. You could talk about investing on fundamentals and investing on the values there. And then other wise guys will say, they're attuned to -- they're saying that there are 2 motives in investing, greed and fear. And I think the greed and fear model is closer to the way our supply chain works than the measured investment in inventory to meet demand forecasted in the future. So what always happens is you cruise along and everything is okay, and then there is a snap point. And the minute they get panicked that they're going to get cut out. And 2/3 of our product goes through distribution. Then they'll order what they need, which is higher. Then they'll order for the next 2 months at the same higher rate, and all of a sudden, you see an ordering avalanche. And then the way we do it now, and we're just getting good at this, as soon as we see that happen, we're going to go in allocation, and we're going to tell them, and we're going to start dealing with them, tell me what you need to stay alive, so we can map our capacity into the factories that need to stay up as opposed to dip into caches of inventory that are going to be sold for higher profit some time in the future. So I'm expecting some time. And we may cruise this year just fine, and the economy is still not that great. But when it turns up again, it's not going to be a measured change. It's going to be a snap to a allocation mode, and it'll happen very quickly.

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

I guess we're all just trying to figure out when that's going to happen or if it's going to happen this year.

And then last question on touch. If you guys look at the percentage of your bookings by end market between handsets and tablets and other, is there anyway you could give us those approximate percentages?

Norman P. Taffe

Chris, this is Norm. I don't want to toss some percentages offhand, but it's still predominantly handsets. I don't -- I think the tablet space is going to grow overall, the space. I think one thing to make sure, as we move to a single-chip model this year, our real growth is mostly handset, that's where most of the bookings are. We certainly see a lot of uptick coming in the eReader space, and then we'll see tablets, but it's mostly handsets.

T. J. Rodgers

The unit volume of handsets versus unit volume of tablets in the end market.

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

Yes.

T. J. Rodgers

Roughly 10:1. The iPad is an amazing device. It's really going to change the world, and I believe that. But cellphone is ubiquitous and it's 10:1. So internally, we've made a big -- we've created a dichotomy between the 2. We have 2 different business groups addressing it. But the fact is, it's pretty much the same chip, the one for the tablet's got to be a little bit bigger, that is, more inputs and outputs to drive a bigger screens. It's the same thing. If you look at the original iPad, the PC inside of it, in the teardown reports, was literally an iPhone PC board. You can see it was meant to be a cellphone board. Same thing in the volumes, 10:1 in favor of cellphones, and that's where our focus is. And then, of course, if you take iPad being 80% of the market or whatever its market share is, what's leftover for non -- then Apple licenses its own proprietary chip, what's left over for the rest of us is more like 30 or 40:1 towards cellphones.

Operator

Steven Eliscu.

Steven Eliscu - UBS Investment Bank, Research Division

UBS. First question, just trying to take a little bit longer-term perspective on touch, and thinking about where you're going to generate future growth. Clearly, he already stated this year is about handsets and the traditional smartphone arena. If we look a little bit further out and see the smartphone market, some of the forecast suggests, it is -- the growth is going to slow significantly. We have ASPs on the touch controllers coming down, which suggests that you're going to need to get growth from other areas. How are you prioritizing your development efforts for some of these higher-end applications like ultrabooks over the next couple of years versus these next billion units that you talked about before, where you have very low-end products?

Norman P. Taffe

Stephen, that's a good question. I think, as T.J. said, still the main meter obviously is the handset space. Actually, yes, there is some roll off at some point, but there is a ton of growth in handsets. If you look at what China is doing, for example, we're seeing a lot of uptick in China. There is still, I think, a lot of growth there, so I don't want to overstate that. But what you said is right. Frankly, it's one of the areas we think we've had dramatic strength in terms of what I'd call the next tier of markets. For example, digital still cameras. We are dominant in digital still cameras. And they're starting to uptick touch. And that's 100 -- couple of hundred million unit market as well. Another market is automotive that we have a lot of design ends for automotive. And those, obviously, markets come at a much, I'd say, higher ASP and better opportunity in terms of -- to add real value. So those kinds of spaces are areas we're successful. A couple of areas I'd name would certainly be white goods. And then you brought up ultrabooks. I think that could be another growth driver. We see that a little more into 2013 as far as the big percentage. But I think this whole move to touch, obviously, been driven by smartphones, but it's the way people are going to interact with everything. And that, I think, has a long, long, long life. And I think at Cypress, the programmability of our product allows us to address lots of different applications. I think long-term, I see this being a huge part of the company for, clearly, 5, 10 years or more.

Christopher A. Seams

Yes, Steve, we're kind of taking it as a user interface, right? And touch is, obviously, the biggest element, but it starts with our CapSense business that were #1. Now we're going to go into trackpads, and we've got the ONS. So really, any end market, any customer that's moving that way, which they're all moving that way, we have the only complete solution that allows them to approach interface in the way they want. And they could go from the low-end to the high-end. And like Norm said, every one of them is programmable. And there is no other competitor that can offer the entire suite. And, obviously, none of them have the programmability in it as well. So that revolution, I think, is just beginning, and we've got a billion units of cellphones still to chomp away at. And I think 3 to 5 years there's another billion-plus units of all these other things that are out there. And we're working on it. We're working on different ways to make it easier to use so that wraps just these other third parties that are springing up left and right, could look at us as the easiest solution of choice, and it's a full solution that we're providing, not just the chip, right?

T. J. Rodgers

The 50,000-foot answer to the question is, cellphone is the leader because they are very powerful technology companies addressing a huge market. But the bigger market is really that buttons and screens as we know them go away and all become touch interfaces. But I was on -- on one of my trips to Dartmouth, I was on the airplane with John Donahoe, the CEO of eBay, whose also on the board. And he was telling a story about his granddaughter, somebody just had a brand-new 52-inch LCD television. And his granddaughter, who is 4, walked up to the TV and started swiping on the television and announced that it was broken because it didn't flip. So when people will come to expect that in any device that a human touches, that has buttons on it or a screen on it to display information, will start to look like World War II unless it has touch in it. So cellphones will create the revolution. Cellphones will drive the cost down. And then it will just take off. Our advantage is PSoC, take the white goods, for example. PSoC has the ability to drive another channel, which is called an active shield. I won't go into the electrical engineering of it, but what it does is it allows you to have water not interfere with your finger. So we're in the processes, as we speak, of redesigning a board from one of our competitors because they made this nice touch interface for a washer dryer. But when it got wet, it stopped working, and we're redesigning the board, putting in a PSoC that handles that. Sony has made a camera that actually -- it's not just wet -- works underwater, under saltwater. So you have this underwater camera from Sony and you can touch the touchscreen. So we think that basically anything humans touch will become touchscreen in the future. And it won't be necessarily a colored touchscreen, a nice one just like on a cellphone. For example, think about all the things you have where you have little black and white LCDs that tells you something about something in your house. Those will become touch. Because if you look at that right below the LCD, you'll have some mechanical buttons. And then those mechanical buttons -- they say a button cost a $0.05. That's true if you make billions of them, a button costs $1. And right below it, you will see $3 or $4 worth of buttons, then you'll have a black and white LCD telling you something is on and off or in the air-conditioning mode or whatever. And all of that will get replaced by super cheap black and white touchscreens that will be another factor lower. To answer the question about, is it going to go in commodity pricing, it sure is. And we're going to make it at our fully depreciated fab in Minnesota and in our partner in China that we worked with for years, Grace Semiconductor, to install our low mask count processes as opposed to high mask count foundry processes. And it's going to get assembled in robots, where the entire assembly test operation is done with 5 people and 0 inventory in 8 hours. And it's the manufacturing capability that, where we eventually, hung in there and beat Samsung in the SRAM market. We're now #1, and we're going to bring to bear that manufacturing capability, so bring on commodity pricing. I'd like to squeeze out some of the guys who aren't so good at manufacturing.

Steven Eliscu - UBS Investment Bank, Research Division

That's helpful. On a different note here, you recently disclosed that you're investing more than $80 million into a battery storage venture. Can you give us a sense of the timing and some of the key milestones and when it could be material to revenue?

T. J. Rodgers

Brad? He said battery company, right?

Brad W. Buss

We said a battery venture. We haven't named it or given any other specifics.

T. J. Rodgers

We're good at manufacturing. Our auto line, I just described, and SunPower, which I also described earlier, is what our capability is. If you get -- if you partner with a company that, which is full of Ph.D. electrochemists that really understand batteries, you can conceive of making a better battery at a lower price. That's the deal, and we're still in the R side of R&D. It's going to be a year-plus before we can tell you what we're making and why it's cool and when you're going to be able to get one. So I'll leave it there.

Brad W. Buss

I think at the end of the year, we'll have a lot better feel for the technical milestones. And this year, the very low investment period and assuming those milestones get hit, the real money doesn't come in until 2013. So we'll give you a nice progress update by the end of the year.

Steven Eliscu - UBS Investment Bank, Research Division

Just one last quick question here. Are you seeing any evidence of a recovery in wireless infrastructure at this point?

Dana C. Nazarian

This is Dana. As I mentioned earlier, I am -- it's not massive, but it's certainly on an uptick now. We quoted a book-to-bill ratio near 1.2, just under 1.2, and that's both the wireline and the wireless sector.

Operator

Srini Pajjuri.

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

CASA. Norm, quickly on the touch side, what percent of your business do you think will be Gen4 exiting this year?

Norman P. Taffe

Exiting this year, I would guess around 25% to 30%. But it's going to be ramping up from there.

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

Okay, great. And then the ASP pressure that you talked about, it seems like competitively, it's still the 3 horse race or 4 horse race. I'm just curious, I mean, what's causing the more aggressive price declines in the last few quarters? Is it because you're seeing any Asian competitors or is it customers asking for more discounts, anything like that?

Norman P. Taffe

What you said is right, the fact that it's still the main guys. However, both the fact the volume is up and we want to pursue some business, it is really penetrating areas like China. And honestly, the fact that these big suppliers are good at leveraging the fact they're shipping literally tens to hundreds of millions of units and expecting you to come with cost reductions. So I do see some presence of other competitors coming in. They are affecting price. At the end of the day, the share's going to the main guy. And I reiterate what T.J. said, I think CapSense is the perfect model. In the long run, when things get tough, we're very, very good at sticking in. We had stayed in there, a great margin business, we are dominant in. We think we're going to do the same thing in touch. I still think in the end, it's the main guys. We're going to continue to be a leader. But some of the -- with the volume of these handset guys, they certainly exert their pressure to keep pushing those prices.

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

Okay. And then one last one on the USB side, USB 3.0, I guess, we've all been waiting for Ivy Bridge. Now that's it's ramping, how should we think about the opportunity for Cypress and also the total market size this year?

Badrinarayanan Kothandaraman

My name is Badri, and I run USB. So we introduced 2 USB 3.0 chips a quarter ago, and one is called FX3 that is a chip that serves the broad applications base, basically industrial markets, machine virtual gaming. And then the other one serves the mobile application base. And so far, and on top of this, is that we have several tens of millions dollars of design pipeline. There are about 30 customers that have gone into production in the first quarter. So we expect to be in the few million dollars exiting the year in terms of revenue. And in terms of the ramp from Intel, we expect that to happen in the second half of the year. So expecting more USB paid out [ph] and proliferation by then.

Brad W. Buss

Yes, like we've said before, I think you'll see the USB 3.0 ramping every quarter for probably 1.5 years to 2 years as more and more customers roll in. So that will be another additional growth leg that we currently haven't seen in the USB front for quite a while. He's doing very well. Probably one of our few products that actually is blowing out their marketing pipeline forecast when we look at our NTP process, so we're hoping to see good stuff for him.

T. J. Rodgers

Yes, if you look at the divisional breakout on the report, I focused on the story about the drop in PSD. But if you look at DCD, it went up from 18.8 to 20. So it was the only division that actually grew quarter-on-quarter.

Operator

Sidney Ho.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

It's Nomura. So in the annual report, I think you mentioned it was about $25 million of cost savings opportunity, of which I think you include 80% in your operating plan. So 2 questions here, can you, one, talk about the impact of those cost savings between cost of goods sold [ph] and operating expenses and when should we start seeing them hitting the P&L? And, two, can you talk about how much of the variable compensation is tied to achieving certain profit metrics and what are those metrics?

T. J. Rodgers

Okay, so I described what in programming we call world-class cost. In short form is that people in this room are bandwidth limited, competing in the areas we've been talking about. We've asked another 100 Cypress people, some managers, some even not managers, step up, look at an area of cost and do something about it. We have 570 some initiatives. Some of them are small, save $1,000 a quarter. Some of them are pretty big. 90% of the initiatives are in manufacturing, where we can save a lot of money, changing from one hydrochloric vendor to another vendor and changing from one buffing pad vendor to another vendor, using less photoresist on a wafer by virtue of having a more clever algorithm for putting the photoresist on the wafer, et cetera. We're driving those, and that opportunity is to the magnitude you've said. The way it will show up in finances is as opposed to -- as we've been talking about price declines and a few percent per quota is light [ph] in our business. And what those are intended to do is maintain our margin. So we'll be able to live versus the ocean, the tide as it goes down and prices, which it always does, of course, that may change in the third quarter if supply is tight, and maintain our margin. That's the purpose for the program. So that's how you see it. I won't come and tell you our margins were 49% last quarter because of blah blah and price cutting here and there. We'll tell you that we're still above 55% for the 10th and 11th quarters in a row.

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Just a follow-up to that. I think in the early call I asked about when your revenue is going to go back to peak levels. So by the time it goes back to peak level in the second half of this year, should I expect operating margin for the core business to exceed the last peak as well?

Brad W. Buss

They'll be up definitely in that range. And again, we've got DecaTech putting a little more pressure in there. But I think in the core business for sure, because of the revenue, the OpEx and like we talked on margins, we expect them to be back up where they definitely trended. And the other part of your question was on the variable comp plan. It's -- the metric is PBT percent and it turns on at 15%, and we hit target at 25%.

T. J. Rodgers

So there were no bonuses this quarter. That automatically dumps, how much?

Brad W. Buss

Close to $2 million.

T. J. Rodgers

$2 million, $0.01 per share into the quarter. We start getting a bonus at 15%, 0 bonus, and then we get all of our bonus at 25% pretax profit. So they're -- everybody in the corporation, me included, is tied to getting back to 25% pretax profit, and they will feel it every quarter we're below 25%.

Brad W. Buss

Yes. But there's -- if you're concerned on any big variable comp thing sliding in the door and whacking you in the back half, it won't be substantial at all. And also, to my earlier point, I think the vast majority of the incremental GP every quarter will go right to the bottom line.

T. J. Rodgers

The way -- again, the bonus plan turns on as a linear. So it's 0% you get of the bonus, calculated bonus is at 15% profit. And 100% of the calculated bonus you get at 25% profit. So from your perspective, the way it will look is, as we zoom through that area, there'll be a profit-sharing mode, where some of the profit -- incremental profit will go to employees and some of the incremental profit will go to the bottom line. And we will ramp from 0 to approximately $2 million a quarter paid out in bonuses as we go through the 15% to 25% gap in profitability.

Operator

Sujeeva De Silva.

Sujeeva De Silva - ThinkEquity LLC, Research Division

ThinkEquity. And, Norm, good luck on the new venture here. In terms of touch, the -- I know you've given a lot of color here. But can you just remind us what tablets were as a percent of the revenues when you peaked in 2011? And in your guidance, what percent you're expecting from tablets as you recover to peak?

Brad W. Buss

2011 tablets were roughly 15-ish percent.

T. J. Rodgers

And that was the peak.

Brad W. Buss

Yes, now that was for the year. And remember they peaked in the second half of that year and then virtually were kind of at a $1 million in this quarter. So there is no tablet risk. You only have tablet -- large screen upside for the remaining of the year.

Sujeeva De Silva - ThinkEquity LLC, Research Division

I guess I was asking what percent are you expecting as you recover touch to peak exiting '12, for example?

Brad W. Buss

Much higher than where it was in Q1.

T. J. Rodgers

I think a reasonable answer to that is 10%. That's the ratio in the marketplace at least. We're currently below that because the tablets we got in were not successful in the marketplace, and we're starting over in several places. Looks like the eReaders are going to be more short-term successful than the iPad competitors. And 10% is a number, and it's really, really -- like I said earlier, it certainly is a separate class of products from an analyst's point of view. But from a production, design, connection with customer's point of view, you're talking to the same guys, and it's the same thing as the cellphone, and it's 10% of the market. We'll get that.[Indiscernible] better ASPs.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Better ASP, okay. And then ONS has graduated to the core part of the business. Can you talk about what run rate you guys use as a threshold for that happening, and if you've broadened beyond Samsung and RIM as 2 large customers and diversified there?

Norman P. Taffe

This is Norm, Sujee. I think really what drove that combination is the fact that we organized in the user interface division so much, and it's obviously a couple -- those same 2 major customers are still the primary customers. But it's so aligned with having a trackpad, optical touch, CapSense that there's a lot of synergy in having those developments together because they're often just different alternatives. And then in addition to that, we're actually seeing optical ONS be attractive to other markets such as automotive where we see people using it in the steering wheel. So it's those kinds of things, but it's still primarily those 2 customers.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Last question on Gen5, you talked about trying, T.J., trying to get ahead of the Barcelona design cycle by mid-summer. And it sounds like that's a bit more compressed than when Gen4 came out. Is Gen5, should we think of it as incremental or will there be features in there that make it a sort of a next step relative to Gen4?

T. J. Rodgers

Gen5 will be both incremental and a major change. Incremental, one of the reasons we took more time to get to market with Gen4 is we changed the software such that the customer will [indiscernible] and will have to change software, but after that, they will see the same software. So we are in effect, like Intel, make chips that run the same operating system for them. And we had a one-time change in Gen4 that was part of the reason we were late to market, not all of it. Execution was part of it. So going forward, we are going to build on that software and provide our customers interesting new features, capability and cost points depending upon what they need. And since the enemy is listening to this broadcast, I won't go further than that, but that's generally our strategy.

Operator

Sandy Harrison.

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

Wunderlich. Just a real quick one on an earlier question. The ultrabook, the Intel marketing machine is really heavily pushing this ultrabook segment and talking about it being a major percentage of total consumer-based PCs, probably a little more aggressively than maybe you guys had. They're talking it second half of 2000 more than -- 2012 and 2013. What does it take to go after this segment? And is this an interesting market or is it just not going to have the volumes that make it attractive?

Norman P. Taffe

Sandy, this is Norm again. That's an interesting segment. I actually like to talk about it in 2 ways. I think people think about it relative to touch. I can tell you where it's already taken off for us, and that's the [indiscernible] trackpad. Ultrabooks are very important because they push the thickness down, and they also are going for a multitouch trackpad. And that's where we've had our most significant position. In fact, one thing that we highlighted is the Dell recent XPS 13 flagship Dell models uses Cypress' trackpad. And so honestly, in the short-term, I see track -- the biggest driver out of ultrabook which will all have a multitouch trackpad, for us being trackpad growth. Having said that, we do see a portion of the market saying for a few models, they also want to do touch. So we're very heavily engaged in those guys. We can come to them both with the trackpad and the touchscreen. And Gen4 is actually an outstanding solution for that, particularly the larger device we introduced early this last quarter. So I still see, in that perspective, it's going to be in the short term, a subset of the market. I think in 2013 and '14, more and more will go to touch, assuming the usability is positive, usability experience. One thing I know for sure is 100% of them are going to have multitouch trackpad, and that's a space that we're gaining share in now.

Operator

Jeff Schreiner.

Jeffrey A. Schreiner - Capstone Investments, Research Division

Capstone Investments. Quickly, we'll just stay with ultrabooks. Can you talk about the revenue trajectory we could expect for trackpads throughout calendar year '12, maybe how many ultrabook designs you've captured? And where, exiting 2012, you think you could be in overall market share? As you said, you're gaining some share there in the trackpad market.

Brad W. Buss

Jeff, we're not breaking down the revenue stuff on that yet. A lot of it really more for competitive reasons that not. And I'll let Norm address some of the traction stuff that you're talking about that it's been very good.

Norman P. Taffe

I would publicly announce that we're in both Dell and Lenovo machines, which are 2 of the top 4 guys. I think we're going to add to that list soon, and we're in multiple models of those guys. So we really kind of crossed the key point there, and we're getting literally tens of models of the guys who've already penetrated. And I think were going to get more of that as the year goes on.

Brad W. Buss

Yes, I think to where you're trying to go, we see it as a big -- it's going to be one of our bigger dollar drivers for sure this year, and I think that is just setting up for an even stronger '13 because of the trends that Norm talked about. I mean we do excel in the multitouch end of it, and that's where the world's going. We're not trying to chase the low-end or all the other chips that's going to get displaced. But one of our competitors is involved in, it's not an attractive, and a dying area from our perspective.

Operator

Charlie Anderson.

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

Dougherty & Company. Norm, best of luck in the next endeavor. So real quick, just a high level question. T.J., you described a customer who said, "What's not interesting is given the price on the chip. It's the whole system. It's the whole module, the stack up." You have a competitor who is sort of approaching it now from going back to the module approach. I wonder if you can talk about the pluses or minuses of that, if there is an argument to go to a more of a module approach, if there is more cost to wring out from the whole stack up?

T. J. Rodgers

That's a great question. I'll give you my opinion on it and then admit upfront that the market will sort out, whether or not my opinion turns out to be right. So the customer -- to the customer, they want a system solution, and they want it to work, and they don't want to have to put their engineers on it, and they want minimum BOM cost for the system. And therefore, they'll trade off the cost of your chip, what they have to pay for your chip, versus other cost reductions you can give them elsewhere in the BOM. That's different from being integrated and providing the entire BOM yourself. One of our very good competitors, that's sort of, not sort of, is the pioneer in this whole area, is Synaptics. And they sold systems and they made sensors for a long time. I'm not sure that they didn't make them themselves but they -- I think they subcontracted it. They shipped whole modules, so they shipped the chip connected to the sensor and you put it in and it just worked. When we came into the market, chip-only, because our customers asked for it, Synaptics has shifted over time. They reported they've shifted over time to being chip-only. So that's a clear trend. That's real, and that dynamic has happened. Now I have another competitor, who I'm choosing not to name, I guess, that is starting to make sensors. And I don't know enough about their sensors to know if that they will succeed with it. They won't be competing against us with sensors. We don't make them. So if you ask what market are they entering, they're entering the sensor market against Asian companies that are cold-blooded killers when it comes to cost and capability. So good luck for bringing some business back to America, as far as I'm concerned. And if it works, we know how to make stuff, too, and there's nothing preventing us from getting in. Our experience is that sensors disaggregated, and that's the right way to go. And question is, can you get back in if you got a new angle? Maybe, and we'll see, and we'll act accordingly.

Christopher A. Seams

Charlie, it's Chris. Just one thing to add there. The reason that we were asked to do chip-only way back when was to disaggregate the supply chain and have multiple sources on the panels. And frankly on probably all of our high-volume opportunities, we still get asked to enable 2 or 3 panel makers. And there is that dynamic with the end customer. So as T.J. said, the market will vote, but they want supply surety in the panel.

Operator

And our last question comes from Li-Wen Zhang.

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

Pacific Crest. And first to Norm, thanks for the support, and I wish you the best in the new comp and the new companiest. And the first question regarding -- it gives the outlook, this year outlook for TrueTouch to be down year-over-year. I'd like to clarify, is this for, in terms of dollar or unit?

Norman P. Taffe

So it would be in terms of dollars. And I think the order, is more in the 10%, 10% to 15% for the year, just to give you a sense. But that'll be in terms of dollars. We'll be up in units but down overall a little bit in dollars.

Li-Wen Zhang - Pacific Crest Securities, Inc., Research Division

And also, for your DCD division revenue up 6%, but on gross margin up as well, but I heard a previous comment is the sequential growth was mainly driven by West Bridge. I thought West Bridge gross margin would be lower than USB 3.0.

Brad W. Buss

USB 3.0 is barely starting to come into play right now. It's marginal from a gross margin perspective.

T. J. Rodgers

Thank you very much. We've concluded the first quarter report. You've seen a turnaround.

Brad W. Buss

Thank you.

Operator

Thank you. This concludes today's Cypress Semiconductor conference call. You may disconnect at this time.

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