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Cypress Semiconductor Corporation (NASDAQ:CY)

Q2 FY08 Earnings Call

July 17, 2008, 11:30 AM ET

Executives

T.J. Rodgers - Founder, President and CEO

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

Chris Seams - EVP of Sales and Marketing

Tom Werner - CEO, SunPower Corporation

Dinesh Ramanathan - EVP, Data Communications Division

Norm Taffe - EVP, Consumer and Computation Division

Analysts

Srini Pajjuri - Merrill Lynch

Tim Luke - Lehman Brothers

John Barton - Cowen & Company

Sandy Harrison - Signal Hill Group LLC

Glen Yeung - Citigroup

Adam Benjamin - Jefferies

Doug Freedman - American Technology Research

Suji De Silva - Kaufman Bros

Operator

Good morning, and welcome to Cypress Semiconductor Second Quarter Earnings Release Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. Your lines will be in a listen-only mode until the question-and-answer segment of today's call. [Operator Instructions].

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

T.J. Rodgers - Founder, President and Chief Executive Officer

Good morning. We are here to discuss second quarter results. We will follow the usual format.

Finances by Brad Buss, our CFO, market by Chris Seams, our VP of Marketing and Sales. I'll give a little bit of update on technical and business issues and discuss the SunPower spin. Brad?

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

Thanks, T. J., thanks everyone. As you can tell, we've got very excellent quarter, and we've got lot of news related to SunPower spin, which T. J. will cover when we go through the standard stuff.

Just the usual disclaimer, that we'll be making a lot forward-looking statements, probably more than normal, on this call. And then obviously our results could differ. Please be sure you go though our press releases and our SEC filing. And there is lot of stuff posted on our website as usual as well.

So I'll go through the Q2 results, and then I'll take through Q3 guidance. So as you can tell by the release, I was very pleased where we ended up for the quarter. Both the SunPower and Semiconductor businesses did very well, especially when we look at the backdrop of the macro environment that we've been in.

So the consolidated revenue for Q2 was a record $592 million, and it exceeded our consolidated guidance of $526 million to $552 million. Revenue actually increased 34% sequentially and 59% on a year-over-year basis.

You remember in Q1 we had the distributor adjustments in the sell through model. Even if you normalize for that, we still grew a strong 28% sequentially. SunPower obviously had a fantastic quarter. They reported record revenue and our semiconductor segment did better than we expected and also exceeded top end of the guidance.

So, specifically on semiconductor, the revenue was a $209.5 million, that was a 24% sequential increase or on a reported basis or a strong 11%, even if you adjusted back for the disti. So, that's far above our normal Q2 seasonality that we would normally see.

So, we're pretty pleased with where that ended up and obviously like I said, it exceeded the top-end of our guidance and more importantly we saw sequential revenue growth in all three of our major divisions.

Chris, will talk about the customers and design wins they grew very nicely. And again provide us with a really nice pipeline going forward. And more importantly, as I'll get to the guidance, we see sequential growth being fairly strong in Q3 as well.

On a GAAP basis, we posted a net profit of $23 million with diluted earnings per share of $0.14. Again included in that was a discreet tax benefit due to some changes in estimates of about $14 million. That compares with last quarters diluted loss per share of $0.11, which again was impacted by the disti conversion, and versus $2.29 on a year ago basis, which again if you remember that was the period that we sold 7.5 million shares of SunPower for a substantial gain.

Turning to non-GAAP net income, it was $47.8 million, and at the highest level we have seen since Q1 of 2000. So something that I was very excited to see. That yielded diluted earnings per share of $0.28, which exceeded the high end of our guidance and the consensus from the street. That's an increase of a 133% from last quarter's diluted earnings per share of $0.12. And is an increase of 75% from the second quarter of 2007 when we posted $0.16.

Turning to gross margin, the non-GAAP consolidated gross margin for the second quarter was 35%, and that was up from the prior quarter, really on the strength of SunPower's increasing gross margin that I'm sure we'll talk a lot about later.

And again remember, we split out the margins between the two groups. We provide a lot of detail in the press release, on Semi versus SunPower as well as various balance sheet items. So, please make sure you take look at that.

The non-GAAP gross margin for the Semi business was 50.7%, which was consistent with the prior quarter and two quarters in a row that we've been above our 50% gross margin target. So, obviously very excited to see that.

We had a good mix in Q2, we had some yield improvements and we had increased fab utilization and we're pretty comfortable that we should be in the 50% range for the balance of the year and I do expect that gross margin to continue increase every year, as we have a higher mix of programmable solutions going forward.

Our non-GAAP consolidated operating expenses in Q2 increase by $9.5 million, mostly due to our friends at SunPower but, we also increased in the semi side slightly due to some continued adds in the sales and marketing arenas. And we also have some higher legal and consulting costs in G&A related to the SunPower announcement that you see today.

So, I do expect to see some of those costs decrease in to Q3 and I'll give you guidance on that later. Just from a headcount respective we've been keeping things very tight, we had just over 20 net hires for the quarter and a vast majority of those were offshore. And just that's kind of a net rate, we have almost 60% of headcount outside of the United States and very big programs keep pushing things that way. Again Q2 we finalized the outstanding IRS audit and there was an 8-K out there related to that, that you could take a look at.

When that was all said and done, as far as Q2 we ended up getting a $1.8 million benefit in the tax line and that's really a one time event and we should be back to a standard 10% rate going forward. If you look at the balance sheet we had cash, cash equivalents and investments that totaled $1 billion. The Semi segment was about 794 of that and we actually have $832 million if we include the auction rates that are currently in long term investments.

The really big... real big change there and we've got pretty strong collateral on that based on what we know at this point. So we are not really overly concerned.

From inventory, inventory was $329 million, it grew $17.2 million and the vast majority of that was due to SunPower, the semi business increased $5 million. However we increased $9.8 million due to the lost time build [ph], associated with the closure of Texas. So if you normalize for that we actually decreased our net inventory in our standard operating portion. So we are pleased to see that lead times continue to remain pretty low and we expect to see inventory flatten down in Q3.

Accounts receivable totaled $355 million, it was up a $104 million and again not to sound like a broken record but the vast majority of that was due to SunPower, the semi business increased to about $14 million. DSO went down in the semi business, our ageing [ph] is really in good shape and we don't see any customer issues out there.

Consolidated CapEx was $56 million of which $45 million was for SunPower, 11 was the semi business. Depreciation in the quarter was $29 million, SunPower was $12 million of that, the semi business was $17 million.

So turning to our ownership of SunPower, basically 46% [ph] ownership on fully diluted basis of 52%, I am sorry, the other way around 56 basic and 52 on a fully diluted, we've spoken 12 above of the 19%, our holding rights, we continue to own a 44.5 million shares. So really no big changes between Q1 and Q2 there.

Our share counts on a non-GAAP basis was 164.7 and it was basically flat in Q2 and we did not purchase any shares in Q2.

Okay, turning to guidance now, consolidated revenue for Q3 on a non-GAAP basis is expected to be in the range of $562 million to $584 million which is above the current street consensus of $562 million and I am pretty pleased to see us do that even after both, both businesses had an extremely strong Q2. And this is basically a year-on-year increase of around 20% to 23%.

SunPower is expected to be in a range of $340 million to $355 million as they have already disclosed in their press release. And on the semi business we're expecting to be in a range of $222 million to $228 million, which is again up another 6% to 9% after a very strong Q2.

I expect sequential growth in all divisions and most likely double digit growth in CCD and DCD. And as we mentioned in the press release, we expect quarterly revenue records for PSoC and West Bridge. Gross margin for SunPower in the range of 27% and 27.5%, our semi gross margins are expected to be in a range of 50.5 to 51 and that'll bobble around a little bit depending on mix and factory utilization. OpEx from the semi business, I expect to be down, probably around in $90 million range and semiconductor OIE of approximately $3.8 million, which again is net of the bond interest that's been there of a $1.5 million.

Okay, the tax rate for Q2 should be about 10% in the semi business, 24% to 25% for SunPower and I think the basic share count, I use about 152 to 153 and on the fully diluted I am estimating 166 to 170, assuming the stock price moves up from where it was in the prior quarter and I think as you know that can move around depending on the stock price. Any repurchases, exercises and all the diluted impacts related to the converts.

Turning the capital, I expect for the year, semi business can still be in the range of 45 to 50 and about $12 million in Q3 for semi and depreciation of just a tad under $17 million. So wrapping up, fully diluted non-GAAP EPS in a range of $0.28 to $0.31 which again is above the current street consensus of 26.

So again, just I think we had a great quarter, I am really proud of what the teams have accomplished. I think we see continued good stuff into Q3, like everybody else I think we'll be somewhat cautious somewhere on Q4 and the macro goes. But so far things are going very well.

And I'll turn the call over to Chris for a discussion of the markets.

Chris Seams - Executive Vice President of Sales and Marketing

Thanks, Brad. Let me go through some of the usual indices. Our revenue split by geography, Asia is by far our largest region, 51% of our revenue shift there, North America in second place at 27%, followed by Europe and Japan at 13% and 9% respectively.

Units [ph] in the quarter are increased to $154 million. The pricing environment remains fairly stable in the second quarter. ASP did decline to $1.34 from $1.40, predominantly due to just mix factors, that's on our end markets and a low range ASP tuned up in the second quarter.

Our book to bill remained above unity at 1.03, our backlog increased to $209 million, and we entered the third quarter, 77% booked which is a traditionally fairly strong number.

As, Brad, mentioned we had a very good designing quarter with our customers, we set records for PSoC customers at almost 8000 in the quarter. We set a record for the design wins in PSoC and design wins for all of our proprietary products for Cypress were a record, last quarter.

Our end markets are fairly healthy. We see more strength in the return of the consumer computation and handset markets for us and into the third quarter, driven both by the traditional seasonality strength of the third quarter. And also by penetration of a lot of our new Cypress solutions into those segments.

Let me turn the call over to T. J. for more details on the quarter.

T.J. Rodgers - Founder, President and Chief Executive Officer

First, a little bit of segment information. CCD did $82.8 million from the non-GAAP gross margin 51%. That's our PSoC consumer and computation division. Our Data comm did $34.4million with gross margin of 56.5%, that includes our traditional data comm products, plus our West Bridge product which is ramping strongly in cell phones. Our memory and information division did $88.9 million, a very strong quarter with gross margins 44.8% with memory division particularly in a quarter that was little bit [indiscernible] going in.

Semiconductor together did 209.5, with $3.4 million of other with 50.7% gross margins. We've been working on year long [ph] did a nice job about 50%, we have done it for the last two quarters in a row and barring some economic issues, that we can't control, we expect a little bit about 50 for the rest of the year.

SunPower revenues [ph] was below up quarter, $382.8 million which raises a question for the rest of the year and instead talking about that myself, I'll give Tom Werner, CEO at SunPower, a couple of minutes to explain where SunPower is.

Tom Werner - Chief Executive Officer, SunPower Corporation

So first of all to the, soon to be or some time later this year, direct shareholders of SunPower. As T. J. mentioned we had a very solid quarter. We beat top-line and bottom-line, $383 million of top-line, $0.61 EPS on the bottom-line. We had very strong gross margins in both our system components business. Our components business is really starting to excel and we are deep modeling in the component business of over 30% gross margin.

As we look forward, we raised guidance for the second half for the year, and we raised guidance for the full year. And we're able to do this because we have a unique strategy in the solar industry. That is, we've invested in the channel or in our brand, in our technology, in our cost in a unique way. We are forward integrated in the channel and that allows us to have predictable guidance, display policy and certainty [ph].

On the technology side, we've demonstrated the world's highest efficiency in solar cell 23.8%. And we have introduced new tracking products that collect more energy. And on the cost side we continue to make progress on our 50% cost reduction goal as compared to 2006 cost by 2012.

So, our strategy is, been implemented very effectively and allows us cap an excellent very strong Q2, raise guidance for the second half the year, and raise guidance for the full year and provide guidance for 2009.

T.J. Rodgers - Founder, President and Chief Executive Officer

Thanks, Tom. A couple other comments on SunPower for you and comments on Cypress. With 23.5%.... 23.6% Tom has talked about is an important technical event. When we acquired SunPower we strived to make a 20% cell, which was a big deal on our first plant. Which is a 100 megawatt plant which is now ramped up to 108 megawatts in the first generation cell.

And our second plant which is a 466 megawatt plant which is currently ramping with... I think its four lines

Tom Werner - Chief Executive Officer, SunPower Corporation

Five.

T.J. Rodgers - Founder, President and Chief Executive Officer

Five lines out of 14 calculated. We're making a second generation cell, which has 22% efficiency. Our competitors have not got in about [ph] efficiency and that two points puts us far away from the pack.

So we just described, the third generation cell. We're not shipping it yet, but for the first time we've shown in R&D, the feasibility of mass manufacturing the cell, with another point and a half on that mid 23.

And that plant... we'll guess that we will be ramping the third plant which is going to be in Malaysia which we recently announced. And that plant will start producing in 2010. While the first two plants are 108 megawatts peak capacity, add that capacity and 466 megawatts are currently not at their capacity, but ramping. The third plant will be over a gigawatt or a 1,000 megawatts.

I am excited to see this, I want to reiterate the increased sales that we grew, our P cell customer base to 7846 customers, at that [ph] 12.2% quarter-on-quarter. Right now if you look at our revenues, not got to do with more zone memory stating, more is got to do with design wins and we're focusing heavily on that. I am involved in on a weekly basis.

We launched a product called TrueTouch, [indiscernible] TrueTouch, it's a touch screen solution, probably the most famous touch screen product, it is the icon and basically just to build this the ability of touch screen, as many as 10 touch points with no risk. The ability to move 10 different things at one time and a Indium Tin Oxide light screen we are doing with a MAS request [ph] PSoC solution, enabling the words switch across through the graphic interface. We introduced another product which will be up, it won't be economically significantly for a while, it is technically quite significant, it's called ColorLock gives optical feedback and what it is, is a PSoC chip that can drive LEDs and have shown that in [indiscernible] where we can control the power into LEDs for example red, green and blue or blue white light used with the color adjustment for grey, can channel the LEDs and control in real time. Our ColorLock has evolved actually [indiscernible] detect color and cell color and drive the circuit to the achieve the color you want regarding of what the LEDs are. So for example you can specify certain color and you can put in [indiscernible] 3,4,5 or 6 LEDs and the LED will be automatically be driven to level it needs to be driven to achieve the color you want. So you don't have to worry about the degrading of LEDs or it doesn't depend on live emitting diodes for different colors.

Secondly light winning diodes have a very strong change in output versus temperature. That compensates automatically in the age over time. They don't put out as much light over time and that compensates automatically. So, ColorLock takes you to the next of level of light control, which is selecting which color you want, select levels of RG & B or what brightness you want and I will achieve that and I will figure out how I have to drive the light emitting diodes to achieve that color.

We have used two 8 megabit non-volatile stagarms [ph]. These are high value-added, good margin stagarms that are [inaudible] stagarms and the active [inaudible]. When the power is switched off they keep continuing your data is a non-volatile storage and not loosing data.

Universal memory concept, we now have memories from 2 megabit to 8 megabit a family that goes from 16 kilobit to 8 megabit. We're still making light machines. We have part of the legacy still in the live bill at Cypress. The optical navigation is sent through CMOS and we're not going to talk about that. Its just starting to ramp. We had a revenue last quarter and the rest of the company.

Now we're still two dynacoms [ph] screens, it was about half of the company. The other half is still with us, embedded in one of our divisions we got $11 million for. Our + BusinessWeek magazine listed us in its annual highest rated U.S. Company, InfoTech100. We were the top ranked semiconductor company based on return on share price over the last year.

Talk about SunPower Vesta, so the last topic, which is the biggest topic today. I held this for last and so, I can take reasonable questions coming out with respect to SunPower. Our Board has approved a plan, term sheet to commence spinning of SunPower and have asked management to make that happen. The timing is unless something goes wrong which we don't anticipate, certainly by the end of the year and sooner if possible, it will be what I call the lowest spin with typical terms and conditions that will spin tax free that will include an option adjustment. So, for Cypress option holders left behind after the spin there will be adjustment for however much the Cypress share price drops.

It includes selling small amount SunPower potentially, consistent with the tax free spin, which requires the most shares that go to shareholders, that sale will be for the purpose of paying off the bond. The bond, the convertible debenture and we're going to have the tender offer for the bond. We will take all or part of the bond to [indiscernible] paying us back, prior to the spin and the tender, the spin-off rather is subject to final Board approval. After we put all the details together I'll give you one example of what's between us and final approval and the announcement, we've received as we have announced I think two quarters ago an IRS ruling that we could spin SunPower tax free, we have yet to receive California ruling, we think that in December and it will happen. But we don't have it yet. So, that's one of the kind of implementation I will call it detail but it matters, implementation details between us and getting the thing done,

Okay. We are ready for questions.

Question And Answer

Operator

Thank you sir. [Operator Instructions]. Tim Luke [ph], you may ask your question and please say your company name. Mr. Luke, you may go ahead. We'll go to the next question. Srini Pajjuri, you may ask your question. Please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Hey Brad. On the gross margin side looks like you are expecting further improvement. Can you talk about where that can go in the long run and what are some of the puts and takes just on semi business?

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

Yes, I mean, I think, we've been bumping our head on this 50% number for quite a while and 57 models. I think as we look at our business going into '09 and '10, where the programmable solutions will find tune the model. I mean, I'm not ready to commit any other number, but I would tell you its going to continue to move up. Right, I mean, we're dealing in higher ASP product. We've got the effect of [indiscernible] that will be gone. In each year we'll have more and more business going to the foundries. So, I think that will be going in the right direction.

Srini Pajjuri - Merrill Lynch

Well, I guess the question I am asking is how much of it is mix related versus any further efficiency improvements that you are expecting?

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

I didn'tcatch the last part, beyond mix what.

Srini Pajjuri - Merrill Lynch

Mix versus efficiency gain going forward.

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

I think going forward, both will be important, we make better gross margins on our programmable solutions, since I gave you the breakout earlier, then we do in memory so as in the programmable solutions are growing very rapidly for us, so that's part of it. We also have the margin improvement program going on in the company no more [ph] is part of that and we are in the process doing in end field and Fab 2 plant in Texas. We expect that to shutdown by the end of the year. That will be part of it. So that's a cost reduction and we have other internal cost reduction programs, ongoing in the company, the answer is all of the above. And they are all being actively worked on.

T.J. Rodgers - Founder, President and Chief Executive Officer

Yes I think the other think too Srini is we expect that more and more business go through distribution especially with PSoC, really PSoC can go at a... you take a customer in that market, it has an opportunity go there and this going to be big challenge to drive that. Now that takes time you guy's driving in cycle, but it's a very positive leading indicator that obviously has good gross margin for us long term as well.

But I think if you look at the across the micro controllers space and to some good degrees CCL need with some of the analog were the market we are playing in, the gross margin are in a really nice zip code. And there is no reason we won't be there, and we have plans all of those areas.

Srini Pajjuri - Merrill Lynch

Okay. And then on the balance sheet obviously you have a decent amount of cash, even for the semi side, once you spin out SunPower, what's your comfort level with the current cash position and where do you see that going?

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

I think so the one question is as TJ mentioned and we said in release we may do a tender for all our portion of the bond, because we depending on where the outcome of that is that could use a fair bit of the cash, number one.

Number two I think, we are big believers and, really having an efficient capital structure I want to pile up a lot of cash. And I think we'll generate a lot of cash, I mean just profitability in no more and more. You know we have a lot of free cash flow ability even now when growing.

So I don't think that will be an issue I think we'll look at buybacks when they make sense, we are not going to get on and out of buyback policy. Buying our shares like some companies have done, will do it when it's beneficial which we've demonstrated twice. And they both were very successful and, I am personally not opposed to looking at the dividend some time down the road. I think it's premature to talk about it now. But just to give you a head start I think it where we kind of think as a cost company and the capital structure.

Srini Pajjuri - Merrill Lynch

Okay, got it. And then finally, Brad, if you decide to sell from SunPower in the open market I am guessing you're probably going to use of some of your NOLs, do you think that's going to have any application for the tax rate going forward, thank you.

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

Not in the short run, not at all. I mean we're not talking amounts, John by any stress, right. We may sell a little bit, if we tender depending on what we do and how we structure which we don't have a plan right now. We could use of some of that to satisfy some of that. We're just trying to keep a little flexibility.

Our goal is to give the maximum amount we can to the shareholders while maintaining an efficient capital structure both spin.

Srini Pajjuri - Merrill Lynch

Thanks Brad.

Operator

Thank you, again Tim Luke, you may go ahead and ask your question. Please state your company name.

Tim Luke - Lehman Brothers

Thanks, with Lehman Brothers. Just with respect to the memory area T. J. or Brad could you give us some color on why it was quite so strong and perhaps give some model items of the expectations in terms of the profitability and the revenue going forward?

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

Let me, the amount to fill that answer, that we peeled the MID division.

T.J. Rodgers - Founder, President and Chief Executive Officer

Hi, Tim. Yes, actually as we have that's one of our major competitors industrialized there, one of their business on SRAM and we have been taking share on that we have full program now for a year to ensure that we take all that. As well as step by step we are improving our cost structure. So that's where the gross margin is happening. I do not expect that kind of growth quarter-on-quarter to happen every quarter going forward. I expect single digit percent going forward in growth. And gross margin to be in the same rate may be a little but up but no more.

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

Okay, I think it consist the ones we talked about right I mean. We are going to take share where it makes sense you know MID is actually a total profit and cash machine. Which again a lot of you still can't quite comprehend now but it is there and it is going to stay there, I think we've consistently demonstrated that. Somewhere in the mid-single digit growth and good margins is what you should expect. And, the monkey's are in the national norm, to be in the double digit guys going forward. Right, gentlemen?

Unidentified Company Representative

Yes, sir.

T.J. Rodgers - Founder, President and Chief Executive Officer

Excellent.

Tim Luke - Lehman Brothers

Brad, with just to get back to the spend per se... we should be clear that your goal is to spend all of the SunPower holding this Common B share, is that correct?

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

The goal has been all the SunPower holding minus a small fraction single digit percent that we may use to raise cash since we have buyback all of the bonds for example worth over $600 million. But yes, in this year. Yes substantially all. Actually.

T.J. Rodgers - Founder, President and Chief Executive Officer

But we will not keep anything posted in and that's where you are going.

Tim Luke - Lehman Brothers

Okay. And it would be most likely tax free spin to shareholders with the exception of... and the goal of spinning a portion towards the consumption of the spin-off is just simply to match the tender offer for the convertibles. Is that's correct?

T.J. Rodgers - Founder, President and Chief Executive Officer

Just look at it as capital structure flexibility.

Tim Luke - Lehman Brothers

Yes.

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

little bit for the kitty.

Tim Luke - Lehman Brothers

Just broadly T.J, and in the press release you talked about the macro being some what... you are cautious on the macro, you are guiding all businesses to the pretty robust in the third quarter. What are you generally monitoring risk closely? How do you feel about sort of the industry inventory levels currently?

T.J. Rodgers - Founder, President and Chief Executive Officer

I am moving in kind of the paranoid world looks drives the work, I hear about the world being... the bank consistent falling apart and oh my God, gas being within $6 a gallon. And then I get to work and the more configurations, key with stock price is okay and the divisions starting falling apart, yes. If you do that for 91 days. So you end up saying Jesus, business is now all advanced for us, bad economic times. We do watch inventory. We are concerned about filing this inventory same as we filed a little normal in that business area.

Tim Luke - Lehman Brothers

[Indiscernible].

T.J. Rodgers - Founder, President and Chief Executive Officer

Our net inventory is 114, we've got to bring that down. But we haven't taken net inventory, Jim, that on as a channel. We do watch the channel. We don't have perfect visions. As a matter of fact, often our vision is obscured by people who want to keep the inventories as just in case with them. But I don't see inventory problems out there. And we see pretty good bookings right now. So, we're... we are... we'll obvious, if they were bad news in the macro market, we'll be out domestic. So we kind of feel good about the third quarter. Because we can see it. And we kind of feel not too optimistic about the fourth quarter, because we can't see it and all the bad news just like you do.

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

And again Tim, I think as you all know I mean we thought West Bridge I mean new products we never had going into markets but even if those markets were flat to down, for guys that have high exposure, its new market for us. And the design wins we talked about, we've generally been hit in new design wins every quarter. Eventually they come in revenue and even if some go way or some get cut, again incremental revenues with a lot of new customers that we never touched before.

So, I mean, yes, I think we definitely have risk at reserves. And I need further macro economic. But we have got a lot of head wins that I think differentiate us pretty heavily from some of the other semi players right now. And our executions been pretty damn good.

Tim Luke - Lehman Brothers

Excellent. Congratulation on the quarter and your guidance and the spin. Thanks.

T.J. Rodgers - Founder, President and Chief Executive Officer

Thanks Jim.

Operator

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

John Barton - Cowen & Company

Yes Cowen & Company. Thank you. On the topic of West Bridge, T.J. could update us on the breadth of the customer base both today and as you look out say over the next four quarters? And then also just revenue forecast update for that please?

T.J. Rodgers - Founder, President and Chief Executive Officer

I'm going to turn that one over to Dinesh Ramanathan, he is the VP of the Data Communications Division of West Bridge.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Hi John, Dinesh Ramanathan, so we are engaged with top five handset vendors. Currently we have two handset vendors that are footing out phones into to the market place with our devices and we expect that they keep growing the number of models with our devices out in the market place is increasing, Q3 should be actually a record for us in terms of number of models into the market place.

John Barton - Cowen & Company

And your ability and history you have so far from ASP prospective, from the margin trend prospective, is it tracking away you expected, could you give us some basic balance as where it is and then part of where my question is coming from as I believe it's consolidated the DCD area and obviously there was a slight decrease in gross margins quarter-on-quarter, I am guessing it's just the blended poll as result of those products mapping.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

Yes, we, we're, experiencing margins where we would have wanted it to be, specifically the 50% and 57% of depending of which market the part goes into. But also seeing non-handset design wins in the same part, which is in to the downloads that you can see from that the carriers that are out in the marketplace and in emerging markets like PC TV stuff in China as well. So, it's not only the handsets space where we are seeing fraction, but we are seeing it in outside and other market as well.

John Barton - Cowen & Company

So the mix question which you raised is such that as West Bridge ramps rapidly which it is against the rest of the data comm products which are quiteish in the our revenue gross margin as a percent will drop but our gross margin dollars in revenue will rise in that organization?

Unidentified Company Representative

Yes, John the other thing to keep in mind is about the a lot of the older com and CPLD business is really with DCD margins around and we can see them move 3% or 5% depending on the mix oft that. And some of that older stuff is that 75% to 85% gross margin that you just saw us switch at CPLD business between Q1 and Q2 that went down. That actual really build the margin decrease and the mix of that. The West Bridge is actually up a little from Q1.

So I think net we've always talked kind of mid 60 gross margins there. And it will be within that zip code subject to some of those older products to coming in relative order. So we real pleased its on target.

John Barton - Cowen & Company

Okay. And then just speaking on West Bridge for a second, obviously its giving you kind of the re-engagement with the cell phone manufacturers and handset manufacturers. What is where can that go I mean is there other functionality that could be integrated into West Bridge. Do you run the risk of West Bridge functionally be integrated with something else, what does the roadmap look like there?

T.J. Rodgers - Founder, President and Chief Executive Officer

First of all let me grapple with the premise of the question there, that there is a reengagement norm talk about PSoC and cell phones and cash nets.

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

I think one of the certainly biggest market we get on the PSoC side has been PSoC, and caps in fabs application is for the further phone and now represents the biggest... second biggest single segment of PSoC sales.

John Barton - Cowen & Company

So we have West Bridge really at a second front in the phone working in where can that go, Dinesh?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So there is multiple things that we are looking at and putting into the device, primarily what we are offering our customers is the ability to enhance the user experience on a phone. Which means be able to move data into the phone and out of the phone at a significantly faster pace that essentially has impact on battery life and as I said before user experience. And the ability for the carriers actually make more money depending on the content that you actually can load upon to your phone and see while you are on a plane or in a trip in your car or various other scenarios.

So I think there is a lot of room and opportunity for what we can do and I think that the name West Bridge is a fundamental important thing basically if we look at its essentially an architecture that supports, the North and South Bridge combination in embedded system and that architecture is intended or is expected to be in the embedded systems for a long time pickup.

John Barton - Cowen & Company

And then Brad just briefly the transition of sell in to sell through in Asia if I remember correctly was about a $20.8 million adjustment in March was there anything that continued in June?

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

No not at all I mean everybody, we conveyed to everybody we've been the financial impact was gone and everybody going through and will recognize revenue a 100% on software.

John Barton - Cowen & Company

Final question, T.J. you made reference to addressing the internal stock option holders for posting, I assume you are referring to a write-down of the stock price, looking beyond this expense the Cypress in now standalone no position in SunPower is there any thing else with this option holders to take place as far as either a split a forced exercise or something that would change that share count substantially. A year out that we need to keep our eyes on?

T.J. Rodgers - Founder, President and Chief Executive Officer

No I deliberately picked towards news spend to the precise about the fact that we are not doing anything creative and vague about the details which we are still working on. So bottom line is two numbers out of the air which really Cypress starts from $20 a share $10 share. The day before and day after is some averaging period before and after the spin. And then there will be an adjustment in internal auction holders which will maintain the capital gains that hold... ahead of the full spin. It's reasonable and fair that the gross plans are not to do that. Our people commented that the company, they're getting options and the company spins out more than half of its value. And share prices are going to drop accordingly and their options need to be adjusted. So they stay whole during that time.

We do not anticipate to accelerate investing that is we are not going to give any wind fall as terms of stock coming more quickly to our employees. We don't want to lose our holding power we've got. But we are going to adjust the intrinsic value for and after the spin to keep them full.

John Barton - Cowen & Company

Thank you very much.

Operator

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

Sandy Harrison - Signal Hill Group LLC

Yes, Signal Hill. Thanks for taking my call guys. T. J quick question is as you go through the process of spinning out the SunPower and you heading down the trial with your program ability products. I mean one thing we haven't seen here is some of your entrepreneurial spirit on the sort of the core Cypress, what is it once this is behind you, what is it that you see sort of some next steps potentially to take advantage of not only what you've been able to do with the West Bridge architecture, but also some of... some of the other devices you developed?

T.J. Rodgers - Founder, President and Chief Executive Officer

Okay. I missed you in talking about that--

Sandy Harrison - Signal Hill Group LLC

In other words where have you got a jacket at lunch table that we're going to hear about in a year?

T.J. Rodgers - Founder, President and Chief Executive Officer

If I use two historical examples, that has been used for SunPower what I talked about picking up the solar company, investors were saying, man this is really bullshit. Now he has really gone off the deep end, not just faced up ... it's really strange passing this. And then... and that turned out to work out pretty well. But I'll remind you before that I talked about on the quarterly basis magnetic memories group grew eight or nine quarters at $53 million before. On the liability from cause because it is to full dug in the markets validating that plug volume was economically correct. We could have made it work, but we pulled the plug because as the technology became more and more limited by what we had to do to make it work, the money we could make on it going forward got less and less and then it finally pulled the plug.

So, synopsis is, I take a big risk when I talk only because... if talk really about something that works out. I mean you'll hear if I talk really about something that doesn't work out then, then I am a guy who's sort of speculating with shareholders money. So might... we wouldn't ask the same questions, what's to make SunPower and I don't have any answer to that. And is that quite possible on like thus far. There won't be one super ball and that was 1996. And that I will tell you about some cool shifts that we are working on.

Sandy Harrison - Signal Hill Group LLC

Like a master plan.

T.J. Rodgers - Founder, President and Chief Executive Officer

All right.There is another semiconductor called Business Cellular. And Business Cellular has unique properties when you run current through it, the current carries heat with it. So by moving an electron through Business Cellular, it carries heat with it. And/or alternatively if you supply heat to that semiconductor it creates electricity. So it offers a possibility of making a thermal or electric generator, something that would heat one side and cool the other side, power comes out, a sandwich.

The thermal electric generator is never been made on silicon on before. There is a possibility and I want to reiterate the word, possibility, that it can be made on silicon, in a cell. We might be able to get some power out of it. The current status of it is that I've got two very smart guys working on it and we sit in the boardroom about once a week and look at power point and talk about ideas and we have never yet made a wafer but I'm interested in that.

Another idea that comes... is coming up is also completely in the theoretical stage, is what I call a Solid state light ball. Where light emitting diodes have a life time that is 10 times longer than any other conductor of light. They cost more. You drive light emitting diodes with PSoC and power PSoC light emitting diodes. So the concept is actual inaugurating a power saving light ball on a piece of Silicon may be consolidated between PSoC and some power chips between PSoC and the wall socket there is possibility and in we can see the working with that again it's completely radical. And I have my fingers on three more things which are more speculative, I am trying real hard to buy some great idea. I'm trying to find a company that got big technology and its small scale and may be not so tightly managed, and see if I can run something else through the Cypress track. But that's a five year proposition. SunPower was a five year proposition, and first revenue of that marriage is 2003, and worked pre-revenue on those other ideas. We work on and that's what I do, Thursday's, that's my fun on Thursday on film, films mint money, I talk about concepts and technology on Thursday.

Sandy Harrison - Signal Hill Group LLC

Got you, and then, kind of, you've talked a couple of times about getting the percentage of revenues from your programmable products versus non-programmable upwards I believe, I believe you talked in about 70%, at some point, I mean where we today versus where you think we could be at the end of the year versus sometime next year ultimately.

T.J. Rodgers - Founder, President and Chief Executive Officer

Let me talk about the products we are trying to run up in revenue, and the first and most important category of programmable products is PSoC programmable USB product and a programmable parts, next category up is proprietary products which are made only by Cypress and therefore are subject not to socket comparable price competitions.

If you look at in programmable products are subset of proprietary products all of our programmable products are also proprietary. So if you look at that category, those are characterize our sales workforce. We get a design win announced [indiscernible] That category is up 75%, is that correct.

Unidentified Company Representative

76.

T.J. Rodgers - Founder, President and Chief Executive Officer

76% and the programmable products are at.

Unidentified Company Representative

Subset of the 76 51 gross point.

T.J. Rodgers - Founder, President and Chief Executive Officer

Is 51% sale. So I believe we can get programmable products in 50% 51% up for 70% and grow up to 80 plus over the next few years.

John Barton - Cowen & Company

And that's stopped T. J. at 45%.

The programmable was 45 in proprietary including programmable was 76. In both of them reserve moving node [ph].

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

Its Brad, just to put it in context I think PSoC one is it got many years by itself PSoC 3 and 5 that double our share this aim I mean I think between that West Bridge and then don't forget we have own assets in its early stage. Cypress System which is a whole lot of gain for us is just starting off I think we are going grow faster then the semi market for many, many years. Before TJ builds up the pipeline with other stuff, so from a financial perspective we are in extremely good shape from a long-term revenue growth rate.

Let me use few the question in the instead of top of my head. What's next? I discussed some things that are sizing on the concept, one of things is next and closer to consolidating into revenue unit values $200,000 quarter, is Cypress Systems and Cypress Systems is a company that makes environmental systems to basically save energy and what we are doing is taking Cypress technology of PSoC, radios and other things. And instead of selling things for what can have as it should were making little void, that are complete systems that, for example save energy in a building. And those little board sell from... anywhere from... $500 to $600 up to over $3000. And that business could get big for us. And that we launched a couple of years ago. So that's already from the [indiscernible] stage, in the early revenue stage, separate company, internal start up, Cypress Microsystems and embedded PSoC will predecessor and then think that will Cypress so the other two things that describe our ideas that we have to turn in to either divisional efforts or start up company within Cypress.

Unidentified Analyst

Got you, thanks a lot guys.

Operator

Thank you, Glen Yeung, you may ask your question. Please state your company name.

Glen Yeung - Citigroup

From Citigroup, you know TJ you have being this long time if we pick out for the moment you know things like PSoC and West Bridge and just look at sort of traditional Cypress business. With what you are seeing today. What's your sense as to where we are in the economic cycle, what you are seeing in your business today is your guy telling you that things are about to get meaningfully worse in semi there is some thing different.

T.J. Rodgers - Founder, President and Chief Executive Officer

No, if you want to take, if you want to take above as if the above weather in the ocean take ramps and more nominally that point semiconductor cycle again other night is semiconductor equipment conference in San Francisco. You want to talk about an industry that is really feeling good about the solar cells right now. That industry and when I look at ramps I don't see that news. I see 48% gross margin. That's typically what we stand during good times. And I don't hear about that book-to-bill. Now we got to limit our back, in some of our smaller competitors advantaged because we got a public years ago, that last man standing advantage works. But right now... like I said, I've got this paranoid where I come in the morning here, put on the radio and I come to work and everything's not bad. And I am having trouble putting those two things together.

Glen Yeung - Citigroup

Okay. Fair enough. And I had a question about your outlook for Q3. I know you are expecting all areas to be up. And I wonder if the specific drivers within each areas that are more driving this growth than others.

T.J. Rodgers - Founder, President and Chief Executive Officer

Yes I mean the thing incorporate rate is PSoC, in PPDS West Bridge, NVCD and again we still see some modest growth in MID after they had a really strong big bid. So nothing bizarre and I think again more impressive from a long run, I think all of the business groups are pretty much expected to grow in TCD including U.S. fees. So again, remember we get a normal Q3 seasonality and you are getting a lot of the build, for the holidays and all that fun stuff. Again I was very pleasantly surprised that we are able still close with that sequential growth rate after really 11% sequential growth rate in Q2 after you adjust it for the dusty [ph], still doing 69 which is really and generally probably a normal seasonality.

And a lot of these new products and in new design wins. I mean everything we are just talking about is part of our transformation for the last two years. It's just summing in the numbers.

Glen Yeung - Citigroup

Okay. And I wonder if some one could just give me an update on the customer concentration of PSoC?

T.J. Rodgers - Founder, President and Chief Executive Officer

Norm?

Norm Taffe - Executive Vice President, Consumer and Computation Division

How are you doing, this is Norm Taffe. Yes I can bring you up to date on this. That's also a something we feel is fundamentally going in the right direction. We still grow the business what is becoming less and less dominated by fewer very large customers all the time. If that some of the largest customers on a year-on-year basis are going down, while our overall sales are going up significantly. So from a standpoint of breadth, we are less concentrated now that we have been really since we start to really ramp about three year ago.

So we are still more weighted towards larger customers and I think our long term model we do about 25% of our business through distribution, long term that will capital business. But that steady growth underlying the PSoC growth just continues to be there every year and its now growing at the pace of our large customers. And that healthy both from a stability standpoint and a gross margin improvement stand point.

T.J. Rodgers - Founder, President and Chief Executive Officer

To comment on the new products and the average selling price, our average selling price for last quarter is about $34, and in the very same quarter the average selling price for new products I mean we define a new product is that which is been it's first good quarter that way. A new product ASP was the Buck 88 [ph]. So, these areas we're shifting our business into our raising our ASP. At same time in fact we are going to continue to be in our traditional business and take... make money it means we are going to run the company like any company pretty tight and lean. With the exception of course through ForEx and marketing applications on the programmable product side.

Glen Yeung - Citigroup

And Normjust to clarify your last comment about PSoC. If I look at it your Q3 growth, is it safe to say that a lot of that growth is coming from the non.... from our broad aspect from our customers....i.e. the customer's concentration getting better in Q3?

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yes, that's correct.

Unidentified Analyst

Okay. Great, thanks.

Operator

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

Adam Benjamin - Jefferies

Right, Jefferies. Guys not you have been through two quarters and your guiding out to the third quarter on PSoC, you previously talked about 20 to 30% year-over-year growth as a reasonable target. Do you mind narrowing that or least take giving some update on that range now?

Norm Taffe - Executive Vice President, Consumer and Computation Division

Yes, we are actually -- this is Norm if I look at it right now, we are looking at the low side of that, we going to... it depends on what happening Q4 we don't get back. In the quarterly basis Q3 was the best target on the year-over-year basis but we don't see that beginning half of this year we separately grow over that space. I said right now I said more on the 50% to 20% range. But we will grow year-on-year and I can repeat the comment the last call... last question you take out of couple of larger customers the broader base [indiscernible] and Wal-Mart for that range.

Adam Benjamin - Jefferies

So now it seems like you that the growth from Q2 to Q3 sequentially be stronger then Q3 to Q4, is that right?

T.J. Rodgers - Founder, President and Chief Executive Officer

What he said is Q3 this year and Q3 last year going to be with 30% that we are talking about any hedging on Q4 because of the visibility you show talk about before. And the primary reasons for that is why we are experiencing pretty rapid growth number of customers and the spreading of the business, however biggest customers are still buying from us but that business is declining, giving us the net growth rate, which is the less than the 30% we will experience year-on-year this quarter.

Adam Benjamin - Jefferies

Got you thanks. And then just moving to West Bridge, similar way that you gave targets on PSoC with West Bridge our performance in June I assume that... is going to continue for the back half of the year you care to give a rough range of revenue for that for the year.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

This is Dinesh Ramanathan and as last time we've basically said it was going to be between 40 and 50 and I had consistently maintained that I think we are going be closer to 50 this time.

Adam Benjamin - Jefferies

Okay, got you and than one of your big customers there you mentioned two one of which is people know about is RIM, do you mind give a little bit more details what you think you ship into their as percentage of their total units or which of the couple models that you are in?

Dinesh Ramanathan - Executive Vice President, Data Communications Division

So we have confidentiality agreements with our customers in terms of what we can tell you in terms of that percentage. I can tell you that we are in the new pool, lets come which is public information we are in the new curve that's come out that public information as well and those two are doing extremely well for them as a customers.

Adam Benjamin - Jefferies

Yes, and then just one last question on the gross margin, on the DCD side, you mentioned that, as per what you are think in the 50%, 57% range, you are going foreword longer term, and that it would increase in the September quarter, from the June period. Just trying to get a better sense as to, where that's ramped has that gradually been increasing, since late last year, when the product started wrapping or has there been some fluctuation due to the lumpiness.

Dinesh Ramanathan - Executive Vice President, Data Communications Division

We typically what happens is that a product essentially ramps, we clean up the funnel, make sure that our overheads are appropriately invested. So last quarter, the number was a little bit lower than what you wanted to and this quarter it's significantly higher. It's closer to the range number, that I gave you between 50 and 57 percentage points.

T.J. Rodgers - Founder, President and Chief Executive Officer

Yes I mean its probably one of our most successful products grow us some hitting the target margin right after that we've been real pleased where that's gone... it will move around with the mix and volume, volume pricing and we have got very good yields on it

Adam Benjamin - Jefferies

Hi guys, sorry, thanks again.

Operator

Andy Baker [ph] you may ask your question and please state your company name.

Unidentified Analyst

Hi, Andy Baker from Jeff Co. just question I am looking at the sort of share count actually there was a question I have said this before, when you talked about adjusting the option of guarantees the intrinsic value you can't just get there with reducing your strike rate you have to issue more option. I was wondering if you have any sort of thoughts on how much nothing more option, if you issue Cypress's options at all I guess another alternative is to give some SunPower options to the Cypress option holders as well I know I should have done in the past also one of crack some.

T.J. Rodgers - Founder, President and Chief Executive Officer

Okay, let me comment on that and we're going probably as far as I want to go on implementation details because we are still working on them but there is a theory for that and I can give you the theory.

You are right, you can't just suggest the option price, and you have to adjust the option count and when I to describe the spin its anything is done in more than 90% of the sense is in effect a stock and option spin that mirrors the price change. So, Cypress's shares dropping than 20 to 10 and the basically Cypress share price was down by factor of two during the spin then the number of options will be multiplied by a factor of two and the option price will be adjusted proportionately. So, its so like actual result you get more share at a lower price and the net value is constant and that's the way lower than 90% spins were done and we are intending to do just that.

Unidentified Analyst

Okay, so I just to make I am sure I am clear, if it going down by a factor of three your 23 million options that's tend to become $69 million options?

T.J. Rodgers - Founder, President and Chief Executive Officer

I don't have number 23 in my head but, yes it's is the factor three we must price on a factor of 3.

Unidentified Analyst

Okay, thank you very much.

Operator

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

Doug Freedman - American Technology Research

Amtech Research, thanks for taking my question guys, can you talk a little bit about the road map for PSoC, I know there are some new products in development and if you have any time lines for their release yet?

T.J. Rodgers - Founder, President and Chief Executive Officer

Sure, thank you for asking the question, because I forgot to talk about the some PSoC stuff. We keep focusing on PCP and on [indiscernible], where PSoC efforts in all those division. We introduce the product line for the PSoC which is important product. But let me discuss this, they can drive anything power [indiscernible] and other things. Let me describe since I used the example I am driving for light, I suppose light that I am driving for light emitting diodes chain that are light emitting diodes but they illuminate a room, it is typical system with using all PSoC and my four string of light emitting diodes, I have two big transistors one above and one below each chain, eight transistors that were changed.

These are power transistor, I would buy from the international rest wire to drive them. Behind those power transistors I would have a circuit break pulse that modulates that is turns on and off it's duty cycles to control them, typically that circuit will come from national semi makes probably the best one the linear manufacture, I have one of those chips with channel and behind that to drive the national chip and tell the national chip to turn on the 6% to 7% the [indiscernible] channel. I would have a micro controller and that becoming the macro chip would have all PSoCs all of is got power in it, eight of them to drive four channel, it's got the pulse rate modulators in it, actually superior to the national semi-conductors to the speed offering.

They have got the micro controller in it and it is not just the micro controllers, the programmable system on chip and then micro controller can actually with caps in has buttons. So power PSoC is a complete power controlling system on chip which, we also view PSoC as sort of puts your comps down on the board draw a circle inside it. Try to start off chips on the board in PSoC. This opens up that circle to include many integrated circuits, power circuits, power transistors and put PSoC in caps sense in the equation as well. That product as you seen this quarter.

Unidentified Company Representative

[indiscernible]

T.J. Rodgers - Founder, President and Chief Executive Officer

Tim, got introduced right now, guys. Sorry about that.

Unidentified Company Representative

That product is out and works, I watched it price wise and we will be introducing it shortly. We have a product called CapSense Express on the low end of PSoC you have the cheapest PSoC which is dollar part... and you control buttons with it or a slider which is nothing but eight or ten bucks, you slide your finger over them, you basically can control something in a linear fashion and we a very low PSoC that doesn't have all the functionality I just described, it just controls buttons, that product is a commodity product we want to hammer and make it super cheap and sell millions of units that product was in the SRAM group, in the MID group. So I proliferated PSoC beyond one division, because of my experience in the entire life of having a division competing in super aggression, a programmable logic division to competing against [indiscernible].

So this year, this time I am getting all of our divisions and their appropriate skill behind PSoC high PSoC. So that we are in a multiple R&D efforts and multiple group of markets in parallel group to which our new platform target as we can.

Doug Freedman - American Technology Research

And what is status PSoC 3 introduction, the higher power PSoCs?

T.J. Rodgers - Founder, President and Chief Executive Officer

PSoC 3 is first to define it a PSoC makes the micro controller better with 6 to 10 times more horse power. Make the analog better, make it much more precise, make it much more competitive, head on with the analog Videomax International. Make the programmable logic better, make the programmable logic on the thing equivalent to dozens of super POPs, also the PSoC. That's PSoC 3 and that's the factory and move the technology from 0.35 micron node to 0.13 micron node. I think described to answer your question is we wait daily for information of bit of paper out here. And that's really right on the edge facing it out. I would be surprised with the take out this week, I will be disappointed if you didn't take out by the end of next week.

Doug Freedman - American Technology Research

Great, moving on to another statement, looking at sort of, what drives some of the DCD other than West Bridge, what is your present outlook for sort of the networks spend, that's going to go on and the infrastructure spending for the back half of the year, what your customers telling you there?

T.J. Rodgers - Founder, President and Chief Executive Officer

Okay, so based on the customers that your are selling our comp parts and our plus parts to we are seeing fairly decent growth in those segments. And we think that portion of our business will actually grow and we will see good revenues and good gross margins coming from there. So that's the healthy portion of our business and will continue to healthy going forward.

Doug Freedman - American Technology Research

All right I am going to switch back now to a more piece out PSoC related market a little bit, there was some effort underway to trader our expand the touch control market after the going after some things in the no put market, any update on how those doing and what you are outlook there is?

Norm Taffe - Executive Vice President, Consumer and Computation Division

Hi, there, this is Norm again. We have solution where local partners there address some of the touch pad safe. We also are spending heavily, we talked about our investing heavily when we talked about today in touch screen space. Both of those are related technologies they can be under way effectively in PSoC. I think one of biggest core drivers we will see over the next year will be the up take of PSoC in touch screen applications specifically.

Doug Freedman - American Technology Research

Great. And my last question and I leave you alone. The USB what happen in the USB, USB wire list market? There had been some share shift in past, what's your present... if you can give us an out look on the ramp to get that?

T.J. Rodgers - Founder, President and Chief Executive Officer

USB continues to be strong this quarter as separate from the business with West Bridge where kind of put the USB in cell phone and it was showing extremely well. What we continues to see is strong market and part of the good growth we will see next quarter is being confirm our traditionally USB state. Both in the wireless and both the USB and also our high speed USB with it's new applications like a digital TV dangles, that are ramping significantly in China use our high speed USB programmer peripherals and it is a seasonal business and we do expect strong seasonal in that business in Q3.

Unidentified Company Representative

Commenting on USB in general, the USB infrastructure got clearance for PCs and it's got driven to very low prices. And with happenings now's rest of the world starting to recognize that you can get a 480 megabit per second connection very cheap. So USB is starting to proliferate, it's a business that's between a 120 and 130 million a year for us, with good margins and we are starting to see renaissance of USB and the other stuff.

In the last three days, two product I have seen here that were great when I give the talk at the conference that I thought same as the size of a credit card and USB coming out of it and that USB connected you up in section of higher solid state disc drivers, a pretty amazing product. I have seen a USB thing that works like USB with an aerial sticking out of it, that hooks up to your computer from the USB port and then we saw one coming out of China which is the being developed for the Olympics is you basically have a TV tuner that hooks up to USB chip because of the personal computer and turn the PC into a TV. So there's all kinds of applications that are starting to show up for USB, it is not a segment or a mature market and we are planning in growing that business which is the big business for us.

Doug Freedman - American Technology Research

Great and congratulation on the nice execution across all the product lines.

T.J. Rodgers - Founder, President and Chief Executive Officer

Thanks, Doug.

Operator

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

Suji De Silva - Kaufman Bros

Yes, hi, Kaufman Brothers. Nice job in the quarter, guys. So I just want to make sure, I heard the guidance for next quarter correctly, DCD and CCD up double-digits and MID up single digit, is that right? Roughly?

T.J. Rodgers - Founder, President and Chief Executive Officer

Sounds good.

Suji De Silva - Kaufman Bros

Okay and then what we are supposed to go by segment.

T.J. Rodgers - Founder, President and Chief Executive Officer

By division, is what you are asking for?

Suji De Silva - Kaufman Bros

Yes.

T.J. Rodgers - Founder, President and Chief Executive Officer

CCD was 1.1, MID 0.9 to and Data Comm 1.13.

Suji De Silva - Kaufman Bros

Okay. And I knows the gross margin are up, if I know that correctly, went up significantly, the other segment and it seems to have about a 1 percent impact in gross margin [indiscernible]. Is that bump-up stainable on what was driving that?

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

It's just around here between some of the ONS swiper systems that T. J. talked a little bit, really nothing big going on there.

Suji De Silva - Kaufman Bros

Okay. It's sustainable to keep it about 50% than Brad.

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

Yes, I mean looks like a very sharp shipping, just like every product you got a early margins that you get the ramp up it goes up enough at the same thing and those their margins will continue to go up to their respective models overtime, that I wouldn't look at the other as being a big thing because remember in Q2 the other big portion of the other that's going away as the SLM portion and that's the vast majority of the revenue and the gross profit driver there right now.

Suji De Silva - Kaufman Bros

Okay fair enough and then last question, I am sure reconciling the commentary, Brad and TJ with the terms of the feeling like your big cash flow and good uptake options in the absence the dividend, versus needing to sell some SunPower for the... to settle the bond, you just help me reconcile the thinking there?

T.J. Rodgers - Founder, President and Chief Executive Officer

Well Brad used the word flexibility, when he was describing it and specifically, based on our cash needs, based on how much the volumes tendered, based on what the bond price is, the bond could be very waived off, and we have to pay for it, we don't know, we may sell between 0 and 3 million shares at some part there's your number that you have been looking for.

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

Yes, part of material chunk in... its just an open issue we'll just see, so that the inverse we may... we will in a personally be reporting 41.5 million to 44.5 million shares of SunPower to our shareholders.

Suji De Silva - Kaufman Bros

Okay thanks and good luck on the spin.

Operator

Thank you, Robert Ruben [ph] you may ask your question. Please state your company name.

Unidentified Analyst

Yes, Forest Investments [ph], just continuing on that question I guess what you looking at regardless of what means you choose to tender the bonds, what is your thinking in terms of the dilutions of the SunPower distribution that you are willing to take on that? In other words would you take a point off of what the percent of SunPower share per Cypress share would be on the dilution in order to retire those bonds.

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

What premium would we pay in the market for the bonds.

Unidentified Analyst

Looking at the amount of the value of the SunPower share, I'll say its around 24% that each quarter of a Cypress share is going to receive in this spin. What are you thinking about a terms of year your budget for retiring the bond which would you be willing to take off of that, would you take a point of that, make it 23% SunPower shares versus 24.

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

I think, Robert, I'd look at it like, we are still deciding are we going to do the centers, to what degree, what amount, what price, it's a little pre mature, I know your interest in it, but we will just have to kind of finish or any outlook, we want to do, and will come up for the market at the appropriate time. Let me just give our mindset about bond holders, our company has funded itself for over a decade in the convertible debenture market, the money's always been there when we wanted it. So we will treat bond holders fairly on the way out.

T.J. Rodgers - Founder, President and Chief Executive Officer

But will be back and we don't want bad memory.

Unidentified Analyst

Thank you.

Operator

Thank you Thomas [indiscernible], you may ask your question. Please say your company name.

Unidentified Analyst

From Goldman Sachs thanks very much. Just a quick question, sort of a granularity of the commentary on spin timing. In the release you indicate you effectively given your self by the end of '08, and I think Brad in a conference in May, you indicated that relative to an announcement. You could maybe get the spin done within 90 days from announcement. If you like today's obviously announcement day, so how much leeway you guys are giving yourself with respect that year end timing and is it realistic to assume that we can may be get the spin by September.

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

At the end of the year sooner, I think again I am not sure some of the comments where you taking it but we have announced what we are going to do it. We will go by reduced stock and hope that get the board approval. So you are on the clock kind of ticking from then. So I think your 90 days is probably appropriate from wherever things melt down and the board does say go on, X, Y and Z.

So find a difference between them and there, we just need to make sure we are covering all the legal things, it's a big spin. We got great separation agreement suffered some prior that we need to get rid of. There chart had got already dozen different things that have about 10 to 28 steps under of each of them what needs to get done, employee benefits plan, get out of a bit distribution, its not your normal, someone's slicing off one tenth or one quarter of the company.

So, it's good in terms of time. We've got a list, that is the surprisingly long, nothing is hard. But it is surprisingly long and it requires a minimal of legal document and falling in the state of Delaware, having an attorney in Delaware, in addition to our team here et cetera. If all of that goes right, nothing messes up. A quarter and little bit can happen. So, we told you by the end of the year, we give yourselves some slack and keeps we just hung up..

Something would have to surprise us, if it beyond the end of the year.

Unidentified Analyst

Okay. Thanks very much and best of luck.

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

Thank you.

Operator

Thank you and our last question comes from Mr. Bob Sales. You may go ahead and please state your company name.

Unidentified Analyst

My questions have been answered, Thank you.

Operator

At this time, we are showing no further questions, sir, I will turn the call back over to you.

T.J. Rodgers - Founder, President and Chief Executive Officer

Thank you. We're wrapping up. Cypress has thus far a good quarter. We are looking at spinning off SunPower to shareholders and we're feeling pretty good about ourselves. Thank you very much.

Operator

Thank you. And this does conclude today's Cypress Semiconductor conference call.

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Source: Cypress Semiconductor Corp. Q2 2008 Earnings Call Transcript
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