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Cypress Semiconductor Corporation (NASDAQ:CY)

Q4 FY07 Earnings Call

January 24, 2008, 11:30 AM ET

Executives

T. J. Rodgers - President and CEO

Brad W. Buss - VP, Finance and Administration and CFO

Chris Seams - EVP, Marketing, Sales and Manufacturing

Ahmad Chatila - EVP, Memory and Imaging Division

Dinesh Ramanathan - EVP, Data Communications Division

Norm Taffe - EVP, Consumer and Computation Division

Analysts

Tim Luke - Lehman Brothers

Srini Pajjuri - Merrill Lynch

John Barton - Cowen & Company

Sandy Harrison - Signal Hill

Adam Benjamin - Jefferies & Company

Glen Yeung - Citigroup Smith Barney

John Pitzer - Credit Suisse

Douglas Freedman - American Technology Research

Chris Danely - JP Morgan

Operator

Good morning and welcome to Cypress Semiconductor's Fourth Quarter Earnings Release Conference call. Your lines have been placed on a listen-only mode until the question and answer segment of today's conference. This call is being recorded. If you have any objection, 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 - President and Chief Executive Officer

Good morning. We are here to report the fourth quarter and the year 2007. We will do it in our usual way, Brad Buss our CFO doing the numbers; Chris Seams, our VP of Marketing and Sales will talk about the market. I will give a few technical and business updates. We will try to give them quickly and go to questions. Brad?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Thanks T.J. Good morning and I want to thank everybody for attending. Just a standard Safe Harbor upfront as usual, we will be making a lot of forward-looking statements. They obviously entail a lot of risk. Please take a look at our press release and our SEC flings for a more detailed discussion of them.

I will start with Q4, I will give you a quick overview on the year and then I will move into guidance and then turn it over to Chris.

So our consolidated revenue for Q4 was $431 million, which was within the mid-range of our consolidated guidance. The revenue actually decreased 4% sequentially; however it was up 50% on a year-over-year basis. Some part continued to grow strongly and it accounted for about 52% of our consolidated revenue, which was consistent with the prior quarter.

Our semi revenues totaled $207 million which is a decrease of 4% on a sequential basis, and it was a little weaker then we had previously anticipated due mostly to revenue declines late in the quarter within our CCD division. Just as the data point if you remember in Q3 our semi revenues exceeded our guidance and actually grew 8% sequentially or 12% if you adjust for the PSRAM divestiture in Q2. And of that CCD actually had grown 21% sequentially and we had set record PSoC and USB revenues then. So I look at the full back half of the year, the CCD division actually did quite well, and actually you see in our internal guidance it just kind of pushed around between Q3 and Q4.

In Q4, CCD actually decreased below 10% after growing to 21% I mentioned. It was fairly concentrated in bigger customers, PC related and kind of what's in the Asian market. I am still really pleased with what's going on there. We have excellent customer and design penetration that I think one that Chris will talk to you on and we are extremely well positioned as we move forward for the next few years.

DCD decreased about 5% sequentially, or that was due to the divestiture of the NSC business in Q3, so obviously that revenue didn't repeat in Q4. And then, we also had some growth in our comp business and again West Bridge which I am sure we can Dinesh will talk about where the... with initial production RAMs were slightly better than we expected. So that's obviously good news as that's going to be one of the big drivers for us in '08.

MIV actually grew revenue 4% sequentially and that was driven by increases in SRAM as well as image sensors.

On a GAAP basis we had a net income of $8 million, which resulted in diluted earnings per share of $0.04 for Q4. It was negatively impacted by one time write off of our consolidated debt issuance cost of about $15 million and I will talk a little further about that and you probably saw the 8-K that we filed related to the conversion trigger as well. And that compares with last quarter's $0.18 which had a bunch of favorable benefits that we obviously adjusted out since they are not reoccurring and it compares to $0.09 in the year-ago fourth quarter.

Our non-GAAP net income was $46.2 million, which resulted in diluted earnings per share of $0.24. This is the second highest EPS we've recorded since the boom time at the top of 2000. So I was extremely pleased to still look how that came in. This is a decrease from last quarter's EPS of $0.26 and more importantly it was a strong increase from our diluted earnings per share of $0.15 in the fourth quarter of 2006. So very strong progress on a year-over-year basis.

One of the things that I looked at some of your models versus the content of EPS versus what we turned in besides the semi-revenue shortfall, I think there was a lot of mis-modeling done on minority interest and obviously the share count ended up being a little higher than most people expected due to the higher average stock price. So make sure you take that into consideration.

We've been talking a lot on the strategic actions we've been taking in the semi business and how they would show up in the back half of the year. We talked in Q3 and you saw that happen and again I think you are still seeing that continue to happen in Q4 and again just a reference point, in Q4 of the $0.24 of the non-GAAP EPS on a fully diluted basis, the Semi business was $0.15 of that and if you go back a year ago the Semi business is only $0.10 of that and actually the semi contribution this quarter was greater than our entire EPS of $0.15 in the Q4 of 2006. So I have been very pleased with the progress we have made in the semi business.

On a non-GAAP gross margin for the fourth quarter on a consolidated basis was 36.6%. It was up 33.2% in the previous quarter since SunPower's gross margins went up as well as in the Semi business. Okay. So it's important when you guys model, you continue to model it separately and then manage a consolidated number from that. It's very hard to just to do a consolidated number without looking at the individual pieces.

Our non-GAAP gross margin for the Semi business for the quarter was 48.8%, almost at the top end of our guidance and again was the highest level we have achieved since Q2 of '06 and it was basically up on favorable product mixes and a matter of fact the utilization. Our product margins continue to remain strong across all the divisions and I still expect to drive to the 50% number in the back half of '08.

Our non-GAAP consolidated operating expense in dollars increased by just slightly under $4 million compared to last quarter and it was mostly due to sales and marketing increases at SunPower.

Our total consolidated non-GAAP OpEx is at 24% of sales, one of our lowest quarters ever and our semiconductor OpEx actually remained relatively flat sequentially and was down 9% year-on-year and that's even while we continue to invest fairly heavily in FAEs and application support for programmable solution strategy.

For the year 2007 now we posted record consolidated revenue of $1.6 billion which was an increase of 46% from fiscal year 2006 revenue of just over $1 billion. On a GAAP basis we achieved diluted earnings per share of $2.32, which as I think most of you know was favorably impacted by the large gain on the sale of a small portion of our SunPower shares and other one time items. And this is up significantly from the diluted earnings per share of $0.25 in 2006.

On a non-GAAP basis, we had diluted EPS per share of $0.82 compared with diluted earnings per share of $0.51 in 2006. Again, an increase of 61% and something I was extremely pleased to see.

To go over the balance sheet real quickly, we had record amount of consolidated all time cash of $1.6 billion. The Semi business we had about 1.1 billion which again was our highest cash balance ever and I plan to put some of that to use. Our net consolidated inventory was $246 million which was up $51 million from the prior quarter and most of that was SunPower, the Semi business actually only grew about $10 million and that growth is really due to two things. It's obviously the shortfall in some of the revenue, but also we have planned increases to support certain customer profiles and also building our inventory for West Bridge products which are expected to ramp very nicely in '08.

Accounts receivable is up $236 million, I am sorry was that $236 million, which is up $44.1 million from the prior quarter. SunPower increased $55 million and the Semi business actually decreased $11.4 million. Our consolidated DSO increased 11 days from the prior quarter to 50 and the Semi business DSO actually decreased to 43 days which was the lowest level in many years beyond if I could even go back far enough to see when it was lower. So we are happy to see there and again... I mean part of that was just revenue slowdown in the last month of the quarter and that helped as well.

CapEx was $50 million for the quarter, if you included $39 for SunPower, and $11 for the Semiconductor business. Total CapEx for the Semi business for the fiscal year 2007 was only $37 million. It was actually below the... above the $50 million I was forecasting for 2007, as approximately $16 million was not received in Q4, and probably will roll into our Q1 number. Again that was the lowest semiconductor CapEx spend in many, many years and we have been at pretty consistent with our positive cash effect of our new flexible manufacturing, and no more, more strategies. Depreciation for the fourth quarter was $29 million, and included $10 million for SunPower.

Now just a quick conversation on the converts, I think most of you saw the 8-K that SunPower and Cypress both filed the other day. As it relates to the stock price trigger test that is in the convert and is pretty standard in a lot of the converts. Both of us were trading at much higher stock prices in Q4. That trigger test was met and it does give the holder the right to convert at their discretion. As we stated in the 8-K, we think it's highly unlikely that anyone would do that because they could make a lot more money just selling the bond in the market based on the current prices. But it could happen. If it does we have the ample cash on our hand, so I have no issues there. And nobody has approached us at this point in time wanting to convert.

So, due to that trigger the various accounting rules require two things to happen. The bond now needs to be classified as a short term, which you will see in our K, we will... that will happen, and we have write off the unamortized debt issuance costs that were previously amortized over the term of convert. So, that impacted the GAAP-only charged of about $7 million in Q4 for the semi business and about another $1.2 million that's already been expensed for January. And then there's SunPower had obviously their impacts on it as well.

Turning to SunPower, our basic ownership is approximately 56%, fully diluted it's 51%, and again to my point on minority interest, please make sure you are modeling that correctly because it's getting pretty big. For instance it was a $15 million number in Q4, and I noticed some people were modeling numbers around the $12.5 million and $13 million. So that can impact a $0.01 or $0.02 on EPS if it's not molded right. So if you are unsure how to do it, Norm and I would be glad to take you through that.

We still currently control SunPower through our 90% voting right control of our Class B shares. We still own 44.5 million shares and as of yesterday had a market value of about $3.3 billion. Our Cypress share pricing increased very sharply in Q4, I think, as everyone saw. That's obviously good news, but it also drove the average stock price up for the quarter to $33.73 from $25.76 in Q3, and obviously that has a very big impact on the diluted share count for Q4. And the warrants and the convertible note became very heavily into the diluted share count for Q4 by tune of approximately 12 million shares. So again, we had a higher share count that I think any of us expected from that. And obviously with what's going on in this quarter that number should drop pretty hard in Q1.

In 2007, our total shareholder return was 118%. We obviously beat the thoughts in a lot of the major markets, even with the current market turbulence that we have seen year-to-date and the decrease in the SunPower stock price which obviously flows through to us. We are still up 30% on a year-over-year basis about 120% on a three year basis and over 250% on a five-year basis. And again, these have all been pretty key benchmarks for our long-term shareholders.

We remain very focused on driving shareholder value, and I currently spoke like the semiconductors stub is undervalued. And you can do the equity and the enterprise value calculations, and I think you guys need to take a real hard look at the valuation methodologies there, because they are still not correct in my opinion.

I'm now going to turn to guidance for Q1, which is all on a non-GAAP basis. Our consolidated revenue for Q1 is expected to be in the range of $410 million to $438 million, which is a year-over-year increase of 20% to 28%. SunPower has already given guidance to be approximately $230 million to $250 million of that, and then that would put the semi business in a range of $180 million to $180 million... $188 million, I should say, which is down 9% to 13% sequentially, again due to normal seasonality that we normally have and we think that will be compounded by some of the uncertain macro economic conditions. I expect the vast majority of the revenue decrease to be centered within CCD and specifically still on the consumer end markets.

Revenue in Q1 will also be impacted from the conversion of our independent distributors in Japan and Asia to a sell-in revenue recognition policy... to a sell-through I should say from a sell-end policy that we currently do. We are doing this for a variety of reasons. We are expecting to achieve higher gross margins in Asia and Japan, as will now be able to manage the end customer resale. We will be able to provide design registration for a rapidly growing proprietary business, and we will obviously align our distribution and revenue recognition policies consistently across the world.

These are always very key benefits. It's the right thing for us to do, and obviously with this quarter, and where things are at we think it's the right time to kick some of that off. The timing and amount of this one-time revenue adjustment will vary with the number of testing [ph] and win. I am currently estimating it could be approximately $18 million to $23 million of revenue impacting Q1, and that $18 million to $23 million is not, and I will repeat not reflected in the guidance that I just gave you above.

Okay. I look at this as a one-time event, and something that is very right for us to do and I am going to have very good gross margin benefits for us in the long-term. So, SunPower gross margins are expected to be in the range of 24% to 25%. I expect the semi margins to be around 47.5 to 48.5. I think a little bit downward pressure really just due to the fact of the utilization as we balance inventory in the current forecast, and we don't really see any significant ASP or customer product margin declines other than normal mix issues.

Tax rate should be about 10% for the Semi business, 24% to 25% for SunPower, which I think Bill talked about on their call. The semiconductor convertible continued to result in a quarterly interest expense of about $1.5 million and again the amortization will go away since we took a charge for that.

Turning to share count. I think the basic share count will be approximately 162 to 164, and the fully diluted... I am currently estimating somewhere around 172 to 178 which is down from the 185 we turned in, and again that will vary with exercises, the price of the common stock which is the big variable in there. And I think as you know we still have a $300 million authorized share repurchase authorization, and if we put that to use, we will obviously see the share count fluctuate based on that.

CapEx for '08 should be in the range of $50 million to $55 million and that includes the carryover from Q4. So we look at '08 the normal run rate is about $50 million which is consistent with what we have been talking about. We continue to own 44.5 million shares at SunPower, and we have no current lock up agreements with respect to those shares. And dropping all that through I think the consolidated fully diluted non-GAAP EPS will be in the range of $0.14 to $0.17. And again, that's before any impact of the independent DCD conversion that I talked about above. Okay. Obviously, the guidance is something too changed the lot of factors, including the timing of DCD conversion, manufacturing customers, et cetera, et cetera.

Just to wrap it up, I was really pleased with '07. I think we turned in some excellent financial results. More importantly, we took on a lot of strategic initiatives that started to bear some fruit, and I think will bear a lot of financial and shareholder value over the coming year or so. I appreciate your support and I'll now turn the call over to Chris for an update on the markets.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Hi, good morning. Let me read out some of the usual indices. The revenue splits by geography was the slowdown in our consumer segment, Asia shrank from 55% to 49% for the fourth quarter. North America grew, I think most of that slide from 25% to 29%. Europe grew a point from 11% to 12% and Japan by 2 points from 9% to 11% of sales.

While we continue to have no customer greater than 10% of sales, units for the quarter were down slightly, 162 million units down from a 167 million in the prior quarter. Pricing actually slipped backwards for the first time in eight quarter to $1.26 was the average selling price down from the $1.29, mostly mix-related pricing continue to be fairly stable.

Our book-to-bill with... what Brad led off with, shrank below $1, it was $0.88 for the company, and our semiconductor backlog declined to a $197 million.

In terms of market outlook, really all of our end market accept for consumer and related consumer which would be PC, peripherals, for us were fairly stable from Q3 to Q4, and the outlook for those are stable into Q1. And really the consumer segment which we felt in hindsight now is little bit over in Q3, and considering the other reports of a weak holiday sell-through, that's where we are having all of the weakness right now. As we enter the first quarter at 76% booked, and our booking patterns have recovered and returned to a point where they support the guidance that Brad gave.

Let me finish off with a few added comments on the transition of our distributors in Asia and Japan that Brad detailed. I have to remember about that 30% of our revenue comes through these independent distributors in Asia and Japan, and with an emphasis on programmable proprietary selling of solution we have aggressively pursued selling based on value rather than at cost at the design location of our design wins. It's important that we protect the design work and resulting selling prices that are based on value from our distributors in European and North America. The transition that Brad talked about will put all of our distribution partners on an equal footing and it really enables us to grow revenue in this very high margin, very broad customer based channel.

Let me turn call back to T. J. now.

T. J. Rodgers - President and Chief Executive Officer

Few comments; first on Financial, I think, it's the appropriate yearend to make some general comments and some products and technology comments and on to questions.

For the year, we have revenue $1.6 billion that's at all time record for us, better than 2000. Our fourth quarter revenue was $431 million, second best quarter we ever did, the best quarter, slightly better than Q3 of this year. Our transition, we did $0.24 earnings per share, that was couple of pennies bellow the street guidance but I think those of you who invested in Cypress overtime realize that in a soft market like we started to experience in December, Cypress, the SRAM company would have gone to near-zero approx or perhaps even a loss. And we think we are proud even though we missed guidance. We are proud of $0.24 a share in the quarter.

Reason for that is our transition to programmable products. We now have 6,301 as of the end of the year. Our PSOC customers, that's up from the 3400 just a year ago. That piece of internal expectations because we have turned in the high year on marketing and we are learning rapidly how to become a design-win driven company as opposed to a commodity based company. If you look at our sales of proprietary product... sales product made only by the Cypress and no one else. In 2003, they were only 48% of sales and PSOC was 1% of sales and again at last year our proprietary products were up 70% of sales, our PSOC up to 18% of sales.

So, the conversion is slow in terms of an oil tanker but we now have a company which is majority proprietary programmable products rather than majority memories.

Few comments on technology and design wins. Interesting for us are some of the design wins we see as we explore the consumer market. And we were designing two Gaggia baby coffeemaker which would be a reducing volume from Gaggia's, Pioneer's super home audio CD receivers and one that's interesting technically but practically not going to be a whole lot of money, it's a company called Therma Blade. It's got PSoC CapSense and power control into a battery powered hockey skate that slightly heats the skate for better performance.

On the money side there was a report from IMS Research; it named Cypress the leader in capacity sensing with mobile handsets that is sensing of beverages that have a mechanical button. With a market share of 70%, where there is shortage of 40 million units.

EDM, a magazine... an engineering magazine in our business named EZ-Color, one of the top items of 2007. EZ-Color if you remember is our solution for guiding high brightness and other light emitting diodes with precise control with parts of modulations in PSoC, one of the reasons this is gaining traction is that light emitting diodes are made out of three-side semiconductor compounds with manufacturing at a certain source. And therefore there are literally dozens of them, so you can't order a white one, you order in three of the 10 billions of white ones. And when you want all your whites to look perceptively identical, you are forced to put all in threes or all in one. And then they charge you an extra dime for that. With PSoC we are able to adjust color and compensate for many and that's getting traction with our customers because it saves them money.

Our West Bridge products, as you know have gone in the cell phones and they are starting to ramp, last quarter being about $5 million with strong growth for this year. Their claim to fame is that, when you download songs and even movies over computer and to cell phones or portable products that can take 10 or more minutes, the normal downloading speed, so we built a West Bridge family to be the fastest in the world. There was a report coming out in semiconductor insights in the end lines, watch different cell phones for how fast it were in downloading because a 20-minute download can put a dent in your day and a 1-minute download doesn't and our solution was found to be the best; in this case it was in the form of a rim phone which is one of our major customers and that phone was 2.7 times faster than the second fastest device today, they analyzed.

We now we will shut down our 0.35 micro and semiconductor plant in Texas by the end of the year. And we are going to do an end of life field for the older products and then we are going to sell the equipment and then the building and then the land, approximately independently. We know we were going to dispose this fast for a year. We are just trying to find a purchase route continue to run the American path, six inch wafers we couldn't get that done, so now we will do end of life and sell the parts. We launched a business unit, a division in Shanghai. Shahin Sharifzadeh who has been our VP of R&D has relocated to launch that business. We have a design center there, we have finances there and we have both circuit designing and solutions design there and we are taking that division in order to increase envision of Chinese sales. We benefited of course from the transfer of sales but we want to start getting design in the indigenous accounts.

And SunPower had great quarter for bookings. They booked five large scale power plants in Spain with a total of 47 megawatts. Just if you remember SunPower was below our quarter in third quarter and that was partly due to the fact of finishing of the China's installation at Nellis Air Force Base down in... it's down in California near Las Vegas. And that giant installation is 14 megawatts as Spain is going national on scale tower, and SunPower's booked 47 megawatt of that. They are hooked on to the middle of the year and they remain completely sort of limited. Start working on the silicon problem which is not going to end for a while, it will get little bit better. SunPower has a joint venture called Wongjin Energy Corporation and it's a 500,000 square foot ingot factory, there thing are recycled up in order to make wafers and that will supply SunPower. They have also done a deal with Jarway [ph] in Central China, a major light emitting diode, solar flash light emitting diode, wireless lights company for a 900 megawatts production for a SunPower panels.

SunPower has signed agreements with Morgan Stanley and GE Financial. It turns out in the solar world one of the popular solutions one has been opting for a lot of companies with us, with companies like Wal-Mart, Macy's, Hewlett Packard and Toyota, is that the company does not want to lay out the capital for a multi megawatt installation, they simply want to declare that they are agreeing in circuiting a load of electricity bill. There you are bringing in a third party namely Morgan Stanley or GE Energy Financial that is able to take the tax benefit of the transaction. They in effect become the owner of the solar installation, maintain SunPower for the equipment and then they gain the annuity of selling power and a fixed contract over a long period of time.

And finally SunPower signed a definitive agreement to acquire Solar Solution; they are the time solar systems integrated distributor. Spain is the new hot spot for Solar, Germany is still growing strong, Spain is the new hot spot and I think Italy will be another one. Our PowerLight acquisition for the American market has been so successful. We have replicated on a smaller scale that same strategy in Italy. Okay those are the primary comments related to the questions. Nisha?

Question And Answer

Operator

Thank you sir. [Operator Instructions]. Tim Luke you may ask your question and please state your company name

Tim Luke - Lehman Brothers

Thanks a lot. Lehman Brothers. Just on with respect to the miss and consumer can you give some color on how that develops in terms of the linearity through the quarter, and any further color on what that relates to? And how you sort of... obviously you are guiding that lower for the first quarter, could you give us some sense of how you would see memory and DCD in terms of sequential guidance? Obviously the SunPower seems to be guided up sequentially. I was also wondering if perhaps you could just clarify the book to bill for the different divisions as you've done in the past. Thanks.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Hey, Tim. This is Chris Seams. Good morning.

Tim Luke - Lehman Brothers

Hi Chris.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

In terms of linearity for the quarter that we just finished fourth quarter October and November or what I would call normal, and where we are looking for, there was a real slowdown in bookings in December. And since, we have come back from the holidays in the last couple of weeks, that's picked up again to the run rate that we were expecting for the first quarter. So, that really... we saw this slowing in December based on the account checks that we have done on our... versus picturing across the board is that everybody was gearing up for big holiday sale in our consumer segment and it didn't materialize as much as you were expecting and the forecast for lower as they exited that quarter.

Tim Luke - Lehman Brothers

You talked about it being fairly concentrated in terms of the consumer mix. Could you give any further color there?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

I am sorry, Tim. I didn't hear the full question?

Tim Luke - Lehman Brothers

You talked about the mix in consumers being fairly concentrated. Could you give any further color as to what it's related to?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

No. I didn't mean to imply that it was concentrated.

Tim Luke - Lehman Brothers

I think Brad said that.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Let me comment on that. On consumer, in the beginning when PSoC was starting to ramp it was big design win or not big design win and a lot of drama. Now with over 6,000 customers, we've got a very broad footprint. And so, we're less susceptible to some particular product turning on and turning off. The main thing was of sort of a general slowdown across the board, and we believe it cannot prove that it was exacerbated by huge Q3 in which our consumer customers product getting ready for the season and burned some inventory in Q4. So there's no major event to this customer turn on or off. It's just more slowing down of consumer over the holiday relative to what we expected.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Let me finish with the book-to-bill and then Brad can give you the guidance answers for Datacom and memory. Both Datacom and the memory were near unity and CCD was below 0.9 and it gave us the average of 0.88 for the company.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, I think that guidance wise the vast majority Tim will come out of CCD. I think DCD will be relatively flattish give or take a little bit. We don't see really any big impacts there. And I think MID is just flat to slightly down. So again I think to our earlier points, it's not... we don't see any broad-based issues impacting us across the board.

Tim Luke - Lehman Brothers

Do you have a comment on the inventory level as to how we should think about that, giving it for the first quarter, and if you have a comment just on the general lead times as well.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Do you want to tackle lead times?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Yes, it's Chris again, Tim. Let me... lead times are on the 40-week range across the board for the company. And I think as far as inventory, I mean, we will continue to selectively build inventory to meet the profiles on, more of the proprietary products, we have got to ramp up West Bridge. And I think at the same time, we are going to obviously take down some starts in the factories to adjust it with new revenue number. So, I don't see any real big increase in inventory, I mean it could stay relatively flat or bobble around a couple of million dollars. But we are managing it very tightly, specifically at a product line and a customer level.

Tim Luke - Lehman Brothers

Thanks a lot guys.

Operator

Thank you. Srini Pajjuri, you may ask your question. Please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Hi Chris, just a clarification, you said lead times are between four and eight weeks and you also said that bookings are about $190 million plus, and your guiding for like somewhere in the $180 million. Just wondering if you're expecting cancellations, is that why you are being a bit more conservative on the guidance?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

No, I didn't say that, but in terms of lead times for you, some of those bookings are for second quarter already, some more customers booked further out independently I believe that.

When we give you book to bill, its backlog that counts in the book is six month. So, some of it is out in the next quarter. Typically in slow times, it's almost all in in-board quarter, and the book to bill one of the reasons it's just stable and fluctuates so much is people book the second quarter when they are concerned about getting products.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

And we are not expecting any major cancellations Srini.

Srini Pajjuri - Merrill Lynch

Okay, great. And then Brad, the sell-in sell-through issue, I... just looking for a couple of clarifications there. One, after you are done with this, are you going to be 100% sell-through, and then is there any risk that this in a Q1 issue could spill out into Q2 or Q3?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, you're correct. After we are done, we are 100% done, to my earlier point as part of our strategy to manage global resale, especially in those two markets where we see very good penetration and increasing penetration long term. And no, I don't anticipate any spillover into Q2. Our current plans I think we can make it all happen within the one quarter.

Srini Pajjuri - Merrill Lynch

Then for modeling purposes we should just take that out of the revenue lining?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I think that's what I would do. I mean it's kind of where we are heading to and I have... at this point in time I have a pretty good degree of confident if anything materially changes, I will let you guys know.

Srini Pajjuri - Merrill Lynch

Okay. And then my last question is on the SRAM business. That's been checking along well despite the fact that that the DRAM and the NAND are struggling, I am just wondering as you look out to the next two to three quarters, what are you seeing out there in the market and what's the risk that Samsung or someone else will start to come back into the market?

Ahmad Chatila - Executive Vice President, Memory and Imaging Division

Hi Srini, this is Ahmad. I expect the SRAM market to continue to be solid for the next 12 quarters; as we know downturn in it. I expect our gross margins to improve as well. And we have been telling actually for two years that the SRAM market has changed dramatically. It's a lot about high performance and limited competition, and that's why you see the improvement quarter-on-quarter, and you continue to see that throughout 2008.

Srini Pajjuri - Merrill Lynch

Thank you.

Operator

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

John Barton - Cowen & Company

It's Cowen. Thank you. Brad, just go back to the sell-through, so as I understood what you just said, you estimate there's about $18 million to $23 million of inventory in Asian distributors that have already claimed for revenue, you can get that all cleaned up in the March quarter, that I understand that correctly?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes.

John Barton - Cowen & Company

And can you give us a profile of what the gross margin of that inventory is, and I assume obviously as accounting phenomena won't change the loading in the fabs, but what impact would we have in the gross margin dollars as we look at them?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, John, there shouldn't be any impact on the fab loading flow material, it's more just a matter of did it hit revenue or deferred revenue. So it's really the one time. So, I don't anticipate any loading, any margin impacts. And you know our disti margins, we don't like to go in certain territory, going at the price and say disti margins for us are above the corporate average, and these regions are below our overall disti end of it. So, it's an opportunity for us to make sure as part of our value-based selling philosophy that we've been on for the last year and a half that we capture the full value for the company going forward. So they're all positives on a going-forward basis and it's really a real basic one-time conversion that obviously a lot of guys have gone through in the past.

We've struck or about to strike deals with our distributors to pull significant resources in designing and PSoC and other programmable products for us. So we have a broader engine for trading design wins which is our currency really going forward more so than revenue. And those distributors want demand really then if they go to the trouble getting a design win, which cost them money so that design win doesn't get poached by another distributor, doesn't support design win undercover. That requires registration and price insurance.

So, basically must raise distributor prices above the point where poaching is allowable and then on a sale-by-sale basis, a lot more lower prices if you have some high volume order into low cost manufacturers for example. And that will protect the design wins of our major distributors. So, our margins in the future will go up because we're going to charge a higher price to Asian distributors, and we want always to be giving up in the price and we will never be giving up in the price in order to allow them to take business from our worldwide distributors. This is the way we've always run American distribution; the Asian tradition for a long time was different. You sell it to them at a low price and it never comes back and they don't ask for returns. And now we're going to the better way which is ship and debit in Asia. What that means of course then is as we've got some inventory out there which we sold to them and taking credit for sales for it, we have to reverse and turn back into unsold product because in the ship and debit model we don't take revenue credit until the next move out of the distributor to the end customer. It's a one time event so an improvement right now for market like... market slowness and share price such that this is probably a really good time to get it behind it.

John Barton - Cowen & Company

Thank you T.J. And if I just could add the question one other way and that is the adjustment that we will put into our models for that decline in revenue for the March as a result of the accounting change, the impact of the cards line will be directly in line with your gross margin guidance at $47.5 to $48.5 for the total semiconductor sector for March, right? So there is no significant disti inventory or something significantly lower in gross margin that's sitting with those distributors?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yeah, I think it's a fair way to model it right now. I mean again until we look at every piece of inventory and what division and which disti and what's there and where to go through, I don't expect a huge fluctuation. So... and again if it does all I will let you guys on that.

John Barton - Cowen & Company

Got it, thank you. On West Bridge, T.J. made a comment about I think it was $5 million of sales in the fourth quarter, could you update us on your thoughts for revenue as we look out through '08 for the product line? And then looking at disti, obviously you picked up about 10 percentage points of gross margin increase sequentially, how much of that was impacted by the exit from NSE, how much was impacted from West Bridge coming in et cetera?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi, this Dinesh Ramanathan. So let me take the question in reverse order, let me give you an update on the gross margin first and then talk about West Bridge. So you are right the largest impact actually came in from two big things. One is that we don't have NSE at this quarter. And then the second impact that came in which actually was even more positive was we had some military orders actually large ones that we fulfilled in Q4.

I expect that the gross margin for disti to remain in the high 60s going forward, primarily getting us the benefit of NSEs not being there. The other side effect that we also had is that West Bridge is ramping. So as we ramp it the gross margins for West Bridge are improving taking into account factory upticks that we take a look.

On the West Bridge revenue perspective we did have as pointed out about $5 million in Q4, we are expecting that number to be significantly larger in all of 2008 put together. So we are expecting anywhere between 3 to 4X growth in that business. We are engaged with top three of the five handset vendors, with active engagements going on with the other two. We expect 10 plus phones with Antioch to be released in 2008 and we expect 10 plus phones with our MoBL dual-port to be released in 2008 into the market as well.

John Barton - Cowen & Company

So you are saying 3 to 4X growth that's annualization of that $5 million in other words $6 million to $8 million for '08?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

No for the year we did $10 million.

John Barton - Cowen & Company

Got it. Last question if I could. T.J, you have talked about inventory build that took place with consumer in Q3 burned off a little in Q4. Based upon all the cycles that you have lived through, what is your field with respect to the inventory that's out there across various end markets? And how that will impact us in the first half of this year? Please.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Let me put that. I am Chris Seams. Some... based on my experience I will answer the question wrong, every down turn. So I will pass the book.

T. J. Rodgers - President and Chief Executive Officer

John, in consumer specifically, we always have seasonality in the first quarter and a little bit of a hangover in second quarter. It amplifies by about a factor or two this year and I really feel that's due to the week holidays sell-through and everybody was aiming for big numbers. If the macroeconomic conditions that we are seeing right now persist, you'll probably take longer to get through that hangover, if all of these remedies that are going on by the government's work they will be looking at a good summer and business build for next year. But I can't guess.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

I think just to add on that the other I have noticed really in the last year and a half, the distributors, especially the big global guys have really been managing their inventory hugely, and I think you've obviously seen it in their return on invested capital and everything that they have been doing. So disti levels for us have been way off the normal where they have been. And, the slowdown we kind of had at the beginning of the year, it's not like disti inventories have ballooned anywhere. So that's another positive that I look at over there.

I think the lot of guys have been knee jerking at the end of the quarter going, oh! My God. You watch CNBC every morning, you have a heart attack, even though you don't see in your business and I think people are just being a little more cautious potentially and... I am excited on that it is just the inventories we are at near high, we are ballooned up in the last six month, I feel a little more concerned and I am really not on from that perspective.

John Barton - Cowen & Company

Thank you.

Operator

Thank you. Sandy Harrison you may ask your question and please state your company name.

Sandy Harrison - Signal Hill

Hi Signal Hill, morning guys. Just the quick follow-up on the previous question on channel inventory Brad, so just for a clear year level of inventory and the disti channel you believe is as a... is appropriate and it's not anything of any concern. In fact you guys have said in the past that might be a little low. Is that fair characterization?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I think that's an overall fair characterization, definitely.

Sandy Harrison - Signal Hill

Got you. And then just some of the mechanics associated with the convert you've mentioned, you've got plenty of cash to buyback. And when you look at the share impact, or potential share impact from the exercise of that, is there a risk dropping below to 50% level and, just if you could take a quick second to address some of the optics of what could happen potentially, and what you guys are looking at from revenue perspective?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

By that more effective ownership of SunPower, because in effect when you buyback site because you are going back ownership to SunPower. As a matter of fact SunPower value in Cypress shares is one of the things that has prevented us from using our $300 million authorized buyback. You go into the market, because even though in sub value of Cypress is undervalued, SunPower once flying was taking it over our share prices, in effect we were using SunPower at a high priced for buyback. SunPower to high price with Cypress sub pass two or three reverse leverage.

Now, the silver industry in general people are worried that the economy will cause people to buy less silver for their homes from primary market. And therefore also the stocks are going down. And all of the sudden SunPower to me looks attractive and certainly the sub value of Cypress has been attractive for a long time and we've got our $300 million buyback authorized. So, we're watching very carefully.

Sandy Harrison - Signal Hill

And then, just a follow on comment on the West Bridge, as far as what you expect to ramp for '08. Do you think it's relatively linear throughout Q2, Q3, Q4, as it sort of a backend loaded. What's a good way since this is one of your bigger growth engines that we should be thinking about modeling that?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So it is fairly linear in our growth and it's not entirely back end loaded, because the customer that we are going into without phones on a fairly regular basis and just don't wait for like Christmas season to put their phones up.

Sandy Harrison - Signal Hill

All right. Thanks guys.

Operator

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

Adam Benjamin - Jefferies & Company

All right, Jefferies, thanks. Brad can you clarify a little bit more on the CCD for Q4, in terms of the weakness was that more heavily weighted to our PSoC or was it more toward timing to USB?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I'll let Norm handle that.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Hi Adam this is Norm Taffe running CCD. In terms of the weakness in Q4 is actually little more weighted towards the USB side, although both PSoC and USB were down, and was really in both cases focused on our top 10 customers, particularly in the high volume consumer in the PC peripherals and the PC markets. If you look beyond the top 10 which is now a pretty big base for both markets, the business actually grew in both cases.

Adam Benjamin - Jefferies & Company

And if you look to the trend to Q1 is that continue in that same fashion?

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yeah. That's correct that's where I guess the softness is in the top ten in actually in both cases the broader basis going to grow slightly in Q1. We always have seasonality cover that market in the consumer space. This year, it was really exacerbated by such a big build in Q4 and a weakness in... I'm sorry in Q3, and weakness in Q4. But we traditionally are down in Q1 and it's particularly at that high volume consumer and PC and PC peripheral base.

Adam Benjamin - Jefferies & Company

Got you. Brad on the distribution change, is there any particular division affected more by that?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I'm not 100%... I think CCD maybe a little more than probably the average guy, DCD probably the least. I don't have a specific breakdown.

Adam Benjamin - Jefferies & Company

Okay.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

And for your modeling purposes, those of you who try to get down at division level, I could try to get more color on that.

Adam Benjamin - Jefferies & Company

Alright. I can follow up with you there.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

It really varies... the inventories... those inventories moves like literally every day.

Adam Benjamin - Jefferies & Company

And just one last question I think for Ahmad on the mid gross margin. I don't think you guys have seen 43% in quite some time. You sound pretty optimistic about the SRAM business going forward, I think you have mentioned for the next 12 quarters. What's the peak gross margin I can get back to given the 43 in the December quarter?

Ahmad Chatila - Executive Vice President, Memory and Imaging Division

Adam, first thanks for question, just to correct you, I said for the next 12 months maybe I misspelled it. I apologize for that. So in --

Adam Benjamin - Jefferies & Company

I think a lot of us were scratching our head, but that's okay.

Ahmad Chatila - Executive Vice President, Memory and Imaging Division

Okay, great. There is no reason why we can't get to 50% in the next couple of years. We are introducing 65 nanometers throughout that time. We are increasing the products with performance. So, we have more with for those and we are converting to 90 nanometer on our async [ph] product line fully within the next 12 months. So, there is no reason why we can't reach 50% gross margin.

T. J. Rodgers - President and Chief Executive Officer

Yes, I think in the near term 43%, 45% is probably more than sufficient. I mean, I think I've been pretty consistent saying if they can hit in the low 40s and make it 20% plus PBC we would be very excited and I think they are doing a fantastic job of doing that. And at the same time, I still think we would be able to grow. As to Ahmad's point, we have a widest deepest portfolio. We are going to have the most advanced product. And now with some of the Samsung end of life behind us we are ale to take some additional shares which we will do as long as it has the right value based selling that we want.

Adam Benjamin - Jefferies & Company

Got you. And so, if you were to weight that big increase sort of 700 basis point, is that been split between pricing, revenue growth and manufacturing efficiencies, how would weight that amount?

T. J. Rodgers - President and Chief Executive Officer

I would actually say it's 50-50 between conversion and pricing management.

Adam Benjamin - Jefferies & Company

Got you. That's all I have. Thanks guys.

Operator

Thank you. I am sorry. Would you like to go to the next question?

T. J. Rodgers - President and Chief Executive Officer

Please.

Operator

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

Glen Yeung - Citigroup Smith Barney

Thanks, from Citi. T.J., given the slight weakness you saw on PSoC in Q4 and something a little bit in Q1, any change in your full year outlook for PSoC growth?

T. J. Rodgers - President and Chief Executive Officer

No change with what we have stated previously as far as overall year-on-year growth. And I will say that in '07 we grew above 50% in PSoC versus '06. So that... and then again that was kind of in line with what we expected.

Glen Yeung - Citigroup Smith Barney

And can you remind us for the numbers of '08, your expected growth rate in '08?

T. J. Rodgers - President and Chief Executive Officer

Well in 20% to 30% over '07.

Glen Yeung - Citigroup Smith Barney

Okay. And then Brad as you shut down fab... the fab this year, how should we think about the impact to depreciation and the impact to gross margins over the course of the year?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

You're referring to the Texas, I assume, just so we are all clear.

Glen Yeung - Citigroup Smith Barney

Yes.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, I mean I think, if you work at the first three quarters, we are really kind of building out end of life and then preparing for hopefully sales or some kind of shut down. So, I don't think you will see any real big changes to the margins that came out of it. I think the benefit obviously comes after, when we either transition a product to one of our other facilities and our foundry where we see the additional margin benefit. So I wouldn't be modeling any benefit until really near Q4-ish from that prospective.

Glen Yeung - Citigroup Smith Barney

Okay.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

And I think it will be decent, I mean we don't quite have a handle on it yet. It depends on where the product ends up going. But it definitely will be an incremental positive. So, that's why we get very confident on the 50% plus gross margin between the proprietary mix products were drawn, between shutting that fab and growing it's foundries margins, this independent disti conversion, and as well we are doing a tremendous amount of internal world class cost efforts in our gross margins. All of those layer out very nicely, and then on top of that the value they saw what we've been doing with all of these design wins that are really going to drive revenue '08, '09 and beyond will keep coming together, and I expect to see a very nice ladder in gross margin over the years. I mean they are going to bounce around in the quarter by mix or absorption, but we are on the right track to move those up.

Glen Yeung - Citigroup Smith Barney

Okay. And then maybe a bigger picture question T.J. for you, as you think about... what you're seeing from an end market perspective, and I think you've already mentioned that you've seen some slowing and what sounds like it's PC peripherals for the moment. And if we kind of look down the major end markets, PC sort of non-PC consumer and coms and wireless, can you give us a sense as to how you think the economy is impacting those, each of those business, as I am sure you are aware other companies are reporting, we are getting very mixed views as to whether or not we are seeing an impact or not?

T. J. Rodgers - President and Chief Executive Officer

First of all there's a warning that that my forecasting ability is probably less than yours. You are talking to the semiconductor companies this season and I get one shot. In general, we see calm as stable, based on our RAM business maybe slightly weak. We've seen a slowdown in PC business, which is middling, certainly nothing like a big darker session and similar in non-PC consumer. Our bookings worth 76... actually little higher than 76% books and sort of the first quarter. So, in a typically really bad quarter we might be at 50% booked or less. So I see us having a cold, but nothing more than that right now. But of course everything including these is uncertain.

Glen Yeung - Citigroup Smith Barney

Yes fair enough. And what about wireless, I know you guys are, you have a new product in West Bridge going forward. Are there sense as to how that handset market is fairing?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi this is Dinesh Ramanathan. Yeah actually we are not seeing directions in the handset market, from the customers are we are playing with they all seem steady and now they are placing orders in our book and they are taking parts from us.

Glen Yeung - Citigroup Smith Barney

Okay.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So that market seems stable as far as we are concerned.

Glen Yeung - Citigroup Smith Barney

Perfect. Thanks very much.

Operator

Thank you. John Pitzer. You may ask your question. Please state your company name.

John Pitzer - Credit Suisse

Yes guys, it's Credit Suisse. Thanks for taking my question, just quickly you talked about booking slowing at the end of December, but then picking up here in the near term to support kind of the forecast for the March quarter. What's the risk that this pick-up is just kind of your supply chain getting ready for the Chinese New Year? And how does your business typically trend around the Chinese New Year? And then I have a follow-up.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

John this is Chris Seams. We typically historically do see a weaker January than February and we've got to see, February increase with the Chinese New Year little bit. But the reversal that we have in the first couple of weeks of January makes us confident that historical trends going to occur this quarter.

John Pitzer - Credit Suisse

And then just secondly on the West Bridge ramp. I guess, help me understand when you look at the expected revenue growth out of West bridge, what's... already designed in, you're just waiting for product to ramp versus new design wins throughout the year? And then did the later provide upside to kind of where you think West Bridge could be this year?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi, this is Dinesh again. So... okay. So most of the designs that we are going to be seeing next year are phones that we have been working on with our customers last year. So, most of our work is essentially delayed by about a year's worth of work that we get done before those phones start ramping. So most of the phones that I mentioned that we are expecting 10 plus phones with Antioch and 10 plus phones with MoBL dual-port to get released this year. They were all in complete design last year. So I am fairly confident that they are going to get to market.

Now inside some of our customers we do see some programs making it all the way through and some programs not being as successful in the marketplace as you would like them to be. So the numbers that I have been giving you here are based on what we know and what we are fairly certain about coming out end of the market. But then there's a bunch of things that we have also working on which if they hit towards the latter half of this year, we could see significantly more upside as well. So the number that I said, between 3 and 4X could go between 4 and 6X, if everything that we are working on hits the market.

T. J. Rodgers - President and Chief Executive Officer

Yes, I think that Dinesh's point, we try to be fairly relatively conservative on forecast and again if some of these phone are very successful in the market there is significant upside. But we are not ready to go nail that right now.

John Pitzer - Credit Suisse

Great. Thanks guys.

Operator

Thank you. Doug Freeman you may ask your question, and please state your company name.

Douglas Freedman - American Technology Research

Amtech Research. Now one other things you guys have been focusing on is sort of trying to improve the pricing in your products. Can you talk a little bit about what we saw as far as the gross margin results, I guess Norm if you could start, I am little surprised that gross margins got hit when you were... when I would think lower end mix fell away.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yes, let me address that. In general, CCD gross margin has improved throughout the year. I'll point out that while we ended at 48.4% in Q4, the Q4 of the previous year was 43%. And so we made major strides in gross margin throughout the year. And I will tell you also that our product margin, which is margin before things such as overhead and inventory effects... effected grew again in Q4 versus Q3. So the net number going backwards slightly versus Q3 is related to really the drop off in sales at the top line while the actual product margin and ASPs have been very firm and we are lowering costs along the way.

I also tell you I expect that to absolutely continue. We were one of the biggest users of Fab 2 too, which was not as competitive as our Grace into 2008. The margins in all of CCD, and particularly PSoC, will grow from a better cost basis as well as the fact that pricing continues to be stable. And then the action we are taking today with distribution is very important for my product line to allow us to again make sure that we keep pricing stable and also to avoid the distributor design wins where appropriate. So I feel very good actually about the gross margin number even last quarter and the gross margin forecast going through 2008.

Douglas Freedman - American Technology Research

All right. Can you also talk about where we are at with some of the new products in PSoC? I mean at the last analyst event, it seemed like every single division of the company was working on introducing new PSoC products. Can we get sort of an update on where we stand there on those things?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

Let me quarterback that. The divisions are working on products, the reason being that I want all the talent and management bandwidth of Cypress behind this little goldmine we have invented. So let me put an overview on it. In DCD, we have PSoC one family, where we are adding a couple more members to finish it out. It's made in a 0.35 micron non-volatile technology, so-called SONOS technology. And that's what will be our revenue this year. The next generation in CCD is we call it PSoC 3 is made in 0.13 microns SONOS technology, and it is a product we will take out when?

Unidentified Company Representative

Q2 this year?

T. J. Rodgers - President and Chief Executive Officer

Q2, and we will be sampling at the end of the year. It basically works to remedy all of the shortfalls of PSoC 1 as perceived by our customers. So PSoC 1 is a complete system. But if you compare the analog in PSoC 1, the stuff from Linear Technology, they will win.

PSoC 1 has got programmable logic in it. But if you compare the programmable logic to that from companies like Ladder [ph], let's say, or Altera's CPLDs, they would win. PSoC 1 has got a microcontroller in it. But if you compared its horsepower to a competitions in a pure microcontroller in which PSoC is not, they would win. So PSoC 3, it's an 80.51 single instruction, high performance microcontroller. Goes for what we call no excuses analog. That is analog that can compete head on against analog companies, but in an integrated way that we think is much more highly competitive than buying discrete products and has bigger, better, more flexible programmable logic. The company has got a history of knowing how to do that. So PSoC 3 family will be the next generation DCD. Why don't you talk about what you are coming out with when?

Norm Taffe - Executive Vice President, Consumer and Computation Division

On CCD. So that generation essentially will come out, that architecture will also extend up to 32 bits as well as 8 bit solutions, also integrate other analog capabilities such as radios on the roadmap. So it's very extensive in my own line, and then the other divisions are also working on other variants that are based on that platform. One of the things that we like about this marketplace is if you build a platform product, that product then can be extended through additions off that same base very rapidly to build a very broad platform across [ph] many, many years and can be... generate a lot across over a long period of time. So we are investing heavily, like you said, to build that broad platform and expect to be bringing up products this year and then a lot more products next year off that same platform.

T. J. Rodgers - President and Chief Executive Officer

Into DCD, we moved the EZ-Color, the LED driver I talked about and started working on chips that can deal with power. Why don't you describe those and say when they are coming out?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Sure. So we have a effort inside DCD where we are taking the easy color solution and if you look at a system with an EZ-Color solution on it, there will be the EZ-Color chip that we have plus power drivers that end up driving the LEDs. So our version of PSoC, which has power integrated into it is to take the power drivers, which are external chips right now and integrate them into our chip. So the product that we'll be coming out with would be the first in the world, completely integrated power electronics controller for the lighting market and several other markets in this space. That chip is expected to sample in Q2.

Unidentified Company Representative

And finally, in the MID division, the memory, as of memory, as you know, we have been trying to work on non-volatile memories for years. Our efforts in magnetic memories have a few years to go with our first attempts technically. We could not get that to work at the price and performance we wanted. So we have made a new kind of non-volatile memory, which is in effect a TORF [ph] transistor static RAM cell with an embedded non-volatile memory in it such that we can store, let's say, four megabits of data in one chip we have. And when the power goes down, 4 megabits of data gets transferred from the bottom half to the top half on a cell-by-cell basis using only the energy from the capacitors that just stick on the chip. So it is a non-volatile solution, it's all CMOS. We have got that working. It became clear to us that PSoC with that sort of non-volatile element embedded in it would be valuable because as we looked at the customers who bought their non-volatile memories from MID and we looked at what systems they were putting them in, we saw that there was a bigger picture for PSoC like products. So why don't you talk about what's going to happen to us here in non-volatile PSoC.

Ahmad Chatila - Executive Vice President, Memory and Imaging Division

So non-volatile PSoC, actually, we're going to introduce two parts and we will see revenue, minimal revenue by Q4 '08. These things take around 9 to 12 months to design and see returns. I would also add, T.J., that we also, leaving the automotive PSoC and we have design wins in engine controls and capacitors substance in dashboards. And you'll see models in '08 and '09 coming out with that. And also, we are, in MID, we are leading the fixed-functions capacitors touch sense based on PSoC technology where 10 IOs or below. And we already have like 15 major design wins that would ramp in '08. So you would see that all divisions have major efforts in PSoC.

Unidentified Analyst

All right, great. And if I could just wrap up with a couple of quick details for Brad. Want to take a shot at what stock comp is going to look like for the balance of the year?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I didn't hear you, Doug.

Unidentified Analyst

Looking for this... your estimate for stock compensation expenses for the balance of the year.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I don't have it handy. I can follow up with you on that, but I don't think there is any real material changes to the trends. The one thing that's been impacting it, as you look at the pieces of volatility assumptions, our volatility went up by Q4. So that's obviously been putting pressures on that number, but I don't see anything material.

Unidentified Analyst

I thought there was some lumpiness to the SunPower, but we can do it offline.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, that is to my point. I have to look it up and then and I don't have a forecast for them, so I'd hate to give you something half baked right now.

Unidentified Analyst

Okay, great. And same sort of question along the interest income line there. Any idea how we should be thinking about that going forward?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

Yes, a very valid point. With the Fed action right down three quarters, it seems like the market's priced in another half. That's obviously going to have downward pressure on that whatever we end up doing with the buyback. I kind of look at OIE for at least the semi business being around a $9 million number for Q1 and then whatever the SunPower number is I'd add on top of that.

Unidentified Analyst

All right, great. Thank you.

Operator

Thank you. [Operator Instructions]. Chris Danely, you may... Chris Danely has just queued out. One moment, Chris Danely, you may ask your question and please state your company name.

Chris Danely - JP Morgan

Thanks, JP Morgan. Hey, thanks for squeezing me in guys, and for whatever it's worth, I think the change in this... the revenue recognition is a good thing. Many other semiconductor companies have done it and it's always led to higher quality of earnings. I just have two quick questions. The first is can you just give us a little more color on how the softness at the end of Q4 manifested itself? Was it just bookings you expected did not materialize? Was it push outs or cancellations or something else?

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

So, Chris... hi this is Chris. As T.J. coined the phrase to me recently and said the phones have stopped ringing. But they were bookings that we were expecting to have for basically a little bit for Q4 turns and mostly for Q1 revenue that didn't materialize in that last month of the quarter.

Chris Danely - JP Morgan

Okay. So it was the turns business basically that didn't come through.

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

A little bit of that and bookings for Q1, which is why our guidance is where it is.

T. J. Rodgers - President and Chief Executive Officer

[Indiscernible].

Chris Danely - JP Morgan

Yes. And then last question is can you just give us some --

Chris Seams - Executive Vice President, Marketing, Sales and Manufacturing

cancellation, people looking to return stuff, nothing... none of that craziness which again makes you feel a little better when you look at things.

Chris Danely - JP Morgan

Yes, well we don't like the craziness. And then Brad, I guess the next question for you is can you just talk about gross margin and OpEx trends after Q1 for this year?

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

I think, again, if I look to the semi business, I expect the gross margin to probably going to be somewhat flattish I think Q1, Q2 depending on where the revenue moves and mix and the factory absorption. But then I think I expect to see them move up nicely in the back half, probably a half a point, three quarters of a point potentially each quarter, obviously subject to assuming there is our nice normal Q3 increase the transitions with the fabs go on and et cetera, et cetera. I think OpEx, like most companies in Q1, you see us jump up. You've got payroll taxes resetting. We just did our annual employee raises in December for one month, and now I've got three months versus one. You get a lot of that that gyrates around in the first quarter. And I think to what the guys have been talking about, there is a significant amount of products we're rolling out, and that will taper off near the back half. So I think we pop off in OpEx a little. I think we stay relatively flat, and then I think it decreases in the back half of the year. The semi business, SunPower is obviously a different animal and you will need to get that from Manny and Tom.

Chris Danely - JP Morgan

That's fine. Thanks guys.

Brad W. Buss - Vice President, Finance and Administration and Chief Financial Officer

We have got very tight expense controls going on. I think you will overall still see R&D year-on-year be flattish and maybe slightly down. You will see some growth in sales and marketing as we continue to invest in FAEs and applications and specific selected areas. But we are also trying to manage costs down very hard in many other areas. That's one thing we do very well.

Chris Danely - JP Morgan

Great, thanks.

Operator

Thank you. At this time, I am showing no further questions. Sir, I will turn the call over to you for any further comments.

T. J. Rodgers - President and Chief Executive Officer

Thank you very much. We just finished a $1.6 billion record year with $0.24 of earnings and a softening economy. Our first quarter looked a little bit weak, but nothing extraordinary and we are happy where we are right now. Thank you very much.

Operator

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

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Source: Cypress Semiconductor Corp. Q4 2007 Earnings Call Transcript
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