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Cypress Semiconductor Corporation (NASDAQ:CY)

Q1 2008 Earnings Call

April 17, 2008, 11:30 AM ET

Executives

T. J. Rodgers - President and CEO

Brad W. Buss - EVP and CFO

Chris Seams - EVP of Sales and Marketing

Norm Taffe - EVP, Consumer and Computation Division

Dinesh Ramanathan - EVP, Data Communications Division

Analysts

John Barton - Cowen & Company

Tim Luke - Lehman Brothers

Chris Danely - JPMorgan

Srini Pajjuri - Merrill Lynch

Adam Benjamin - Jefferies & Company

John Pitzer - Credit Suisse

Doug Freedman - American Technology Research

Robert Weaver - Forest Investment

William Harrison - Signal Hill

Suji De Silva - Kaufman Bros

S.T. Tallapragada - Quattro Global Capital

Operator

Good morning and welcome to Cypress Semiconductor's first quarter earnings release conference call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until the question-and-answer segment of today's conference call.

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

T. J. Rodgers - President and Chief Executive Officer

Good morning. We are here to report the first quarter of 2008 and we will go through our usual with CFO, Brad Buss talking about finances and Chris Seams talking about the market. I will give a few business points and we will come to questions. Brad?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Thanks, T. J. Thanks, everyone. I appreciate you attending. As usual, I just want to give you a quick reminder that we are going to be making various forward-looking statements. They obviously entail a bunch of risk. The information is based on kind of what we know today in our expectations and obviously could differ materially. Please make sure you thoroughly look though our press release on our SEC filings for a more detailed discussion of these risks and we have got a full recount of all our GAAP, non-GAAP measures in the earnings release put on the web, which I think you all know how to get to.

So I think you saw today besides the normal earnings release, we put out a release relating to the favorable IRS ruling we received with respect to a potential spin-off of SunPower. The press release pretty much tells you basically what we know today and more importantly a lot of the things that we need to go through to figure out if we can make it work and to provide that information to the Board to make the final decision. It is going to take a little bit of time. We are obviously very focused on this and we would like to accomplish that as soon as we can and, when and as we know the Board makes the final decision, we will be glad to update everybody on that. However, there is really not much else we can go on in the call right now. We had a very good quarter. SunPower has had a very good quarter. We both have a lot of good things to talk about. We both have very good guidance. So we would like to kind of keep the call focused on that as much as possible. And also don't forget we have a limited amount of time for SunPower follows us in the same room right after. So we will have to kind of keep things on track.

I am going to go through Q1 real quickly, then I am going to give Q2 guidance. So the consolidated reported revenue for Q1 was $442 million and it was impacted by a $20.8 million one-time planned disti conversion in Asia and I will talk a little more about that later. It was a record revenue quarter if you adjusted for the disti conversion and it actually exceeded our consolidated revenue guidance, free the disti conversion which I guided at $410 million to $438 million or $392 million to $415 million after the disti conversion. So our reported revenue again which includes the impact of the disti conversion increased 3% sequentially and 29% year-on-year or put another way, if you normalize for the disti conversion we increased 7% sequentially and a strong 35% year-on-year. SunPower had another great quarter as they reported record revenue and our Semiconductor segment actually did better than we expected and it exceeded the top end of our guidance, which I was excited to see in this challenging economic environment.

So now I am going to talk just on the semi revenue and I am going to talk about it prior to the impact of the disti conversion, okay, so that way we kind of get a feel of how it normally ran versus Q4. So that was a $189.2 million that exceeded the top end of our guidance and more importantly, we expect to see continued strength in the Q2, which I will talk about in guidance the down the road.

On a sequential basis, CCD was basically the entire decrease that we saw and it was consistent with what we expected obviously due to the normal seasonality and further declines in certain large consumer and PC peripheral-related customers. MID was relatively flat and DCD actually grew, I think about 4% was solid growth in West Bridge that Dinesh can talk about later.

So our reported revenue which is what you're seeing in the press release which is after the $220.8 million was taken out totaled a $168.4 million and again like I said, it was at the high end of our guidance, what I expected.

As we've talked about in Q4, we plan to convert the Asia and Japanese distributors. It's going to allow us to have better pricing control. We expect longer or higher margins over the long-term. More importantly, we're going to provide design registration protection for the design efforts which is the major focus of the company going forward and we now have a consistent revenue recognition policy across our entire distribution chain worldwide and that's very important since distribution is north of 50% and we expect that to continue to grow as they go deeper into our PSoC and other proprietary programmable products.

The breakdown of the $20.8 million between the three divisions so that you can kind of threw up your model was CCD, was the bulk of it at $12.1 million, MID was $7.6 million and DCD was $1.1 million. Overall, the conversion went very well and we expect to have the majority of guys fully operational under ship and debit in Q2.

Turning to the net income end of the life, GAAP basis we posted a net loss of $18 million, which was a diluted loss per share of $0.12 and it was impacted obviously by the lower sales of the disti conversion. We had write-offs various manufacturing equipment between SunPower and Cypress of over $7 million. We had a $2.4 million charge related to the restructuring costs for CTI which we'll talk about down the road and we wrote-off the remaining part of the bond issuance costs at about $2.5 million.

The non-GAAP net income was about $20 million and it gave us $0.12 in fully diluted earnings per share, and again there was about a 6.5% impact related to the disti conversion. So if we add all that together, we're just north of 18% and actually higher than the guidance that I have given of 14% to 17%.

I think one other thing when I look at the consensus guidance was out there, different analysts were treating the disti conversion, whether it was in or out of the model and the assumptions differently. So I think the consensus guidance looks different than when we came in, but I think the important thing for everyone to notice that we actually did what we expected when we normalized for the disti.

Our consolidated non-GAAP gross margin for the quarter was 34%, it was down from 37%, almost or entirely due to the mix of SunPower revenue. SunPower was actually 62% of the consolidated revenue in the quarter, and again I want to keep emphasize and it's important that you model SunPower in the semi business separately, because the margins structures are vastly different and we provide all the information in the press release on the actuals and I actually guide separately, so please ensure that you model the businesses that way.

The non-GAAP gross margin for the semi business was $50.7 million, actually the highest level we've seen since Q2 of '04. It was up nicely from $48.8 million in the prior quarter, mainly due to product mix, a higher fabulization, we reset our standards that reflect we do every year at the beginning of the year and we're also seeing a heavier weight towards our foundry partners as we go more to a fabulized model and a few other inventory related adjustments. We expect a slight decline in Q2, but the key thing that I am excited about as our ASPs remain very strong and our product margins with our customers are extremely strong. So as we continue to work on the various categories of inventory and overhead in COGS, we expect to continue to hit our 50% gross margin target in the back half of the year. Going to the expense line, our non-GAAP consolidated operating expenses increased by about $10 million of which semi was 8, SunPower is roughly 2. The semi OpEx was basically a comp related due to kind of a lot of the Q1 event. Well that payroll tax is resetting. We had a full quarter of our annual merit increase in Q1 versus only 1 month in Q4. We had less vacation and no shutdowns in Q1 versus Q4. We've kept a very tight reign I should say on new hiring. We only added 22 net people in the semiconductor business for the quarter and the vast majority of them were offshore in our lower cost areas.

We also had a seasonal increase in our added SoCs cost and we had higher legal and consulting costs for a variety of initiatives, obviously including the one that we announced in the press release on today. Offsetting those increase was actually a benefit of $1.6 million related to the adjustment to our differed comp plan due to the accounting rule that force you to kind of take a comp charge through OpEx when the plan moves around. That could be a benefit, it could be negative. This quarter is actually with a benefit. There is not net impact to the P&L as I think most of you know because the other side of the charge goes through OIE. So, it's really just fluctuations between OIE and OpEx and there is not net income or EPS impact. So, on the balance sheet now consolidated cash and investments totaled $957 million. The semiconductor segment had cash and short-term investments of 761 and that doesn't include the auction-rate securities that I'll talk about. We declined from Q4 as we purchased $12.6 million shares of stock, which was approximately 8% of the Q4 ending basic share count, and we bought it a price of $21.95, which was 8% below the Q1 average stock price and it's actually 22% below yesterday's closing price. So, we are happy with that.

Since March of 2007, we have repurchased 41.5 million shares at a cost of $848 million, which is approximately 30% of the basic share count outstanding at the beginning of Q1 2007, and again we have been very strategic in how we purchased it and the average purchases of all of this is actually 27% below our closing stock price. We continue to have an outstanding stock and bond repurchase authorization and that equals $323 million and we will execute on that accordingly.

So, just a quick update on the auction-rate, consolidated to 75 million, the semi business had about half of that SunPower has the rest of it. The semi ones are all highly rated self student loans that are guaranteed by the US government and they are all AAA rating. We took an unrealized valuation mark down like everybody else is holding these things right now. That was recorded in OCI equity, so there is no P&L impact and we are going to continue to monitor that.

We don't have any other significant asset backed investments and actually if you look at our portfolio at the end of Q1, we had 82% of it was in AAA money market funds and to our US treasuries and agencies, about 13% was in corporate bond and the balances within, about 5% was in those auction-rate that are actually classified as long-term. So, obviously the portfolio yield moved down as we re-balanced and as well with the Fed decreasing the rate. So, we expect to see some downward pressure in OIE for Q2 and the rest of the year.

Turning to inventory, we are up $65 million bucks, mostly due to our friends at SunPower. The semi business was $18 million of the increase of which $5 million is due to the last time inventory build related to Texas. So, the down to the increase is really driven by profiled built for our proprietary products, a planned increase in DCD is to support West Bridge. We've had nice growth there and we continue to see that ramp nicely and as well we actually have lower distributor purchases. We saw distributor inventories go down again, and they've been running up levels that are well below historical norm. So, there is not a build up of inventory in the channel by any stretch and I do expect to see distributor's pickup going forward. Our lead times remains fairly low and we trying to lock the customers, the contractor manufacturers and our distributors are expecting us to secure the inventory and we're hoping to get a rebalance of that going on.

Just to close up with Texas, the last time bills going on there, it's going very well. The team down there is doing a fantastic job and we project that it will probably have about $16 million of inventory for last time billed at the end of Q2. But after the last time bills, I think Q2 inventory for our basic regular moving inventory will probably be flattish as we increase sales and [inaudible] some of the inventory we have.

AR was up $14.2 million, SunPower was up $20 million. The semi business actually decreased $6.5 million. DSO's are pretty much in line and there is no concerns anywhere with AR that we have. Just relates to the convertible debt, I think most of you saw that we put 8-K [ph] about the stock price conversion trigger, they got triggered. We didn't expected to be a big deal that was it for some unknown reasons, someone did tender $6000 worth of bonds, which made no financial sense

AR was up $14.2 million, SunPower was up $20 million. The semi business actually decreased $6.5 million. DSO's are pretty much in line and there are concerns anywhere with AR that we have. Just relates to the convertible debt, I think most of you saw that we put an 8-K at about the stock price conversion trigger, they got triggered. We didn't expect it to be a big deal. That wasn't for some unknown reasons, someone did tender $6000 worth of bonds, which made no financial sense, but nevertheless that happened, and the target was not met in Q2 so for us, in some part, it's being re-classed back a long-term debt for the end of Q2 and Q1.

Okay, CapEx was $61 million for the quarter; $51 million of it was for SunPower and $10 million for the semi business. Recession of the quarter was $28 million, approximately $10 million for SunPower and $18 million for the semi business.

Turning to our SunPower and our ownership, we had 56% on a basic basis and 52% on a fully diluted basis, pretty much unchanged. I want to keep remind you to model the minority interest rate. It's a big number and between that and SunPower's higher tax rate, the fall-through into this Cypress EPS calculation gets diluted pretty heavily so I would like you to focus pretty heavily on that for your current model.

We currently control 90% of the voting rates due to our B share ownership. We still own 44.5 million shares. We have not sold any shares in the prior quarter and that was worth $4.4 billion yesterday, slightly down today, but I do expect it to do backup. And as you know, none of that's reflected on our balance sheet. So again, when we do our favorite little stub map, it's being running from negative to approximately $200 million which has been kind of enough than we're obviously seeing some movement on that today.

Okay, going into the share count, I talked about this 12.6 million shares that we bought and the basic share count at the end of the quarter was a 150.2 and I put up a nice spreadsheet in the press release, so you can see the details of the share count and movements, the impact of the average stock price. So please make sure you take some time to look through the various sheets at the back, they're actually there for you guys and your models.

Okay, and the other big thing that you know that impacts the share price is the average stock price, it was $33.73 in Q4, it was $23.74 in Q1 as the broader market that in particular are solar investments sold off pretty heavily. So that is obviously taken our diluted share count down pretty nicely. I do expect that to move back up again as the stocks rebounded very nicely and I am projecting a pretty good stock price for the rest of this quarter.

Okay, I will now flip over to guidance real quick. So the consolidated guidance for Q2 is expected to the be in the range of $526 million to $552 million which is a sequential increase of 19% to 25% and a year-over-year increase of 41% to 48% and that is significantly higher than I think where most of you are at and definitely where the first call average is.

Some part of revenue I think as they have already guided, I will go through was $330 to $350 million and we are expecting the semi business to be in the range of $196 million to $202 million, which is up 16% to 20% on what we reported sequentially, but remember that is not really a good comparison because of the disti conversion. So if you look on it on apples-to-apples, it is about a sequential revenue growth of 4% to 7% which is actually higher than the last three average... last three year average was, it has been running 2% and is extremely strong considering the economic environment we are in. The good thing is we expect to see growth in all of the divisions led by CCD and DCD.

Gross margins, SunPower 23% to 24%, our semi margins are going to be slightly down to the range of 49 to 50, really just due to mix. We are taking utilization down slightly and again some of the standards impact that I already talked about. And again just to reiterate, we expect good strong strengths go on our ASPs and our product margins and we fully expect to hit our 50% target for the back half of the year. Semiconductor OpEx should be relatively flattish in the range of 90 to 92, OIE will be around $3.5 million and that is already net of the convert interest expenses, okay. And that obviously assumes no big fluctuations in the deferred comp plan which net out.

Tax rates, 10% for semi, and about 24% to 25% for SunPower. I am assuming a higher stock price in Q2 than Q1. So if we look at a price of around 30 buckish on an average weighted basis, I would the basic count to be around 153 to 154 and fully diluted could run up to around 168 to 172 as the options to convert the call spread and all that fun stuff from a diluted basis will pop back into action with the higher stock price.

CapEx, no real big changes there from the semi side, about $15 million for Q2. We still expect to be around our $50 million range of the year. And depreciation for the semi will be around $17.5 million, I will let Manny [ph] cover the balance of that for SunPower. The fully diluted non-GAAP EPS we expect to be in the range of $0.20 to $0.24.

So just want to wrap up, I was very pleased where the quarter came in, especially in the economic environment that we are in and I am now going to turn the call over to Chris for an update on the markets.

Chris Seams - Executive Vice President of Sales and Marketing

Thanks, Brad. Good morning. Now let me go through some of the usual indices. Revenues split by geography, Asia declined to 45% of our sales because of the first quarter seasonality that we saw in the Consumer segment that Brad referenced. North America stayed at 29%, Europe grew to 14% with strong penetration into a handset account there and growth and distribution, and Japan stayed at 12% of sales. We continue to have no customer greater 10% of our sales.

Units for the quarter declined to 134 million. Our pricing was a bright spot as Brad talked about. We had a very positive first quarter. Our ASP grew to a $1.40 that was up from $1.26 in the fourth quarter. Our backlog increased, we saw booking patterns strength in the mid quarter and continue to do so as we sit here today. Our book-to-bill is above unity and our backlog is at $191 million. If you do the calculations, we entered the quarter almost 80% booked for the guidance that Brad gave us and we see booking patterns it's two weeks in to the quarter, it's still support that.

In terms of end markets, now the story for Q1 was what we expected, which was signification seasonality effect in the consumer end market. We do see that recovering, as Brad said in Q2. Our other end markets, both wireless and wireline infrastructure were, I call stable to before the Q1, and we do expect some growth in those two as we go into Q2. And handsets actually were a bright spot, as we continue to penetrate that end-market with both PSoC and West Bridge. We saw slight growth there from Q4 to Q1 and we expect to see continued growth both in Q2 and throughout the year there.

Now, let me turn over to T.J. now for more details on the quarter.

T. J. Rodgers - President and Chief Executive Officer

Little bit on the division, business units. CCD, consumer and computation, which is our PSoC and USB division, $53 million, 50.1% gross margin. Datacom $28 million, $28.3, 71.8% of gross margin, our memory and imaging division, $74.6 million a strong quarter, 44.4% gross margin, also a strong gross margin quarter for downturn where memory is usually paying and can go way below 44.4%. Overall, semiconductor is $168.4 million, big 20 on top of that for apples-to-apples accounting, SunPower is $273.7 million. That's a quarter of $442 million, which is the second best quarter in our history with the $20 million of the distribution change would have been the best quarter in our history and we're forecasting as you heard earlier, next quarter to be at $526 million to $552 million which will be by far the best quarter in our history.

Couple of points on the business, right now, we're in the game of driving customer accounts, PSoC which in turn drives design win in PSoc and drives revenues, so our economy has changed. We grew our PSoC customer base to 6,991 that's up 66.5%. Our main focus is marketing. Once you acquire a customer, which means you acquire somebody who gives you money. For PSoC itself or for PSoC related products there are some evaluation related software [ph]. The next step is to train them and how to use the software, so they can design with it.

In Q1 '08, we trained here one of our on-demand trainings or workshops, 10,118 customer engineers. Now that's incremental to the 7,800 they've been trained in the prior quarter. So that's big effort for us. We introduced something called CapSense Express. CapSense are the buttons that are not mechanical buttons. It is a PSoC light chip that allows you to replace the mechanical button and which we replaced $2.5 million off in the... as we started to shipping CapSense Express. This is the chip where the microcontroller PSoC and the programming wires, they disappear, and we put the program in the chip. It's like a hardwire chip noticed PSoC inside and it allows people to make buttons and sliders with no programming in five minutes. So, it's sort of the low end of the market we got into with the CapSense touch, the CapSense buttons. [Inaudible] came up. That's a big deal for us. It is on PSoC. One of the main things we do for the front end of the funnel is try to penetrate universities as if they were strategic account, of course we are giving away stuff and telling the people just to get them to do it, so engineers that are graduated will have a preference for PSoC.

Today we have 158 universities offering courses on PSoC and so far 19,300 students have taken a college course on PSoC. On the buyback, our board authorized another $300 million for buyback and to remind you a year ago we had a $600 million buyback a little over a year ago that was followed by $300 million buyback of which we have used over $23 million and when we got that $23 million, the board authorized another $300 million. So, accumulative buyback over the last year and half is $1.2 billion, currently with $323 million of dry powder. SunPower, as you know has been limited by its ability to get polysilicon. We signed two agreements, one for 2500 megawatts equivalent of solar cells at $4000 a megawatt. That's roughly $10 billion worth of revenue over time and we signed a second deal for 3000 megawatt supply with a Chinese company. The first one was a company called NorSun that they actually invested in. SunPower is turning its focus to Spain, which is the latest country to go solar in a big way and they did an 8-megawatt solar electric plant for Turner Group in Spain, that brings to 21-megawatt full, the project that they have done for that group of Spain, that's the biggest project they have done so far. The second biggest being Edward Air Force base, Southern California, which is 14 megawatts.

And finally, GE Financial Services has agreed to fund five SunPower California solar projects. These are for corporations, Toyota, HP, Agilent and a couple of government agencies. In addition, MMA Renewable Ventures is funding solar electric systems at 14 Macy's stores. The new trend is for corporations who want to go solar but not to lay out the cash upfront. So we are bringing a third party to finance it. They basically own many solar power plants, get the tax credits in cell power though the corporation, which goes green, has reduction in its power build that never lays out any money.

Those are the highlights. I won't take any more time. We can go directly for questions. Thank you very much.

Question and Answer

Operator

Thank you. [Operator Instructions]. John Barton, you may ask your question and please state your company name.

John Barton - Cowen & Company

Thank you very much. It's Cowen. T. J. I heard Brad's comments in the beginning. You don't want to spend a lot of time talking about the potential of doing something with the SunPower position. But maybe generically, if you could just share your thoughts and what the most likely strategies you could potentially pursue, if you could do it in a tax free basis in the near-term, such as distribution shareholders, say on the open market, secondaries or however you are thinking about it?

T. J. Rodgers - President and Chief Executive Officer

So, the thinking of, you don't want to talk about that, but and then the details of my thinking. Brad may want to comment which wasn't your warship, it was in fact, it was in the press release, pretty much what we know. We got this ruling from the IRS yesterday morning, and scrambled to get out of press release yesterday so that because we know you all interested in it. The upside of the press release is that brick wall of tax inefficiency that was in front of us that would be removed in November 2005, we request that if you remove now and in the ruling which is not binding I might add.

And the ruling which only comes from the federal government not from all the other taxing agencies we have to deal with yet. But obviously the favorable event, the major indication, they say well, we're willing to get rid of the tax brick wall now. That means we are launched into the decision making process as of yesterday morning and that's why I am not fooling when I say I cant really get all those details, but we are looking at our options and basically it says, tax free spin-out, at least federal tax spin-out as we say here is possible now rather than in the future. We have to scope out, can we really get it done, whether the diffractions and losses in the current time.

For example, we've got to convert now, that what has to be unwound or else if we waited to November 2009, we design to convert to evaporate the month for that time. So, we have a convert, we have to deal with now, we're going to ask to deal with in the future. There are other issues like that. So we have to compare spending now versus spending later and do we lose money as we are losing the money now to get it done faster.

We also told you in detail and that's on the website, I won't go through, the investigators had a bunch of other options. We need to compare a spin which is typically the most favorable way to do things. With other options, and pick the right answer, so without exaggerating, we're in the study mode, and the study mode got turned on hard yesterday, except that I am dizzy getting ready for this meeting since that time. We'll obviously be into it heavily for the next periods of time, and I'd expect and I have deliberately being a little bit ambiguous here in order to not to box myself in on time. I would expect that this thing would be substantially resolved, i.e. we would have a plan that we could articulate, what it was, and why we chose it, before the next conference call. Honestly guys, really it bought as much as we can say to finish that we right now and speculation is just not in anybody's interest.

John Barton - Cowen & Company

Thanks. On the topic of a COM end market, and I guess, Chris, but you've talked about the growth in the June quarter. Could you elaborate a little bit on the strength of the COM market, regionally where you're seeing it and if you're willing to look at a little further into the end of the year, whether we think we can continue the growth in COM et cetera?

Chris Seams - Executive Vice President of Sales and Marketing

Hi, John, looking out beyond the next quarter is probably all is dangerous for us. Where we're seeing strength, I'll say it's global, I'll say, it's most of all the concentration. However, China is a hotspot obviously, they are building a lot of infrastructure, so they put the best foot forward in their country. But those companies, they are also making in roads outside of Mainland China. So, it's broad-based across the Board and COMs and there is concentration, the peak would be in China.

John Barton - Cowen & Company

Then last question if I could just on the fab front, with the Texas shutting down, what will utilization rates be in Minnesota and then what are thoughts on that fab for the foreseeable future.

Chris Seams - Executive Vice President of Sales and Marketing

This is showing, so you see that run the fabs utilization in Minnesota we expect to be between 85 to 90% for Q2. The plans, there are no specific plans for the fab. We continue to operate that fab. It is, we're going to run our mandatory on [ph] 90-nanometer technologies and we will make it more and more competitive going forward. So no specific plans for Minnesota.

John Barton - Cowen & Company

Thank you.

Operator

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

Tim Luke - Lehman Brothers

Thanks, Lehman Brothers. Just as a follow-up to that. I think Brad you said your utilization rate was going to be lower in the coming quarter, but your gross margins are better and obviously the revenue is higher, so the semi business. Can you just reconcile the lower utilization for higher revenue and higher gross margin?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yeah, I think the one part you have got wrong is the gross margins are lower, I guided it 48 to 49.

Tim Luke - Lehman Brothers

Okay, sorry.

Brad W. Buss - Executive Vice President and Chief Financial Officer

49.

Tim Luke - Lehman Brothers

Why is the utilization low with higher revenue?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Well it's utilization and mix depending on the products. You remember we run a pretty broad portfolio products through there. Though we kind of look at our forecast what went down with inventories in the profile, it kind of split side of the system. So, like to be nearly upper end of that guidance and hopefully meet it, but I think we need to let it sort out, plus especially with the standards change right. When you do a standard change, you end up putting your inventory and then you got an excess impact when it starts selling out, so we need to balance through that.

Tim Luke - Lehman Brothers

I was wondering, also if you could give...

Brad W. Buss - Executive Vice President and Chief Financial Officer

They are running very well, better than they have over the last couple of years. So, I have been very excited to see that.

Tim Luke - Lehman Brothers

Sorry. But, I was also wondering if you may, of course if you could give the book-to-bill for the different businesses and separately just in terms of seeing stronger bookings and in the release, T.J. talked about how it's the bottom of the current cycle, I think, the bottom quarter of the current slowdown. So, how confident you feel about that? And, what are some of the factors in what it seems to be an environment of potentially weakening macro that suggests that this is the bottom of the current slowdown? And, is there any element of restocking or is it just that you just say it better end markets? Thanks.

Unidentified Company Representative

Tim, let me give you the book-to-bill by division. CCD was 0.98, MID 1.09 and Datacom 1.25. In terms of visibility, in terms of this being the bottom, Q1 is normally the bottom for us because we are heavily consumer oriented. So, on that seasonality, take Q1, depending on our people pull inventory in or not during the quarter. Q1 traditionally is our lowest quarter and that would be the bottom for us as we see it this year. I don't think any of us have visibility of what's going to happen macro economically. I can tell you, our outlook from our customers through Q2 and through Q3 is to continue for us to grow.

Tim Luke - Lehman Brothers

Brad, do you have anything on that, sort of why you're seeing the bookings better?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Well I think, there is a couple other overlays between our guidance. Again, I keep emphasizing the Disti channels, there is not a lot of inventory in my perspective in CM and in Disti. In general, I think there is a lot of right ups on that but when you particularly look at our guides, it gives us a level of confidence accepted and its there. We have so many new products that have been coming out right that even if the macro environment doesn't move, we're going into end market guys we've never been in before. Right, we keep penetrating analog, we keep penetrating microcontroller.

Even if handsets stakes latter went down, Dinesh is still going to grow his business in all these models that are coming out. But, I would say a lot of it, its just what we've been continually talking to you guys on, as we've been moving in the new market and focused on these proprietary products and we've been building the customers and design wins that we talked about we already have a win. So, you have long lead times to get into revenue that we're seeing it and we're going to see it more in the back half and I think we will see it even stronger into '09 when we release the next gen PSoC that one can talk about later.

Tim Luke - Lehman Brothers

Thanks, Brad.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Am I worried, I mean, obviously in the press release we're still worried on the macro environment. But, I think we've got enough new product strength to over come any of that and we're going to continue to remain cautious, especially in the spending area, right gentlemen.

Tim Luke - Lehman Brothers

Correct. And, then just with respect T.J. on this potential spend, I think that you and Brad have articulated that if you could do it, philosophically you'd like to do it sooner rather than later. And, I just want to check that that is sort of broadly what we should understand, and if there are any broader themes that might limit your enthusiasm, even if you can't get specifics on the timing.

T. J. Rodgers - President and Chief Executive Officer

Okay. That's a question on what are, what you like to get done, and I cant answer that one. I..

Tim Luke - Lehman Brothers

Thanks.

T. J. Rodgers - President and Chief Executive Officer

I said, consistently, I think for the last three quarters that SunPower's is basic of rolling it's own, and our models are different. And, in November 2009, when the wall comes down, we're ready roll. Therefore, all things being the same, which they may not be, but all things being the same, if we can do it earlier, we will do it earlier. The barrier for doing earlier are structural things, we've got to get through, to getting it done and compare, doing it now and the losses we would suffer now in doing it now to a more straightforward spin in 2009. But yes, name of the game, is we've been pushed by investors to spin it, we agree that we would, now won't use the word spin, because that implies the mechanism, to separate the company and in doing so, to release the value of semiconductor business, it's not showing up in the combined share price in the assets or retention.

We're working towards that end but it's extremely complicated. It's one of a... I'm a problem solver and I'm a good one. Just one of these problems where you don't... a harder problem might be optimizing 20 variables and let me do the answer in the sweet spot. This is the kind of problem where if one variable changes, we changes the form of the problem so sudden variable changes and you ask different questions and you are working on different problems, so it's very manual. It requires meetings in a interdisciplinary so I got complicated tax stuff in multiple places.

I've got investment banking stuff and convertible debentures to be unwounded and equity structure host the deal. Obviously a bunch of legal stuff so every time you have a meaning, if you don't have an outside parties in the room all I can done homework then you can't make any progress. That's why it's accelerating its flow for me. But to answer your question directly, yes. We'll prepare to do it when we can get it done right and not lose the bunch of money that we don't have to lose in getting it done.

Tim Luke - Lehman Brothers

Thanks very much. And just lastly, just the detail, I think Brad, what is the cash level on the guidance OEI seems to 3.5 from 9, I think?

Brad W. Buss - Executive Vice President and Chief Financial Officer

There are couple of things, the buyback as I mentioned, right. We have spent $280ish million on that, so that obviously takes down pretty heavily from the semi perspective, SunPower's cash is down as well. On the OII specifically again between the lower balance and then I mentioned a lot beginning on the yield, but if you look at the yield to the portfolio, it is almost cut in half, for more it was running in the back half of '07. Two reasons, the fed decreases have been substantially hit and we have also got a little more conservative, well some of your employers are going through some of the challenges that they are facing. And also on the SunPower side, there is basically nothing in there from the SunPower contribution as there used to be a few bucks in there. So that is a pretty solid number.

Tim Luke - Lehman Brothers

Thank you so much.

Brad W. Buss - Executive Vice President and Chief Financial Officer

There is much movement there.

Tim Luke - Lehman Brothers

Very helpful. Thanks.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yeah.

Operator

Thank you. Chris Danely, you may ask your question and please state your company name.

Chris Danely - JPMorgan

JPMorgan. T.J., I guess the results are really good, the bookings are really good and you talked about macro concerns in the press release. But it sounds like you are not really getting anything disconcerting out of your customers. I guess I am just trying to discern where the macroeconomic concerns are coming from that you speak of, it is just CNBC and the Internet or something?

T. J. Rodgers - President and Chief Executive Officer

Much, much worse than that. There is just no chronicle.

Chris Danely - JPMorgan

No comment.

T. J. Rodgers - President and Chief Executive Officer

If you think about the practical event of writing report, things are looking good. We have got the quarter booked, we have the quarter booked to a target, and it is going to be a record for us. Be right or less done, then you send it up to the lawyers and to your Board to look at and they all freak up because it looks like you are making promises which they can't keep, might give you legal jeopardy, but you sprinkle some, except for us in there and yeah but in order to a rebut, what can I say that, we are feeling pretty good. But the economy could melt down if we, I talk to people who are credible people, I think there could be another step down due to the housing problems. And if that happens, obviously, we are cork in the ocean, we will be down in the tide. But that's it. It is sort of a general concern.

Chris Danely - JPMorgan

Okay, great. And then, looking into the second half, can you guys give us a sense of how we should expect operating expenses to trend? And on the gross margins, it seems like utilization rates and gross margins trend down a little bit in Q2, but then I guess we could expect those to take back up in the second half of the year. Is that how we should look at that?

T. J. Rodgers - President and Chief Executive Officer

Yeah. I think that's a fair model. Again, we have got nice sequential growth in Q2 and then in the back half of Q2 we will start building for the seasonal pop, right. I mean we usually get a very nice seasonal pop in Q3 and we've got more designs, we've got more ramps with Dinesh's workforce [ph] et cetera, et cetera. So utilization should go up and part of the reason for our gross margin confidence, it may not in the mix for the product. I think OpEx-wise, I think we are pretty much going to start peaking the first half of the quarter.

Year-on-year, I expect R&D dollars to be roughly flattish and we are spending very heavily on the amazing next gen products that we are going to be rolling out in the whole new PSoC platforms and that probably starts peaking kind of first half of this year and then it starts to roll down in that end of it, and I think we saw the Q1 bump we always get from a reset, I don't expect this kind of growth. We are going to continue to invest in sales and marketing on application engineers, software, FAEs to help drive the next gen of the product and obviously to support the rollout for these next products. But nothing substantial, $1 million or $2 million a quarter, give or take a quarter, depending on timing of expense, really.

Chris Danely - JPMorgan

That make sense.

Unidentified Company Representative

Might legal and consulting, keep down and that's another issue, we have between some of the legal expense on DoJ and now looking at all the SunPower staff, we're going to incur some slightly higher nuts that you saw in Q1. But, I expect that to take it off by the back half of the year.

Chris Danely - JPMorgan

Okay. And then, in terms of PSoC and West Bridge, it sounds like PSoC was pretty much in line and if we read between the lines we're expecting a sharp increase in PSoC for Q2. Have your estimates for yearly growth of PSoC changed, and also with West Bridge was that a better than expected Q1 for West Bridge and would you care to give us a new estimate on how much you think West Bridge could be this year.

Unidentified Company Representative

The global answer is, the prior expectations for PSoC and West Bridge remain unchanged and they are both bullish, but let me normally answer for PSoC and international [ph] West Bridge.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Hey Chris, this is Norm. Relative to PSoC, as far as growth in the second quarter we do expect it to bounce back. It did pull back as we along with our expectations particularly some of the larger consumer accounts. I think, that's where we saw some of the macro economic issues, with more in the Q1 results, but bookings have been strong. We're showing growth in Q2, and that business traditionally has very strong Q3 and Q4, and we right now all indications are that it should happen again.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi, this is Dinesh Ramanathan. For West Bridge, the Q1 number was higher than what we expected the number to be for Q1. The guidance for the year remains unchanged, it's between $40 million and $50 million for the year.

Chris Danely - JPMorgan

Any reason, why you would not pick up that expectation?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Well, I am being conservative, let me put it that way and the reason for it is there is one customer that we want to make sure, if their numbers towards the second half of this year and it's a North American customer and you all know about it as well, so.

Chris Danely - JPMorgan

Fair enough, thanks a lot guys.

Operator

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

Srini Pajjuri - Merrill Lynch

Thank you, Merrill Lynch. Hey, Brad, you talked about Q3 being seasonally strong for you guys, which is normally the case, but if I look at Q2, it looks like you're benefiting from some of the new product RAMs. I'm just wondering, I mean, do we have the visibility into Q3 now to say that it's going to be a normal seasonal Q3?

Brad W. Buss - Executive Vice President and Chief Financial Officer

I am throwing that over to Chris as that way he will be accountable for it.

Chris Seams - Executive Vice President of Sales and Marketing

Yeah Srini, the indications from our customers and forecast that we've got from them, say that obviously nothing is said until we get the purchase order in hand, but the numbers are well up and we're expecting seasonally strong Q3 again.

Unidentified Company Representative

I made my comments earlier about things look good but we got to watch general economy. So, one of the things that happens during weak time is that your backlog contracts to a quarter. So, although we've got this quarter and the day, first day of the quarter 80% booked and we can be fairly bullish about saying we've got a good quarter coming up. Now the fact is during times like this, that the third quarter, at the beginning of this quarter was not very well booked and therefore, we don't have the visibility, and therefore that leads the possibility, some economic, some patterns between now and then, if those bookings in the third quarter won't materialize. So, there may be some substance behind the cautionary language.

Srini Pajjuri - Merrill Lynch

Fair enough and then Brad, I guess, you said, your gross margin for Q2 is going to be 49 to 50, right? I just want to make sure, because you also said 48 to 49 later so.

Brad W. Buss - Executive Vice President and Chief Financial Officer

49 to 50.

Srini Pajjuri - Merrill Lynch

$49 million to $50 million. Okay, got it. Okay on the DCD side, I guess, your revenues in Q1 were flattish, yet the gross margin went down a little bit, I'm just wondering is this because of West Bridge and if so, should we expect a similar headwind as West Bridge becomes a bigger portion of your revenues?

Unidentified Company Representative

No, we had if you remember last quarter I had mentioned that we had some military upside in the Q4 quarter. We didn't see that military upside coming in the Q1 quarter. So, that's the main reason why you are seeing the gross margins go backward. We are seeing some of those military revenues come back in Q1 as well. So, we will actually see a slight pop as we, in Q2, so we will see a slight possibility for growth [ph].

Unidentified Company Representative

Right, and just to clarify I think you've said, I mean DCD was actually up.

Unidentified Company Representative

They're about 4% I think if you adjust for DCD conversion.

Srini Pajjuri - Merrill Lynch

Okay.

Unidentified Company Representative

They actually did fairly nicely, a 1 million, 1.5 million bucks I think roughly and again don't forget our model there is kind of mid to high 60.

Srini Pajjuri - Merrill Lynch

Okay got it.

Unidentified Company Representative

Including the model and a lot of it is like financial setting, a lot of these military CPLD last time buys, and we think our margin model will definitely stay up there in the high 60s and West Bridge contributes very nicely to the model mix and it's on track and it is yielding and doing very well.

Srini Pajjuri - Merrill Lynch

Okay and then Brad, the selling issue, is that completely behind us now?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yes.

Srini Pajjuri - Merrill Lynch

Okay and then my final clarification is just hypothetically.

Brad W. Buss - Executive Vice President and Chief Financial Officer

I just want to comment one thing on that.

Srini Pajjuri - Merrill Lynch

Sure.

Brad W. Buss - Executive Vice President and Chief Financial Officer

We have done and the only thing that will impact us, basically how they do from an end customer resale perspective, right because we are 100% on the PLS with these guys now.

Srini Pajjuri - Merrill Lynch

Okay fair enough. And, then on SunPower, Brad if you were to spin off, I mean if you were to distribute, do only partial distribution. I am trying to understand how that can work as far as the consolidation is concerned, because you also have 90% voting rights, could you explain how that will work, I mean if you decide to do a partial let us say distribution?

Brad W. Buss - Executive Vice President and Chief Financial Officer

So, hypothetically if the distribution happened you have to distribute up over 80% of the voting control. So, even if we kept some stock back, say if that decision was made or sold or whatever, you still have to distribute over 80, so by doing that you would deconsolidate. Even if we held back some stock for some reason, then we would have to deconsolidate.

Srini Pajjuri - Merrill Lynch

Okay. So of the 42 million shares you have to distribute about 80% for you to be able to deconsolidate?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Don't know. We have class B shares with 90% voting rights and we have something like 56% economic ownership fully diluted down to 52% today. We have to have 80% ownership control voting for Board members in order to do a tax respin. That's why the class B stock exists, so we could have the business size, business determine economic ownership to still maintain the 80% ownership per tax respin. If we spin, to first order, you spin everything you've got. And if we want to somehow maintain some SunPower, we would... this is completely hypothetical, we might sell some for a couple hundred million in bank and spin the rest. But basically when SunPower goes, it's gone. And we will no longer have any ownership or control in it to first order, right. So there will be no consolidation if you kept a little debt, it would be no different than any other investment as B class quite as like the long-term investment and we would just enjoy the rapid appreciation on its stock over the long term right, [inaudible]?

Srini Pajjuri - Merrill Lynch

Great. Thank you.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Okay.

Operator

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

Adam Benjamin - Jefferies & Company

Hi. Jefferies. Thanks, guys. Just trying to reconcile some of the commentary on the CCD business. Clearly, you had a tough quarter there and you had guided that to come down. The book-to-bill you said is 0.98, you expect it to come back, you get some help from the disti. But I am just trying to reconcile that with your full year guidance is still 20% to 30%. What do you see, do you get a lot of turns business in that business and can you reconcile that commentary for me? Thanks.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yes, Adam, this is Norm. So couple of comments to make just to clarify, you remember that the CCD number overall is an aggregate about the USB and the PSoC business. So, one comment on that is that, book-to-bill for just the PSoC segment, we don't normally separate is about higher, but together they are 0.98, but the book-to-bill is stronger on the PSoC side so that's part of it. We also just frankly, the designing momentum on PSoC continues to be extremely strong and while we had a pull back at top customers, a few top customers reflected in the revenue. We also had our highest level of design wins and our highest level of active designs declared in Q1 we've ever had. So, I think there is, part is driven by that strength. And one other comment, I want to make sure reiterated, when you look at the numbers, you see in the press release, remember the PSoC also, PSoC and USB took the brunt, majority of that $20 million was in CCD. So, since we are heavily distributor oriented business, like $12.8 million of that $20.8 million was on the CCD. So, it looks even worse relative to the numbers in the press release.

Adam Benjamin - Jefferies & Company

Got you, thanks. That's helpful. Hey Brad, on the OpEx I mean you guys have been the no more, more and the OpEx did increase significantly in the quarter. Should we expect, I know you talked about it a little bit going forward as you move throughout the rest of the year, but should we expect Q1 of '09 to kind of see the same bump up again?

Brad W. Buss - Executive Vice President and Chief Financial Officer

I mean again you always get the first quarter resets right, that there is $6 million as of that increase was just, it wasn't adding any people, it's just timing, and then you get it back in Q4. So I say, yes, you're going to get some level but I think some of our expenses could be lower in another area, some could be higher. It's a little hard but I don't expect vast growth, I mean I said many times today I expect to see a good 70% of our incremental GP over the next year or so start dropping right through to the bottom line because we have a lot of leverage in the model. We have the infrastructure in many places, we got to build in a few, but we're going to get a lot of droppage to the bottom line as the revenue grows and obviously the margins build up. And we're restoring a building phase with the PSoC and the NextGen right and I think that's pretty much to start peaking up itself this year and then level off.

Adam Benjamin - Jefferies & Company

Okay. And then T.J., I know a bunch of people already tired, I'll give it a shot as well. Obviously, the press release indicated that you can do it before November of '09. Your commentary seemed to indicate that you'd like to do it as soon as possible. Just want to make sure that we're hearing that correctly?

T. J. Rodgers - President and Chief Executive Officer

Yes, you heard it correctly. I just want to make sure that the phrase "as soon as possible" reflects the fact that they've got a lot of homework they got to do and it's complicated and it's not weeks to react to this. Yeah, I think that's really important, I mean, stocks trading a lot of volumes, there is different investors that jump in and this is not something that's going to get resolved in a few weeks or may be even a couple of months. So we just want to caution people to getting ahead. There is a reason we did that one section in those big capital letters. And then another point is, I want to make sure that the implication behind the question and its answer doesn't stick, because the question is related to spin now and spin later. We also have to go back to the other options we have for separation. The name of the game is to separate and release the value of Cypress's so called sub value and we have to compare, spin off, spin later and other options to make sure we pick the right one.

Adam Benjamin - Jefferies & Company

All right. Great thanks a lot guys.

Operator

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

John Pitzer - Credit Suisse

Hey guys, Credit Suisse, thanks. Couple of questions. First if I add back in the $20 million in to the March quarter from the DCD, I get CCD down about 18% quarter-on-quarter from doing my math right up. Kind of curious, how do you guys kind of view normal seasonal relative to that and is that mostly been influenced by the MP3 market?

Norm Taffe - Executive Vice President, Consumer and Computation Division

This is Norm, yes so normal seasonal, that's beyond normal season as we have indicated in the press release. Normal seasonal is more like a 5% to 10% of level. I think for us, we were heavily influenced by what you just said, which is some of the larger consumer customers is being down significantly quarter-on-quarter, which we in hindsight from what we can tell looks like there is an overall build in Q3 and Q4 and had quite a bit of inventory, like we said we expect some of that to bounce back certainly in Q2.

John Pitzer - Credit Suisse

And, then guys a nice jump up in the ASPs quarter-on-quarter. How much of that was mix related?

Chris Seams - Executive Vice President of Sales and Marketing

This is Chris, John. I would say most of it is in mix, selling higher value products into the end accounts, little less consumer help that is well. If you look by division, every division if I remember right went up in ASP, so it was broad based and across the company. But it was probably predominately mix.

John Pitzer - Credit Suisse

And, then I guess prior to, you kind of give up book-to-bill by division, the implication…

Chris Seams - Executive Vice President of Sales and Marketing

Book-to-bill, let me give another comment on ASP. So the ASP for Q1 is above 40 and that's been essentially upward right. Ever since the bottom in Q4 '05, which was $1.2 and a $1.40 the contribution with new products, which we're now starting to track, was $1.59. So, yeah, about 59 of the smaller types of the new products and that weighted average was about 40. So it's partly mix dependent and if partly mix dependent in the existing products and partly dependent on new products, we still have a higher ASP.

John Pitzer - Credit Suisse

Guys, even though your consumer comes back in Q2, just kind of inferring from the book-to-bills by division, its still sounds like mix should be favorable to ASPs in June, is that a fair assumption?

Unidentified Company Representative

Yeah. I think overall definitely. I mean obviously the comps out carries a different ASP mix, I am sorry the consumer. But yeah, overall, yeah, we don't see any deterioration in any division of any magnitude and the mix overtime just continues to be impact the good proprietary stuff that we are doing.

John Pitzer - Credit Suisse

And, then guys, last question from me. Just going back to the macro relative to the 47%, apples-to-apples guidance in the semi business, I guess given PSoC, West Bridge, the new products, help me understand how market dependent your growth is and how much of that is just Cypress gaining share and or leverage the right products?

Chris Seams - Executive Vice President of Sales and Marketing

This is Chris, let me answer that for you. Obviously our penetration into the handsets base is very leveraged on West Bridge and PSoC penetration into that end market. So, that's driven by those new applications for those new products. If we look at the broader base of the market, I would say that I hinted that in wireless and wireline infrastructure, we would see a modest growth there. So, we call that across all of our product lines. And, we are taking share in the memory business that we're taking share and that drives that generally. And, then in consumer, you will see CCD drive, there is a big rebound there.

John Pitzer - Credit Suisse

Great, thanks guys.

Operator

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

Doug Freedman - American Technology Research

AmTech Research. Can you guys spend a little time talking about a few of the projects going on in other the PSoC systems business and the little bit about the, I saw some nice design wins on the mouse, the laser silicon business?

Unidentified Company Representative

I mean, Doug, first little bit of our Cypress Systems, it's an embryonic company. Its revenues still in the few hundred thousand dollar quarter range. It is still loosing money. So, part of the reason other tax and earnings. They made the product that I talked about, which is the Gauge Reader, where you plug it their device on a manual gauge like pressure gage and it will convert it to a digital reading and [inaudible], so that you can start controlling things that are in the factory.

Their second product, which they are now working on is a energy savings device. We're having them focus on energy and environment primarily. In energy saving device, it will turn a manual thermostat into a computer controlled thermostat without re-working it, which is extremely expensive. As it's certainly like the gauge readers. The wireless device, you plug in and place it under stairs. The classic Honeywell gauge reader that you all know about, classic Honeywell thermostat you all know about. And it will douse the plate, turn down the heat at night and compensate when it's outside temperature et cetera.

So, our expectation is, they will grow over the next couple of years from $50 million business. We'll brag about in the leverage margins. Now the fact is this quarter if they got target pretty hard. Unfortunately, they are not big enough to show up because during its downturn, one of the very first causalities of the downturn is capital expenses on businesses, somebody say don't spend any money to their facilities people and obviously automating reading and gauge, we're putting in that automatic thermostat is something that you can wait a quarter due to without killing yourself as you have been that way for years anyway. That's one.

Two is the mouse. I'll talk about it technically and now ask Norm, the mouse is now in its position to talk about it. Our optical navigation system, or ONS, mouse is a single chip complete mouse which contains a virtual laser and a sensing chip and analog and digital processing to the sensing chip and so that an invisible laser being now set into some motion. It is more accurate than the classic light emitting diode mouse, the optical mouse you're used to. We have roadmap for some products to achieve accuracy and form factor size of the chip, size of the package that are unachievable with other products and we're starting to get some traction in the market, Norm.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yes. So from a business standpoint, it's certainly new business, although we get reached full production this past quarter. We on our first product as you saw, we had our first few major designs wins. We also have a new version of that product that will come out probably, announced beginning in Q3 which adds an improved form factor. Now, I'm still [inaudible] business, very aligned with our existing strength in both wireless and USB devices and the low speeds. So from a customer doing PC peripherals, it's very complimentary and it gives us really penetration to a much larger time than we've had in the mouse in the past with what we feel is the highest performance laser solution in the market.

Unidentified Company Representative

With another one maker of [inaudible] for mice, we also have the significant business of WirelessUSB chips for mice and in the future and that's not the distant future either. This will allow us to make a single USB mouse on a chip and a wireless mouse on a chip everything integrated in one package.

Norm Taffe - Executive Vice President, Consumer and Computation Division

Terrific. Thank you.

Operator

[Operator Instructions] Robert Weaver, you may ask your question and please state your company name.

Robert Weaver - Forest Investment

Yes, it's a Forest Investment. Again going back to your press release on the IRS, 355 is a pretty broad section of the code. Can you be any more specific on exactly where the exemption was, I mean was it on the expansion doctrine? Was it on the active business requirement? What was that the IRS gave you guys to pass on?

T. J. Rodgers - President and Chief Executive Officer

You are obviously a much better expert on the tax code than I am. As I said I got the letter yesterday morning and I at this scramble to get out what we know in a press release last night to you guys, so I can't answer that question right now.

Robert Weaver - Forest Investment

Can we talk about that off the call some point?

T. J. Rodgers - President and Chief Executive Officer

But that I'd assume Brad knows about it too and I haven't had my first meeting and like I said, we just got the letter yesterday and I personally didn't expect that would happen and therefore I haven't invested my personal time in lot of the investments and lot of legal money in analyzing exactly what it means.

Robert Weaver - Forest Investment

Okay. Is there something we could just follow up with you guys later once you get more color on it?

T. J. Rodgers - President and Chief Executive Officer

Something later when we get the time if I adjust everything.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yeah, I am not trying to saying any of this, what I said is, in this meeting, and quarters from now we are going to tell you what we got, what it means, what are the options, what we have studied and what we want to do. And I won't make it hard dead line, because I don't want to put a brick wall in front of myself. But we are eager to get on and study this thing. It's a diversion for us too. And we'd like to make a decision and get on with it.

Robert Weaver - Forest Investment

Okay, guys. Well, thanks a lot.

T. J. Rodgers - President and Chief Executive Officer

We've got time for maybe one or two more quick questions, because we need to need cleared up and that SunPower gets setup.

Operator

Thank you. Our next question comes from Sandy Harrison. Please state your company name.

William Harrison - Signal Hill

Thanks for taking my call. It's Signal Hill. Real quickly, if you could Dinesh, I think there has been some moving targets on West Bridge, you guys had hoped for, I think a little bit more last year. But it looks like you came back on real strong here in Q1. If you could just take a quick second and highlight some of the growth opportunities that you guys are looking for that we can watch in the markets to kind of judge performance on this and some of the milestones you guys are looking at setting in the group for the next couple quarters that you will be measuring yourself against?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Okay. So, let me sort of phase it broadly in the sense, we are seeing fundamental traction, in customers, in devices, because devices are getting more converged. Which means phones are becoming more capable of playing music, they are capable of taking high resolution pictures, with this comes music sideloading, which means that you can download music from your PC into your phones and then there are new business models that the carriers are coming with, which we call all-you-can-eat music services. In addition to that there is higher storage capacity, which is SD cards that are also going onto these phones.

You combine all this stuff together and you look at high performance sideloading, which basically reduces the consumer wait time to put data from their PC on to their phones, and then run away with their phones into their cars or whatever, it is that they are going. So, it makes that sideloading capability very, very appealing. And again, high performance sideloading capability is very appealing to the end consumer. So, this is the sort of overall trend that you we are seeing, that's basically driving our business.

To give you a perspective of kind of where we are, is we are engaged at different levels at the top five handset makers, who basically contribute about 80% of the total volume in this market. And we expect new models from them to keep coming out through the rest of this year and the existing models that we are in, to actually ramp into reasonable volumes for us. So, that's sort of the overall perspective in that business. I hope that answers your question.

T. J. Rodgers - President and Chief Executive Officer

What can you track from the end market with PC's with other stuff in it?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So, I think that the best thing to track would be to see how the smart phone sales are growing. And I think that will give a very, very good picture of where things are headed.

William Harrison - Signal Hill

Right. And given this is a 1.4 billion unit market a year, pretty attractive, and its, you guys one of the earlier ones to introduce the concept, has the competitive landscape changed much or is this still an area that you guys thing you have a pretty long run way on and should be able to capture good piece of that potential unit market?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

As this becomes more and more interesting and a lot more of the carrier CEOs are beginning to talk sideloading, I mean we are seeing some of the competition sort of coming from behind. But we believe we are still ahead and that's sort of dictated by Antioch, which is our first part in the West Bridge family of products, and the second part which is Astoria. So, we have two parts that are fairly ahead of the rest of the game and is taking care of our customer needs at this point.

T. J. Rodgers - President and Chief Executive Officer

Does anybody offers chip with equivalent sideloading performance, today?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Today there is nobody that offers and equivalent chip with sideloading performance.

William Harrison - Signal Hill

Got you

T. J. Rodgers - President and Chief Executive Officer

If you want to look at the dynamics, the first chip looks up to NAND Flash and it has an interface to a given processor, an asynchronous Static RAM type interface which is some of the vendors use. A second chip offers the same performance, but its [inaudible] to multilevel NAND, which is the bigger, next generation NAND and the interface back to the processor, there is this multiple different interface that have got different flavors. And we're working on a roadmap right now and as a matter of fact, we've spent much of time on this last week to try to keep a featured roadmap, feature and performance roadmap, especially with the chip. Basically, it subsumes as much as we can get out of the cell phone.

Obviously the other guys have got circles drawn around our chip. They haven't tried it yet, we have to go into, but right now, we will put an article on the website which compares RIM, which is one of our customer's… their sideloading performance to other cell phones and show its RIM to be superior. And this is a cell phone type article, not a chip type article. And the name of our game is to stay ahead of that cut and in US it is a $1.4 billion annual market, flip side of that coin is… therefore the sharks are out to control, business they can get and we're actively pursuing a roadmap.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

And that article came in eTimes. In a eTimes articles so you're free to download it.

T. J. Rodgers - President and Chief Executive Officer

We will post on the IR site, so on the IR site, if you want to download and take a look at it.

Unidentified Analyst

All right, thanks to do that, and again, Brad, thanks for transparency on the disti stuff, that was helpful.

Brad W. Buss - Executive Vice President and Chief Financial Officer

I appreciate you guys' support.

Operator

Thank you, Suji De Silva, you may ask your question Please state your company name.

Suji De Silva - Kaufman Bros

Hi guys this is Kaufman Bros. Thanks for squeezing me in. And I'll try and make this quick. On the West Bridge side, Dinesh, how much, I am trying to understand the customer concentration you have now and versus toward the end of the year how much that starts to spread out. Can you give us sense of how many customers are driving sort of that volume now and toward the end of the year how that spreads out potentially?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So, the base of customers that's basically driving volume now is anywhere between five to 10, which is fairly broad, the bigger ones that are driving volume are two at this point in time and we are hoping to actually exceed that and make it too close to five by the end of this year.

Suji De Silva - Kaufman Bros

Right and you are engaged with all five you are saying?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Yes.

Suji De Silva - Kaufman Bros

Okay. Great. And then on PSoC guys, as the new products comes out, I don't know what the timing are sort of for those and how those will kind of be positioned in the market place, but are those meant to be kind of incremental revenue drivers, higher ASP or just to maintain the current stream you have?

Norm Taffe - Executive Vice President, Consumer and Computation Division

This is Norm, the new product that we have which is been around for sometime is quite substantial. We'll be focused on a really complimentary TAM, quite a significant TAM increase and a little bit more towards higher end products. You know PSoC today is in $1 or $2 type product space, very high volume space, we'd expect the products to be more $3 to $10 type solutions that will be coming out really towards the back half, the end of this year as our plans that were on schedule for introducing.

Suji De Silva - Kaufman Bros

And what magnitude of TAM increase would you expect, sorry?

Norm Taffe - Executive Vice President, Consumer and Computation Division

What kind of TAM increase?

Suji De Silva - Kaufman Bros

What magnitude, yeah?

T. J. Rodgers - President and Chief Executive Officer

Let me, Norm is talking about his division. I want to talk at a corporate level.

Suji De Silva - Kaufman Bros

Sure.

T. J. Rodgers - President and Chief Executive Officer

In the, when we competed in PLDs, I had a PLD division competing against both corporations, namely Xilinx and Altera, and I learned not to put a division against an army. Therefore this time we have spread out the PSoC franchise, if you will, to all of our divisions. So, PSoC is what we have always talked about. We put certain software it and it becomes CapSense, we talked about that. When you make a software and controller invisible and make it a button slider chip, that's called CapSense Express in our jargon. That's actually in a Memory and Imaging Division which specializes in cost reduction high volume products. We are about to bring out, I've talked about this before, something called Power PSoC, introduction will be when at the end of Q2. We have already got

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Silicon we will take out in two weeks.

T. J. Rodgers - President and Chief Executive Officer

We are taking out in two weeks. It basically is a PSoC 1 on to which we have grafted a power control circuitry, and by power control I am talking 40 volts and one ampere on each of four channels. So we are going to move PSoC into the realm of starting to push on some of the power control chips from National Semiconductor Linear or Maxim for example, stocked with PSoC functionality and the other side of it. So that one's coming out this year. I would call, and there is one more which we call Non-volatile PSoC. This is a PSoC which has a non-volatile memory in it. By that, I mean it is non-volatile SRAM, which can act as an SRAM and store data in a one fell swoop. That product is made by our MID Memory Group and they are hyperdesigning a Non-volatile SRAM and PSoC 1 that products will come up, for resampling.

So we are sampling what I would call very good products on the PSoC 1 family. At the end of this year, if we're lucky, and if we are not, in January, we will bring out the next generation of PSoC, which we call PSoC 3 and 5. This will be a whole new clan of device that will have instead of having the good enough analog that characteristically resides on microcontrollers, it will have world class analogs on it. It will have high performance CPUs in it. If the CPU's will no longer be proprietary they will be 80.51, in a very high performance [inaudible] to the end market. And in on 32 bit machines for this...

Our first entry in the 32 bit market and that will be a product on a whole new plain and that products would be getting from the version in the $3 to $10 range, with much higher performance, both analog and digital. That products we're already talking of fanning out into the various sub markets, for example power and non-volatile memory, etcetera, and such thing. So, that's the bigger picture, and the TAM we address… It is not really just a microcontroller TAM, we have now starting to tap into analog and power controller TAM. And our hope is that we are competing with companies that have one expertise Axim and Power for example. We can win by offering a complete solution, as we are competing is microcontroller companies.

Microchip for example, we can win by offering integrated analog and programmable digital on the same chips. But its really a system on a chip and it's a new category of product, you can't realize that, and makes it difficult and in short answer to talk about what is the TAM.

Suji De Silva - Kaufman Bros

Great, that colors it up. And one quick question on the tax, was this the last in the series of communication with the IRS, is this a discrete communication or do you expect to have further sort of clarifications that are coming that have to refine this?

Brad W. Buss - Executive Vice President and Chief Financial Officer

With the IRS you are referencing.

Suji De Silva - Kaufman Bros

Yes, exactly.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yes, no, I mean from that perspective, its done, we did mention in the press release other taxing authorities.

Suji De Silva - Kaufman Bros

Right, understood.

Brad W. Buss - Executive Vice President and Chief Financial Officer

We kind of look at foreign and obviously state issues to make sure we get a similar clearance. But once Big Daddy is on board, it's generally not a problem but its time and its distance.

Suji De Silva - Kaufman Bros

Great, thanks, guys.

Brad W. Buss - Executive Vice President and Chief Financial Officer

Great

Operator

And our last question comes from S.T. Tallapragada. You may go ahead and please state your company name.

S.T. Tallapragada - Quattro Global Capital

Its Quattro Global Capital. Brad, the $0.20 to $0.24 of that fully diluted non-GAAP, does that include the dilution from the convert, because you said earlier, that your forecast is for a higher stock price?

Brad W. Buss - Executive Vice President and Chief Financial Officer

Yes, it does.

S.T. Tallapragada - Quattro Global Capital

Does, okay and has there been any change to the call spread with regard to the convert that you have on right now so that the net share issuance would be zero up to a stock price of 27?

Brad W. Buss - Executive Vice President and Chief Financial Officer

No, there's nothing… Nothing has changed with the converter, the call spreads have been introduced.

S.T. Tallapragada - Quattro Global Capital

Okay. And the remaining 323 and the buy back authorization. It looks like today; you haven't bought back any bonds. What are the circumstances under which you consider doing that versus buying back stock which you have done consistently?

T. J. Rodgers - President and Chief Executive Officer

I think it's just a matter of value and obviously, EPS impact, capital structure. It will vary. If you look at how can you raise earnings more quickly for the given amount of money to spent on and accumulate $1.2 billion. You can get more shares out of the market faster than buying equities and buying bonds.

S.T. Tallapragada - Quattro Global Capital

Thanks

T. J. Rodgers - President and Chief Executive Officer

Thanks everyone. I think we're finished. We appreciate your support and if there is any other follow up question, let us know.

Operator

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

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Source: Cypress Semiconductor Corporation Q1 2008 Earnings Call Transcript
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