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Executives

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

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

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

Cathal Phelan - Executive Vice President of the Consumer and Computation Division

Hassane El-Khoury - Executive Vice President of Programmable Systems Division

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

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

Analysts

Blayne Curtis - Barclays Capital, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

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

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

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

John Nguyen Vinh - Pacific Crest Securities, Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

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

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

Dale Pfau - Cantor Fitzgerald & Co., Research Division

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

Liwen Zhang

Cypress Semiconductor (CY) Q3 2012 Earnings Call October 18, 2012 11:30 AM ET

Operator

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

T. J. Rodgers

Good morning. We're here to report the third quarter and answer some questions. As usual, we will start out with our CFO, Brad Buss, talking about the numbers; and follow with our VP of Marketing and Sales, Chris Seams, talking about mark-to-markets and customers. I'll do a few technical odds and ends, and then we'll open up for questions as quickly as we can. Brad?

Brad W. Buss

Thanks, T.J. Thanks, everyone, for attending our third quarter call. Just a reminder that everything is based on preliminary unaudited results. Our Q will be filed in early November. We would like you to take a look at that and all the risk factors incorporated there within our press release, and we have full GAAP to non-GAAP recon in the release and on our website.

So I'm going to start off with a little housekeeping related to Ramtron. So the tender was successful. And on October 10, we took control of Ramtron with about 70% ownership. That's now gone up to about 78%. The tender is officially over. We've paid out $80.3 million so far in October, and we will begin to consolidate the results effective October 10.

There is a proxy statement that'll be going out to shareholders. That's basically a paperwork exercise to finalize the merger and then bring in the other 22% that we don't own. We expect all of that to be done and have 100% control of the company by the end of November, subject to any kind of regulatory review. And just as a note, all the current minority shareholders that are out there will receive the same $3.10 as everybody else.

We're just going through -- we've only been involved with them for just over a week. We're still poring through the numbers and beginning our integration process. So I'll give you an update from a guidance perspective with and without Ramtron, just so you can kind of understand the impact that Ramtron will have. And I'll explain some of the stuff that's in flux there.

So as we look at our Q3, which, again, has nothing of Ramtron in it, okay, just this -- it levels to everybody [ph]. We had revenue of $203 million. It was at the higher end of our guidance. It was up about 1% sequentially. As you can see in the release there, MPD increased about 6%. They had some onetime benefits in the timing group related to some patent sales, and they saw some increases in their Sync business. DCD decreased 8%. We have 100% of the end of life of West Bridge now through us. PSD decreased a little bit, primarily in the CapSense and auto area and it was offset by a slight growth in TrueTouch. PSD remains our largest division by revenue, and TrueTouch continues to be our largest product line by revenue.

By end market, there was really no surprises, and Chris will touch on that. Our direct sales channel increased slightly due to customer mix, and our distribution business was down slightly but still remained at 74% of revenue. Our historical largest customer continues to remain our largest customer. However, they're just under 10% of revenue versus just over 10% of revenue versus the prior quarter.

Our GAAP net income was $14.3 million or $0.09 per diluted share. That was a 200% increase from the prior quarter, mainly due to higher earnings and lower stock-based comp expense. Non-GAAP net income was $32.3 million. It was our best all year. It grew 7% sequentially and yielded us earnings per diluted share of $0.20.

Our Core Semi business, which excludes the impact of our Emerging Tech division, resulted in $0.23. So the Emerging Tech division, as you can tell, cost us $0.03. I was very happy where the quarter came in, considering it's a pretty gnarly macro environment out there, and again, we demonstrated very good leverage, growing earnings at a far greater rate than sales.

Our non-GAAP gross margins continued to hold in well. We came in at 57.1%. The core semiconductor margins, again, which excludes the Emerging Tech impact, was a strong 57.8%. Utilization in our Minnesota fab was around 81%. That was down from Q2. And obviously, we're managing wafer starts with the level of inventory and bookings in the quarter. I'd expect utilization to go down slightly in Q4.

Our non-GAAP operating expenses of $80.8 million decreased 3.5% sequentially. It was below guidance, and it's the lowest level we've seen all year. We had a few onetime expenses that won't repeat. And again, I'd expect OpEx to decrease again in Q4, even as we start some new projects. We're very focused on OpEx, as you all know, especially fixed costs and especially in this kind of crazy macro environment we're in.

Our OIE was a loss of $1.2 million and if we -- we had nominal interest income on higher cash balances, offset by the interest expense from the revolver, which I'm sure you're all aware of. The non-GAAP tax expense was $2 million or about 6%. The percent's higher than normal but it's basically the tax expense is fairly flat, and it's now just spread over a lever -- lower revenue base.

On the balance sheet. Cash and investments totaled $219 million. It increased about $9 million from Q2. Approximately 60% of the cash is onshore. We had a very good cash flow quarter. We generated $58.1 million in cash from ops, which equaled 29% of revenue, and our free cash flow was $52.6 million, again the highest for the year, even in a pretty soft revenue quarter.

We took out 7.3 million shares in the quarter for $81.6 million. We have approximately $121 million left as of the end of Q3 for additional repurchases. And so far in Q4, under 10b-5, we've taken out another 2 million shares.

In Q3, we paid a dividend of $0.11 per share. That totaled $16.7 million. And again, that was only 31% of our free cash flow for the quarter, so a very manageable payout ratio. And we just paid our Q4 dividend today, again, of $0.11 per share, and that was $16.1 million.

I think we've got one of the best return to capital strategies in the industry. We're very proud of what we're able to do. And more importantly, we have the cash flow and the balance sheet to continue to execute that strategy in 2013 and beyond.

Regards to inventory. Again, we decreased it by $2.1 million or 2% from Q2. And again, within that $89.3 million of net inventory, there's $3.5 million related to capitalized stock-based comp and $7.1 million was for last time inventory build. So if you truly look at the real operating inventory, it was around $78.7 million for 82 days, and we have plans internally to continue to take that down over the next quarter.

Our disti inventory increased 15% in dollars, but only 8% in units, really just due to the mix of the products that they're purchasing, and we saw increased inventory levels at the global, as well as the independent. The weeks of inventory increased to about 7, which is kind of in the middle of our desired model of 6 to 8 weeks. This lead to an increase in the deferred income, which you can see on the balance sheet, of almost $20 million. And remember, we don't recognize revenue into the distis that resold the product to the end customer. So we don't benefit from shipments into the distis.

AR was in good shape. It was down $1 million. DSO was down another day, and our aging is very good.

Debt is $198 million on a revolver. We took another $45 million down. We have all the cash we needed on the balance sheet at the end of the Q3 to fully pay for Ramtron, all the transaction cost, integration cost, et cetera, so I don't see any need to draw down on the revolver for Ramtron at all. And there's $232 million left on the revolver. And all of our standard covenants are in good shape, and I see no issues going forward with that.

CapEx was $5.5 million. Depreciation was $11.8 million. Share count, we made good progress there. The weighted basic shares came in at $147.7 million. That was the lowest level in over 3 years. And our fully diluted shares were $161.6 million ago. Again, that's the lowest level in 5 years.

Like I said, we took out 7.3 million shares. That was about 5% of the outstanding shares in the quarter. And we ended the quarter at 145.6 million basic shares, and I'll expect that our basic and fully diluted will go down again in Q4.

So now I'm going flip to the guidance. And this guidance I'm going to give you is without Ramtron, so that we can kind get a baseline set for the core business pre the acquisition. So obviously, the macro is still pretty shitty out there. You're hearing that from a variety of customers or competitors. We're hearing it from our customers and our distributors.

Our book-to-bill was at 0.81. It was lower than Q3. It was the lowest all year. We're 77% booked, again which is slightly lower than normal. So we're expecting a range of revenue of around $186 million to $192 million. That's down 5% to 8%, and that's slightly lower than our normal historical average for Q4. We expect all divisions to be down sequentially and TrueTouch to be our only major product line that will grow in Q4.

We expect to be able to keep consolidated gross margins flattish around 57%, give or take a little bit. Obviously, the core business are around higher than that. The Emerging Tech, I continue to expect to be slightly negative, and that'll obviously vary with mix, reserves, et cetera.

OpEx will go down. I expect to be in the range of $78 million to $80 million. We're going to have lower variable comp costs. We're going to have our standard Christmas shutdown, and again, we're very focused on managing the OpEx.

Net interest income will be about -- I'm sorry, net interest expense will be about $1.5 million. The minority interest benefit will be about $400,000. The tax rate for Q4 should be around 4%. CapEx of $8 million to $10 million as we'll have a little more spending for DecaTech. Depreciation would be around $12 million, and I expect the share count to be around 158 million to 160 million, probably closer to lower end. If you mush all that together, you'll get non-GAAP earnings per share in the range of about $0.16 to $0.18.

Okay. So now I'm going to go over and give you some guidance on Ramtron that you'll need to add the 2 of them together. So we expect to close the merger in late November and then have 100% control. Between October 10, when we take control, and the merger closes, we'll have a minority interest stub period that'll get factored on the results.

I expect to see about $7 million to $10 million on a GAAP basis only for severance, transaction costs and anything else that pops out of the woods during the integration. If you look at it on a non-GAAP basis, as far as their continuing business, we're expecting a revenue contribution of approximately $3 million to $5 million.

Now that's a lot lower than their normal historical run rate for a couple of different reasons. One, we've got the stub period in there. Two, they have softer bookings like everybody else. And more importantly, they recognized revenue to all of their distributors on a sell-in basis, and they've got a lot of inventory already in their channels. We're going to begin to recognize revenue on a sell-through basis.

So for this quarter and probably Q4, the only revenue we'll be able to recognize will be direct OEM sales and any shipments to distis that also sell through in the quarter. So hence, that reason, we do expect, once we go through the transition, to run back up to a normalized revenue run rate.

OpEx will be about $6.5 million to $7.5 million, and again, that'll drop much lower once we finished the integration and go through the headcount and various other expenses. I would expect that to drop significantly beginning in Q1. And thus, it'll be dilutive to earnings, as we expected, by about $0.03 to $0.04 in this quarter, and we expect to become fully accretive to earnings and EPS beginning in early Q2.

All right. And I'll just wrap it up there, and I'll turn it over to Chris and then to T.J.

Christopher A. Seams

Thanks, Brad. A few indices and then some color on what's going on in our end market segment. Revenues splits by geography, no big shifts. Asia Pacific remained number one, up slightly to 60%. Followed by North America and Japan, both at 15% of our revenue. And Europe was in fourth place there at 10%.

Unit shipments were almost flat, down 1 million at 168 million units for the quarter. In the pricing, the environment continued to show what we see as expected reductions on a part-by-part basis, while you see that the corporate average selling price actually went up $0.02 to $1.21, really, from a more favorable product and customer mix.

From an end market perspective, our largest end market segments remained handsets, industrial, comm, computation and consumer. Given that the revenue was just slightly up during the quarter, we had some gives and takes there in terms of growths or declines. Three of our segments grew slightly, computation consumer and comm, and handsets and consumer declined slightly to offset those. Looking forward, we think that all of those end segments will decline slightly in the December quarter.

Given the current weak economic environment that Brad described and the fact that we have record low lead times, we aren't getting much visibility for extended backlog at the moment. And as Brad talked about, our corporate book-to-bill was below unity for the second consecutive quarter. Let me give the 3 divisions because you usually ask me that question: MPD was 0.75; DCD, 0.81; and PCD, based on what Brad talked about with touch, 0.83 was the highest of the 3.

Our booking patterns in the first few weeks of this quarter support our guidance, but I talked about we're not getting very much long-term visibility because of the short lead times. And the fact that we see that there aren't very many cancellations and pushouts gives us some confidence that the customers are booking what they need. They're managing their inventory, but they're taking advantage of the short lead times.

Now let me now turn the call back to T.J. for some other highlights on the quarter.

T. J. Rodgers

Okay. Cypress shipped its 1 billionth capacitive touch-sensing unit. Capacitive touch sensing includes the most well known, the touchscreens on cell phones. It also includes capacitive buttons that are on pretty much everything. We crossed the 1 billionth mark last quarter.

With regard to touch, one other point, we currently have 47 issued touch-related patents and 200 more in process. The reason I give that patent data, which I usually don't talk about, is that if you look at the cell phone world, there's lot of litigation going on in that area. It's a hotbed. And the point is we've been there for more than a decade, and we are very well protected on IP. Look at it from a positive perspective, we are able to license our customers in a way that they are protected by buying our products, and we can tout that as a selling point relative to our competitors.

Tesla is the electric car company in California. Their newest car is the Sedan Model S, a long-range, high-performance car. The thing is controlled -- if you get inside of it, it's a unique automobile. If you get inside of it, you're looking at a 17-inch touchscreen, a big one, with all the controls, electrically controlled. That's our touch chip in the Tesla.

We got a design win, a big one, in a premium cell phone company called Pantech. That's important for us because Pantech is #2 in Korea, next to Samsung, the unnamed customer that was almost 10%. So we're penetrating Korea pretty well with touch.

We have a technology called MFi, because we don't call it that, Apple calls it that. It stands for Made for iPod | iPhone | iPad. And the deal is all of those platforms have a 3010 plug on them, which is standard. And Apple is creating -- and if you've been to an Apple store, you've seen this stuff, an ecosystem where you can plug stuff into their system, into their iPhone, for example, and make a product that is an MFi product.

For example, you can plug in a device which has the blood pressure cushion on it and the iPhone will turn into a blood pressure meter. The advantage is that the iPhone has got state-of-the-art power system with lithium-ion batteries, a good power system. It's got a super high resolution screen. So somebody making a product that may or may not be able to afford, all of the power system and nice visual display that's in the Apple, they now can make something that's a pretty sexy product and lean on Apple for those -- that overhead structure.

This quarter, we had 2 design wins in that area. TEAC, it's a Japanese company. They produce the digital stereo recorder for Apple. And another one that you've not heard of is a company called Griffin. I mentioned it because it's a trend right now. We have 3 wins there: one called GuitarConnect Pro, one's called StudioConnect and one is called MIDIConnect. MIDI stands for music instrument digital interface. It's a standard.

The deal is that -- we all know that the iPhone, iPad, iPod play music well, and they store a lot of music. What's happening now is reverse. They're becoming studio quality recorders for musical instruments. The iPhone is -- all of the 3 have excellent sound capabilities, studio-quality sound capability. And the music industry is realizing that they can put -- literally put a studio-quality recording studio into an iPad, for example, and put in custom controls for it. We have a chip for that. If any of you e-mail me at tjr@cypress.com, I'll send you some information on MFi. And compare it to that of our competitor, there's only one competitor out there, and we feel we have an advantage.

Another chip that's a hot chip for us is called FX3. That is our name for the USB 3 chip. USB 3.0 is the newest form of USB. Everybody knows about the USB port on their computer. It's a 480 megabit per second port that actually will do about 380 megabits per second. It's a -- more than a decade old. And although at 280 megabits net sounds like a lot, it's not. USB 3.0 is 5 gigabits per second. It's starting to take off. The first Intel computers that have the USB 3.0 plug on them -- it's the same plug. The USB 3.0 is compatible to USB 2.0. You can just get higher bandwidth through the same form factor plug.

The first application that appears to be taking off is video. Video never fit on USB. The demands of transferring video always exceeded what USB could do. So that led to an entire industry. I was on the board of a company called C-Cube, which no longer exists, is work on video compression.

Video compression would take the video signal, let's say, standard definition TV signal at 270 megabits per second, and compress it down to the picture would go at 5, let's say, megabits per second. The problem with video compression is it's complicated. It requires an extra chip. And those little raggedy edges you see or the little ghost things when somebody moves around quickly across your television, those are artifacts of video compression. The world has decided to get rid of video compression in the USB 3.0 era and just blast on through a 1.2 gigabit per second high-definition image right on USB 3.0.

Therefore, the 2 design wins we're talking about really are a harbinger of the future. They're Himax Imaging, an image sensor manufacturer, and YUAN, a leading Taiwanese audio/video equipment manufacturer.

We've added Tokyo Electron Devices as a distribution partner in Japan. Tokyo Electron Devices distinguished itself by becoming an early pioneer of the distribution of programmable devices, which, at the time they took it on, were new and risky, especially in the Japanese market. They specialize in industrial communications and consumers. So they have a little bit different focus than our other distributors in Japan, and they have been franchised to sell our entire line.

We talked about Ramtron and what we expect for it. Let me just give an overview on why we did it and what our intent is. We have a small nonvolatile SRAM division. Nonvolatile SRAM is a static RAM, which is a very high-performance memory, which, when the power is turned off, can store data. It's different from the nonvolatile memories that are used elsewhere to store data in that it is a high-performance memory, computer speed memory and also nonvolatile. That business is subscale for us, but it's highly profitable. It makes about 30% pretax, and we desired to expand that business.

We looked at Ramtron. They have a good nonvolatile SRAM technology, and we were aware of their products because we saw them in the marketplace. And we decided to expand our business by bringing in Ramtron. They were suffering, for one reason, because they were trying to support an entire public company overhead and a -- on a smallish company with $50 million, $70 million a year. We will be able to eliminate that overhead as a synergy and expand the size of our highly profitable nvSRAM position and become the largest nvSRAM maker in the world.

We have a new Executive Vice President. His name is Hassane El-Khoury. He's been here since 2007. He's the guy that designed the chip into the Tesla and other automobiles, Volkswagen, Mercedes, et cetera. He's been a successful business unit manager for -- which, for us, is one notch down from division, and he's been promoted to take over the Programmable Systems Division, PSD, which is the division that contains PSoC.

The prior manager of that division, Dinesh Ramanathan, has over 20 -- prior Cyprus senior executive, has become the president of a startup company here at Silicon Valley. Dinesh is now a gallium nitride guy. We wish him luck since we might even partner with them on something.

I'd like to make one other comment on costs. Our OpEx is $80 million this quarter. And as you know, if you look at our OpEx line, we've been cutting our costs consistently over the years. We have 2 very focused programs to cut cost. We thought -- every time we think we're done, we peel a layer of the onion and surprisingly find another layer in the onion.

One of our methods is called direct -- direct Hiring Auction. In that, we have a rule in the company that when somebody leaves, they're not automatically replaced. The position and the money for the position comes into the executive staff meeting, and we have a "auction" in which the division managers make their case why that position should be in their division, why it's critical. And we look at what's the best for Cypress, and then we aim the money in that direction. Interestingly enough, you would think that we would be depleting the ranks down below us. We have -- our turnover rate is about normal, but it leads to about 7 people a week for our 3,500 employees.

It turns out that we rarely get a demand to replace people. And over the last 2 years that we have been using the system, we really resculpted the company by taking away from what, in effect, was overhead that we didn't know was there and moving it into the most important position for the future. That's system number one.

System number 2, we dubbed World Class Cost inside. One of our directors, Dan McCranie, is also a former Cypress Executive Vice President of Sales and Marketing and is now the Chairman of ON Semiconductor and Freescale, both of them chip companies that spun out of Motorola, pushed on us to name a senior executive to work on costs. And I'm talking about hammer on cost the way you'd hammer on any organization, not just be cognizant of it and be careful when you sign the purchase orders, but really look at structural cost, closing of offices, consolidation of groups, the -- what we do with inventory, well, how we monetize inventory that is obsolescent, et cetera. We brought in Peter Mitchell, who used to run Fab 4 for us. We brought him back. He had retired, and he's running that program for us. And that program is cutting a lot of costs for us.

So during these hard times, it's nice to have these 2 machines running inside the company that even though our revenue isn't what we would like it to be, we're still maintaining good margins as we get through this period.

We are now ready to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Blayne Curtis and please state your company name.

Blayne Curtis - Barclays Capital, Research Division

Barclays. Maybe just to start with the one area that is growing in Q4 is TrueTouch. Brad, you had some positive guidance last quarter. Clearly, everything has gotten weaker. I was wondering if you could just comment on the puts and takes as to what's -- if you can give any magnitude as to how much that business is up, one. And then, two, if you can just talk about the puts and takes in that business in the handsets as well as tablets.

Brad W. Buss

Blayne, let me turn it over to the boss.

Cathal Phelan

Blayne, this is Cathal. In Q3, it was modest growth, a few percent across-the-board, no particular area being stronger or weaker. In Q4, -- and I do expect tablets, e-readers to come on pretty strong and we're going to see close to 10% growth in that group, in my group.

Blayne Curtis - Barclays Capital, Research Division

Okay. And then maybe comment on your positioning in handsets. You had some ramps there that you're also hopeful of. How's that been trending?

Cathal Phelan

So yes, that's a very good question. We're seeing a lot of growth in the market in the low-end smartphones and the high-end featured phones and particularly in China. And one of our big pushes is in that area with our Gen 2, Gen 3, Gen 4 product driving what we call our low-cost, single-layer solutions, which is absolutely actually perfect for that market. So we're seeing a lot of design win activity in that space. A little bit of revenue coming in, in Q4, so that would be more of a Q2, Q3 next year, when we see some growth in that.

Blayne Curtis - Barclays Capital, Research Division

And then maybe a question for Brad just on the gross margin, guiding at flat at 57%. You saw a big step-up in the memory margins. Is that the new level? And can you just talk about in PCD, is that just volumes? Or are you seeing -- it has declined a bit. Is that -- is there any sort of mix or anything going on there?

Brad W. Buss

Yes. The PSD, again, like I said before, remember, they -- one of the reasons they're lower and the memory group is better is Dana's got the vast majority of his revenue going outside of the foundries. So most of the under-absorption in the fab is getting absorbed by the PSD group. That's been really the biggest thing. We have a few mix and inventory-related things like normal. But that group will benefit once that fab is full and we start doing more through the foundry partners, much like with the trend in the mid to latter half of 2011.

Blayne Curtis - Barclays Capital, Research Division

Okay. So the MTD margins can sustainably be at this level?

Brad W. Buss

We like them being in the low 60s. I mean, I think that's a decent area, and that's where we're looking at. But we'll also look at trying to grow the business as well. Yes, I was real happy where the margins have been, considering the environment and the utilization of the fab.

Operator

Our next question comes from Doug Freedman, and please state your company name.

Doug Freedman - RBC Capital Markets, LLC, Research Division

It's RBC Capital Markets. Can you guys talk a little bit about what you're seeing from just -- you've talked a little bit about the customer base and the hesitancy. Can you talk about if you're starting to see any push-outs of projects, whether projects are on schedule, and what the reaction in the marketplace is from your customers to the weak demand that they may be seeing?

Christopher A. Seams

Doug, it's Chris. From a design activity standpoint, we don't see any abatement in terms of people trying to design their way out of this current environment. In fact, everybody's trying to probably put more pressure on innovation and driving their market shares up while the overall market's not growing. So in terms of design activity, it's unchanged. In terms of what we're seeing with customers' end products, obviously, they're selling less of those end products than they had thought they would because of the current economic environment. So on a per-design basis, we're getting less than we would have expected or historically had. But in terms of number of designs that we're involved in and supporting, it's probably higher than we've been in history.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Can you give us a metric on what you've seen for the toolkit for PSoC, the PSoC 1, 3 and 5? Is there sort of a download number or some sort of a metric that we can track there?

Hassane El-Khoury

This is Hassane. I run PSD. We're still seeing very strong growth in the metrics that we track, which is primarily downloads of our new software creator, PSoC creator, as well as -- complemented with a very strong push with the kit sales that we also track. Both of those and our strong funnel are very positive signs for us.

T. J. Rodgers

Yes. All of them have been hitting our internal target for the last few quarters, which is great from a funnel perspective. I mean, the revenue ramp there has been slow, but he is definitely growing and bringing in a variety of new customers, literally every quarter. And that's one of the areas, even with the shitty environment that's out there, that's growing sequentially. And he you should outgrow the market by factors, obviously, off of a smaller base but -- for years. I mean, we don't need that TAM to grow at all for him to grow, and he is seeding that field right now.

Christopher A. Seams

Doug, let me just give you a few numbers because I think you were maybe looking for some magnitudes. We shipped over 10,000 PSoC 3, 5 kits to date. Hassane's customers have downloaded almost 8,000 downloads of this new software last quarter, and there's 34,000 downloads for PSoC 3 to date.

T. J. Rodgers

One of the things we're doing in the software. I'm not a software guy. I have a colorful story I tell about how I once had a class that required me to learn some assembly language, which is the most primitive, close to the computer-type software, when I was in graduate school at Stanford, and that was a traumatic experience for me. But when you start to have about a 30 of your engineers be software engineers, you realize that you're starting to convert to being a software company. We promoted the best software person in the company, who was a senior manager, a guy named Alan Hawse. He's now Executive Vice President on the staff. And we now have the leadership in the boardroom in software. One of the things Alan has done for us is he's looked at our PSoC Creator software, which is a designed software, the so-called Integrated Design Environment. We can design a chip and the software. It can come at [ph] inside of a -- inside of PC. And Alan started looking at the feedback from our customers. We've made -- in the last quarter, we released a new release of the software with 100 improvements. And we've taken our Net Promoter Score, which, for those of you who understand, Net Promoter Score is a score that can go from minus 100% to plus 100%. To give you a calibration, United Airlines is around 20% and Apple Computer is around 70%. And we've taken our Net Promoter Score on our creative product from -- in the 20% or even below 20% range up to...

Hassane El-Khoury

40 plus now.

T. J. Rodgers

40-plus percent. And we will not stop until we get to 60%. So right now, we're starting to focus on software. We're starting to focus on software as a method to gain customers, and we're doing it with the structure in the company, not just good intent.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Great. If I could just ask one more. Win 8 introduction happening later this month, USB 3.0 attached to that, touch attached to that. What are you seeing as far as that having any impact on your business?

Cathal Phelan

Doug, this is Cathal again. Actually, from my group, which covers CapSense, touch, Trackpad, I think the most interesting activity that we have is in the Trackpad space. Win 8 is driving a lot of touch activity, and I think the connection with the Trackpad will be strongest. So we've actually achieved some Microsoft certification, a couple of designs in that space. And our true pure touch, I don't think it's going to really matter as much. I can't talk about USB 3.0, but I'll let Badri talk about that.

Badrinarayanan Kothandaraman

My name is Badri, and I run the Data Communications Division. So basically, Intel introduced their Ivy Bridge chipset about 4 months back, and that is going to drive more laptops shipping with USB 3.0. We are peripheral driven. Cypress has FX3, like what T.J. talked about, that talks to the host in the laptop, and we expect more and more of those laptops to proliferate in 2013. So we will be compatible with Windows 8, and we will basically be able to hook up to the host. So I expect that to be increasing in 2013 and go forward.

Operator

Our next question comes from Betsy Van Hees, and please state your company name.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Wedbush Securities. I was wondering if you could -- you talked about revenue being down in the core business with the exception of TrueTouch. Could you walk us through each division and give us a sense of how we should be looking at it from a modeling purpose? What percent it's going to be down quarter-over-quarter?

Brad W. Buss

We don't usually go down to that level of detail. I mean, I think -- like I said earlier, I mean, pretty much all of divisions and all the product lines other than touch. I mean, there's not one division that's down a dramatic difference from anyone else.

T. J. Rodgers

Yes. I'd say for your model, if you took our guidance, 5% to 8% down for the quarter and just did it across the divisions, you'd be pretty close to correct.

Brad W. Buss

Yes.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Okay, T.J. And then in the Memory division, revenue was up quite a bit, and I might have missed this if you explained this. I was wondering if you could talk about why revenue was up so much in that quarter, and then if you could update us possibly on what was happening with GSI losses?

Dana C. Nazarian

Yes, Betsy. So there's 2 reasons why it was up. The primary reason is we did a pretty significant onetime patent sales in the division. But even excluding that, we were also up a little bit. And that's a reflection of just continued market share gains, particularly as Samsung has almost completely exited the market now. And with respect to the -- your second question was on GSI?

Betsy Van Hees - Wedbush Securities Inc., Research Division

Yes.

Dana C. Nazarian

Yes. With respect to GSI, as you know, the -- we expected a decision originally in July. That decision was postponed because the ITC got backlogged. But the new deadline for the ITC to give a decision is 10 days from now, October 25. So we're fully expecting positive outcome on that date.

Christopher A. Seams

Yes. That could come down any day, but that should be the latest date. And I think it's right before GSI's earnings release.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Yes, very interesting timing. And then last question, Brad, housekeeping. So you mentioned gross margin was going to be essentially flat, and you didn't give us anything for Ramtron. So I would imagine that you're not going to have any type of an impact to gross margin from Ramtron, it's going to be between...

Brad W. Buss

Did I not give it? It's -- I mean, it's going to be around 35%. And again, mostly because there's some fixed overhead charges and other things that we're taking during the transition. I'd expect that to run back up into the low 50s, where they've been, once we get through the transition.

Betsy Van Hees - Wedbush Securities Inc., Research Division

Okay. And then as for -- so obviously, it's going to be diluted by $0.03 to $0.04 this quarter. And then as we look at Q1 and into next year, we can expect it to be breakeven in the first few quarters to accretive as we get to the back half of the year. Is that how we should be looking at it?

Brad W. Buss

Yes. I think that could be accretive in Q2. Q1, we'll -- we're still going to be going through the transition with their channel and some manufacturing stuff and finalizing all the people, people adjustments in that. So I'd expect that -- the Q4 to be the highest. It'll get better in Q1. It'll become accretive in Q2. So pretty standard, I think, what you see for most companies. It usually takes about 2 quarters.

Operator

Our next question comes from Vijay Rakesh, and please state your company name.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Yes, Sterne Agee. On the Ramtron side, just to continue on that same line. When do you expect it to come back to the normal quarterly run rate? I think they did like $66 million, $70 million annualized over the last 2 years.

Brad W. Buss

Yes. I mean, we'd hope to see that kind of closer in the back half of the year. I mean, they're getting impacted financially as well. They will put a 10-Q out. We're going through their numbers with them as we speak. They would have missed their numbers for the quarter. I think they're feeling some of the softness. And now that the uncertainties with the customer base are out of the way, we're looking to bring those numbers back up. But like T.J. said, the combination of our group and their group together, it'll be a very powerful combination, and there's going to be very good incremental earnings that come out of that.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

And that gets converted from a sell-in to a sell-through like your model, right?

Brad W. Buss

Exactly. That's -- hence, the reason that some of you are probably going, "Wow, that's a low revenue number." It's really because of that. We're beginning that full conversion. It'll take probably Q4 and Q1 to work it through.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Sorry, last question. When you look at touch, obviously, it was a tough year this year. When you look at next year, if -- assuming Windows 8 gives you some opportunity, it'll to be small overall. But assuming there are some opportunities there, how do you look at touch next year between revenues and pricing, et cetera?

T. J. Rodgers

Dana?

Dana C. Nazarian

T.J., thank you very much. I think we'll see something in the region of 15% to 25% growth for our touch business, in next year, in revenue.

T. J. Rodgers

That's subject to the macro.

Cathal Phelan

Yes, exactly. But I think we're very well positioned. Like I talked before, the low end of smartphones and the high end of featured phones is really growing very strong. It's a large number of customers. It's a very broad base of customers, and we're engaged with a lot of them. And there's a lot of design activity. So I really think we'll see decent to strong growth in this area next year.

Brad W. Buss

And again, Vijay, that's revenue adjusting for unit growth and any kind of ASP erosion, et cetera, et cetera, okay?

Operator

And your next question comes from Christopher Danely, and please state your company name.

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

JPMorgan. Just to follow up on the previous comment. Can you guys give us your outlook, or maybe give us a sense of what pricing in touch is like right now and then the outlook for pricing next year? Then if you could also give us your SRAM outlook roughly for next year in terms of share as well?

T. J. Rodgers

Christopher?

Cathal Phelan

The last couple of quarters, we've seen 3% to 4% ASP erosion per quarter. And I think that might be a point more in the next 3 or 4 quarters, but it's going to be in the 3%, 5% ASP erosion per quarter for touch. And as a company who does RAMs for 30 years, we know how to crank the handle, reduce costs and move forward.

Christopher A. Seams

And, Chris, the second half of your question was SRAM share, I believe. And we've been increasing 2%, 3%, 4% per year for the last decade, and that hasn't slowed down. And we really expect the same thing to happen next year.

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

Great. And then, Brad, just a question for you. If this "shitty environment" extends into the first half of next year.

Brad W. Buss

Did I say that?

T. J. Rodgers

Twice.

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

What can we -- so I guess it's really shitty. What should we be thinking roughly on how OpEx and gross margins will trend, if things stay a little bit sluggish?

Brad W. Buss

I mean, again, 2 of our biggest focus areas. I mean, I think the track record of what you saw on OpEx this year will continue to repeat. I mean, we're around 20% to 25% of our cost structure is -- it's somewhat variable, whether it's the comp plans or sales commissions, rep commissions, travel, yada, yada. So we'll continue all of that. We're continuing to still invest in key areas, particularly in our touch, Trackpad, PSoC areas. We're continuing to roll out products. But we're going to be vigilant, right? We'll keep our eye on things. Like Chris said, we do have a lot of good design traction and if that comes in. And a lot of these markets, we don't need the TAMs to grow, right, the PSoC 3 and 5, the Trackpad. Lot of these were kind of the new kid on the block. So as long as they stay where they're at, and even if they went down 10% or 15%, we're looking at eating into a lot of those and maybe at a slower rate than what we'd expect. But I think our cost structure and our future are pretty balanced. And you know us, if it becomes unbalanced, we'll take action where we need to. But we don't see the need to do anything drastic at this point.

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

Great. And that leads to my last question. So if I look at the balance sheet in the last 4 quarters, your net cash has gone from I think about $350 million or $360 million to maybe $20 million in net cash. you saw the pretty big buyback out there. You're paying a dividend every quarter. What can we expect from a spending net cash front? How safe is the dividend, buyback, all that stuff?

Brad W. Buss

The dividend rocks. There's no issue there. I mean, like I was saying. If you look at this quarter, right, I mean, it was only 31-ish percent of our free cash flow, right? So we have plenty of cash flow to support that. But the net cash position has really gone the other way because of the buyback, because it's part of our strategy to take advantage of this lovely stock price, as well as the Ramtron acquisition, right? So if you look at our cash flow and our cash flow expectation, we can continue to buy the stock. We can continue to do the dividend and even increase it, and then we'll start chipping away with that debt. But I'm very comfortable that we'll draw down on that debt over the next couple of years while continuing to do the return on capital strategy that's been a key part of our strategy.

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

So we should not expect the net debt position then?

Brad W. Buss

Over the long term?

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

No. Just, say, over the next year or so.

Brad W. Buss

The next year or so? It depends what we do with the stock. I mean, that's the magic question. But I wouldn't expect it to -- I'd expect it to only get better.

Operator

Our next question comes from Sandy Harrison, and please state your company name.

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

Yes, it's Wunderlich. We talked about touch, which, obviously, everyone's focused on and looking for. And if you listened to Intel's call early in the week, they talked about having the Ultrabooks, the number of SKUs coming out. I think the numbers they used were something like 140, with 40 of them having touch on that. That seems like a high number of a lot of units. How does that impact you guys? I mean, 40 new platforms with touch on it has got to, in some ways, translate to some decent opportunities?

Cathal Phelan

Actually, Sandy, for ours, we are not going to participate as much in the first wave as in the second or third wave, where we think the volume will actually happen, for the touchscreen side of that discussion. For the Trackpad side, like I said before, I think it will impact us some. But on the touch side, when you've got a screen that's 13 to 15 inches and the total cost to add touch to that screen is going to be $60 to $70 to the manufacturer, which means the customer is going to have to pay hundreds of dollars to pay for it, then I don't think it's going to take off that soon. I think there's going to be a very modest volume of touchscreens on notebooks. That's my personal opinion.

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

Got you. And then as far as the Emerging businesses, you guys have talked about some of the real opportunities there. I mean, how should we be thinking of the Emerging business as an asset and value it, and if you could maybe talk about some of what they're seeing in this tougher environment? Are then products and markets they're going after continuing, or are they seeing the similar lever of impacts of other segments?

Brad W. Buss

Yes, sure. This is Brad on that. I mean, again, we're very confident with that, and that continues to be one of the bright spots, I think, into next year. I mean, again, the beauty of both of them is they're into established markets with really growth and coming from a low base with some innovative solutions. So I'd expect to see very strong revenue growth year-on-year. And like I said, the goal of that group is to see that get close to breakeven, which I think there is the opportunity for that to happen in the second half of next year. So we'll lose the drag on earnings. From a cash perspective, that'll slow down and we should start getting some accretion out of them. So if I really look at it as they hit their stride and probably exiting next year into early '14, when it becomes clearer, I think there's $3 to $5 of hidden option value there that we're going to have to deliver on to allow you to feel comfortable in valuing that. But you do need to keep your eye on that, if you do need to really look at the core business, value that separately and then look at an option value that you're comfortable with when you're figuring things out.

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

And then my last one. You guys talked about record low lead times, and that's giving relatively limited visibility, although the confidence of what's going into the channels is being absorbed versus inventory. What turns that? What ultimately gets the visibility or gets lead times increases? Is it all just demand, or is it with fabs get throttled down enough that you got to turn them back on? But what should we be looking at for this to get this metric up again?

Christopher A. Seams

Sandy, it's Chris. Obviously, demand is going to drive it. The longer this, I'll call it, slowdown goes, people are going to adjust their factories' capacities, sometimes permanently or temporarily. And temporary in a factory is never switched back on immediately. So I think both things will start to happen. And whenever demand does start to tick up significantly, we'll see how far people pare it back and that's when the lead times will push out again. You're going to see for another reason, not external, our lead times go down. We have an internal program to get our lead times down on as many products as we can to 4 weeks. The reason is that our terms and conditions are -- they're standard. And they say that if you order from us, let's say, a quarter in advance, that order is on the books and cancelable until one month, which is the presumed period of manufacture. And once we launch the project -- product for you, then it's -- the order is noncancelable. Therefore, as one of our cost-reduction measures I talked about earlier, we're going to get our -- we're going to go into a program called BTOB, build to order and buy back. We're going to store our product at a low value point as wafers, and we are going to be able to serve our customers from the wafer bank in 4 weeks, so that we don't launch anything for which we don't have a noncancelable order to the first order. The reason for doing that is it prevents us from having to forecast. Our customers aren't any good at forecasting, and we're not much better than they are. And therefore, when we get to make something and forecast, inevitably, some of it doesn't ship, and it sits around for 6 months. And we have 4 different ways to devalue inventory. One of them is it's -- when it's 6 months old. So we have a drain on our earnings and cash. That's in the inventory in excess of what we really need to run the business. And we have a war going on that. That's going to be a big focus for us this year. So our lead times aren't going to be in and out based on is market good or bad this year. We've got an internal program that make them go down.

Operator

Our next question comes from Jeff Schreiner, and please state your company name.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Feltl and Company. I just want to circle back. We're at record low lead times. The visibility in touch over the last 6 months, obviously, could haven't been that good as it doesn't look that you achieved the 40% second half growth over the first half. So I'm wondering how we reconcile the guidance that was given for 15% to 30% growth in touch next year.

Brad W. Buss

I would say -- I mean, it's purely on the design funnel, right? If you look at the additional customers that he's added, which are pretty substantial, and obviously, we judge volumes in that the best we can. We don't tend to take what we see. We tend to judge it down. But I think really the expansion of the customer base, number 1. And then really number 2, I mean, we're coming off of a pretty tough comp year, right? In the first half, it was pretty tough. It's gotten a lot better in the second half. No, it didn't hit the target we were hoping. But I think the momentum exiting it and those new designs, I think we feel as comfortable as we can with what we know from the customer. And that's why we got we caveated it. I mean, if the world does slow down and even if the odd customer's phone is a bust or doesn't sell as well, we probably have the most breadth out of any guy out there right now and especially going into next year.

T. J. Rodgers

I think the -- overarching into answer your question is it's very difficult to forecast this business. It's a very dynamic business, companies spring out new cell phone models every 3 months, companies that are flying high one year can be on the edge of bankruptcy the next year, companies in China that you don't even know, you don't know their name, but who sell as an OEM to another company whose name you know and take off and become big volume. There's pretty tough competition, and companies will use the design win as inducement to drop price. Therefore, you can have a big design win and then the next generation phone get punished for not being willing to cave on price. So it's more the market that is the uncertainty. We know what design wins we're in. We get a 6-month lead. We can tell you the phone. I can even tell you the name of the engineer we've got at the company working on helping design the chip in. But after that, there's a bunch of stuff that is not predictable for us.

Brad W. Buss

Just with that, we've hopefully hedged a lot of that. But you don't know, but...

Christopher A. Seams

To be clear, Jeff, we said 15% to 25%, not 15% to 30%.

Jeffrey A. Schreiner - Feltl and Company, Inc., Research Division

Okay, sorry about that. And just a quick follow-up, though. It sounds like, Brad and T.J., in your answers that you're now admitting that there's a lot more competitive threats out there, especially I would guess, out of Asia. And when we look at the Asian growth and players like ELAN, EETI, Focal Tech. Focal Tech is growing at 3x over last year. And so I'm -- and none of the North American counterparts are really doing that. So have we seen a dynamic change now in the overall competitive landscape within the touch markets?

T. J. Rodgers

So a little bit but not nearly as dramatic as you're describing it. The Big 3, big 4 players that have been there for the last couple years are still the biggest 3, biggest 4. And yes, there are small guys coming up, very small base, who take 1, maybe 2 designs there. In the case of something like ELAN. And in the case of Focal Tech, yes, they have a broad number of interactions with customers, but in most times, when we are willing to support that customer, when we're willing to engage with that customer, and we will win the account.

Operator

And the next question comes from Ian Ing.

Ian Ing - Lazard Capital Markets LLC, Research Division

Lazard Capital Markets. This Ramtron acquisition, $3 to $5 option value, could you talk a bit about the medium- and long-term synergies potentially to help us understand in terms of maybe manufacturing operations opportunities for cross-sell integration of F-RAM into nvSRAM [ph]?

Brad W. Buss

So Ian, just a clarification, the $3 to $5, that was the option value on the Emerging Tech guys. That had nothing to do with Ramtron. I mean, I think there will be additional value from Ramtron, but we need to spend a little more than a week to kind of figure that out. But obviously, our base case during the acquisition, we saw it being very accretive to upsell the company, or else we wouldn't have attempted it. And as far as the synergies. I think T.J. hit it at the beginning. There's a tremendous amount of cost they have just being a public company, where this gets rolled into a product line as part of the division for us, right? So from a G&A end of it, the Board will be gone, most of the senior management's gone. There will be rationalizations in the sales and R&D channels as well. And then also, I think there's opportunities on the COGS line that we can help with our scale and our expertise as well because they had a decent margin profile. They ran in the low 50s before. And they were definitely paying more for wafers, and it cost them more to do certain things than combined with us. So I think when it's done, they'll go from a company that was barely profitable to making a little to losing a little to they should be well north of the 20%, 25% PBT line probably a year out from now, when we get fully integrated and start seeing some of the synergies. I mean, and we had a nonvolatile group that was there as well. So I mean, building, people, resources, a lot of things are very easily rationalized. Just going to take a quarter or 2 to do it.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay, I understand. And then this comment on design wins tending to bring in less revenue than in better times. Is that across the board between high-volume handsets and some of the lower-volume opportunities? Would that change your go-to-market approach, perhaps, more business [indiscernible] toward distributors or perhaps not pursuing certain applications?

Christopher A. Seams

Ian, it's Chris. It is widespread. Our biggest end markets are what I have the most visibility to. Yes, in terms of changing how we go to market, we've got to get more efficient. Just like we do on our internal cost, we've got to get more efficient on how we go to market, and that's how we have to respond to it.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then last question, the China market and helping drive this 15% to 25% growth next year, is that related -- sort of the top China OEM type of business? Or are you also addressing the white box market? And it's a tough market. They need a lot of easy turnkey solutions and close reference design partners. Perhaps you can talk about that.

T. J. Rodgers

Ian, it's actually both. I mean, we are engaged both with the top-tier guys and the broad -- with second-tier players. And they both drive revenue, and we know both groups.

Christopher A. Seams

And Ian, it's also 2 handset OEMs that supply that market that are not located in China but ship high volumes into that same end market.

Operator

And our next question comes from John Vinh.

John Nguyen Vinh - Pacific Crest Securities, Inc., Research Division

Pacific Crest Securities. Follow on to China smartphones. My question is can you help us understand what the pricing differential of kind of the ASP chips in the China market compared to your Tier 1 vendors? And then associated with that, how are you guys looking at kind of the gross margin profile for the TrueTouch business? Is there a slightly lower gross margin profile for these China smartphone handsets?

T. J. Rodgers

To the first order, I see no real difference. They tend sometimes to use a lower overall cost solution to them, which means it's more important to them to get one layer of ITOMs [ph] and use the 1-layer solution rather than the 2-layer solution, which is effectively cutting their costs by $1 or $1.50. But it doesn't change the controller's price. It's pretty much the same in both cases. And as far as gross margins for the near term that we can see and predict, I said it earlier, I continue to forecast 3% to 5% reduction per quarter, pretty much what we've seen for the last few quarters.

John Nguyen Vinh - Pacific Crest Securities, Inc., Research Division

Right. And then my follow-on is can you give us a sense of how you're looking at the mix of smartphones versus tablets and eReaders this year? It sounds like for next year, you're seeing a much stronger growth of the smartphone market, and how do see that mix changing next year at this point?

T. J. Rodgers

For this year, our mix pretty much reflects the market volumes, so we're about 10% dollars in tablets. And even though I didn't mention them, I think it's going to be about the same next year. I think our tablet volume will be -- the dollar volume will be about 10% of our revenue next year as well. Right, I just had mentioned -- I already mentioned the China one. We actually are seeing tablet growth, and we're also seeing digital film camera growth as well, where we are seeing a lot of activity.

Christopher A. Seams

Yes, we'll also see the auto stuff pick up next year as well.

Brad W. Buss

Beyond that [indiscernible] capital screen.

John Nguyen Vinh - Pacific Crest Securities, Inc., Research Division

Great. And then last housekeeping question. Brad, I don't know if you had mentioned this, but how do we think about kind of the normalized quarterly revenue run rate for Ramtron going forward?

Brad W. Buss

We need a little more time to get through it, John. I mean, they're feeling some of the headwinds. We have to look at customer overlap in that. It'll definitely be a nice jump for us. Give us a few more weeks to get through it, and I can probably provide more guidance.

Operator

And our next question comes from Steven Eliscu.

Steven Eliscu - UBS Investment Bank, Research Division

UBS. First question, just on Ramtron. They use some other foundries. Do you expect to bring F-RAM manufacturing in-house in the relatively near term, next year?

T. J. Rodgers

We haven't made a decision there yet. We do want to have 2 sources for manufacturing our memory. But as Brad said, it's been a couple of weeks, and we haven't even had our fab people there yet to start planning.

Steven Eliscu - UBS Investment Bank, Research Division

Okay. Another question on touch. Just specifically in the past, you talked about Gen5 controller. It's been over a year since you announced Gen4. And one of the things, if I recall correctly, that you talked about, making sure that you would get Gen5 early to market relative to where the product cycles are. Now you've also talked about putting resources on Gen 2, 3 and 4 into low end. Have you made the decision to refocus your efforts there rather than on a Gen5 controller, which presumably is going to address the Windows 8 markets?

T. J. Rodgers

Absolutely not. And we talk now about products, not silicon. And when we talk about enabling a product for our customer, it's via firmware, via system understanding. So it can go on a lot of our platforms. Gen5, as we have talked about previously, actually did sample already to a couple key customers, and we will go broad with this at the end of this year. But a lot of this firmware and features that we will bring in on Gen5, we're already showing customers on Gen4. So the capability that we've got is broad and is actually built on all our generations for silicon. So we're not just focusing on low, old silicon and old products.

Steven Eliscu - UBS Investment Bank, Research Division

And for next year, what percent of revenue will Gen5 contribute approximately?

Brad W. Buss

It's way too early to call. I mean, we're just starting the planning process, Steve.

Steven Eliscu - UBS Investment Bank, Research Division

Okay. Let me ask just one final question here on just M&A.

Christopher A. Seams

Let me give a little color on that. Gen5, it's been a success for us, and we're not saying that -- for costing sake, I guess, it'll be about $10 million. We'll have revenue this year. We'll get our first revenue in the first quarter. That -- I'll give you an answer on generations. We're trying now to change as we start shifting and thinking more about software than chips. In the market, we've also started thinking more about products than about chips. For example, glove, a capability that many companies want, so you can be in cold weather and use your cell phone and not have the glove render the touch screen not working. So we talk about glove, and we may put the glove product on 3 different generations of chips. That's why we kind of made the statement we did. But answering your question on a chip basis, Gen 2 is the chip that's got famous in the original iPod nano. And was a nice little touch screen, it's our lowest-priced product. And we're selling a lot of them, we're talking tens of million per quarter. Gen 3 was our big success that was in the heyday a year ago of touchscreens. And it was the best cell phone touchscreen chip available. It's being replaced by Gen4 as we speak. Gen4 is starting to ship volume. How many cell phones will have Gen 4 in the Mobile World Congress?

T. J. Rodgers

5 to 10.

Christopher A. Seams

So we've got 5 to 10 designs that exist, and have been debugged and will be shown in February in the Barcelona Mobile World Congress. So Gen4 is the one that's taking off like a rocket whereas the Gen5 works. It worked that we got it to market very much more quickly. We have an excellent design effort on it. And it's our future. It's feature is that it's a super low-noise chip. And it's also -- it's a lot -- it's more cost-effective as well. So that's a story based on the chip, whereas again we are shifting our thinking toward the customer product. And they don't really care what chip it is. They care if you can put your finger into it and the screen and get the screen to react. Wear gloves and do it, or run water on it and have it not -- have rain on it and have it not malfunction. So we're going to start talking about our products that way. And whenever we do that, it also means the low end wants the same feature as well.

Steven Eliscu - UBS Investment Bank, Research Division

Okay, that's really helpful. If I could just ask a question here about M&A versus organic growth with your Emerging Tech businesses, we've seen that you essentially shy away from M&A, except in the cases when we talk about more recently in memory, in nonvolatile memory. You've also talked about PSoC and including TrueTouch being your focus areas for growth. Do you think you may need to re-examine how you do M&A to be able to ensure that you could sustain some stronger growth in PSoC and perhaps put less resources either in acquiring memory or your Emerging Tech businesses?

Brad W. Buss

We want to grow faster. We're proud of the fact we're making good margins, that $200 million-a-quarter run rate. We'd just rather be smoking at $300 million a quarter and growing. The answer to your question is all of the above. We absolutely believe PSoC is growth-oriented and Touch is growth-oriented. We started the startups. The Emerging Technology division, as we call it, we started the startups, specifically to get one of them to hit, and the best case being have the SunPower force. And we've also started -- we've never stopped looking at M&A. But we -- as we were making a company more and more -- we were managing the company more and more carefully to improve our margins with what we've managed, what we've got better. We shied away from acquisitions because they tend to be pretty difficult, pretty disruptive. We're now looking a little bit harder at acquisitions. We acquired 24 companies in the 1998-2001 period. We have a system for acquisition. We have a specification for it. I'm talking a book-like specification with -- so we really understand how to acquire. And we're going to get -- we're going to look harder at acquisition. There's nothing in the pipe right now. I can't give you a name or even tell you that I can't give you a name, but we're looking at company X. But acquisition is going to be something we will look at in the future.

Operator

And our next question comes from Srini Pajjuri.

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

CLSA. A couple of follow-ups on the touch side. The 40% expectation and the actual delta that you're seeing, just wondering what happened. It does seem like the smartphone market is holding up fine. And also, the tablet market seems to be holding up fine. So I'm just wondering what the delta was.

T. J. Rodgers

So the 40% expectation was driven by design win activity across a broad spectrum of customers. And what you can't predict is who's going to win and who's going to lose in that customer space. And some of the designs we got didn't ramp as hard or as fast as we thought because the customers didn't do as well. We actually did grow reasonably well in the second half, but we didn't get to the 41% [ph].

Brad W. Buss

Yes, I would encourage that and then the other things. I think we're seeing some of the guys being cautious on their inventory exiting the year and trying to draw down their inventories a little more than what they and we probably expected to happen. But from a competitive, from a growth, from a new design end of it, it's worth that exactly and probably even slightly better than what we are expecting.

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

Okay. And then your largest customer, Brad, I mean, the question is -- and basically, the same question -- they seem to be doing extremely well, but at the same time they fell below 10%. Just wondering if this is due to share losses or price pressures or anything else going on there.

T. J. Rodgers

In the handset space with that customer, we actually saw an earlier roll-off of the Generation 3 products than we had expected by a few months, but our Generation 4 designs are very, very active and with Dell [ph] come back in. There may be a minor gap with a couple of quarters -- or a couple of months rather.

T. J. Rodgers

Yes, that's really what we're expecting to have to announce. They're a greater [ph] than 10% customer for a long time.

Operator

Our next question comes from Charlie Anderson.

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

[indiscernible] start with the 15% to 25% revenue growth in Touch. I think based on ASP compression you're talking about, that assumes somewhere in the neighborhood of like a 40% unit growth rate. So I'm just kind of wondering what you guys are expecting the industry to grow in 2013 and kind of what kind of market share gains you're implying there.

Cathal Phelan

And the overall industry growth is high single-digit across touch-enabled handsets, and thus, we expect to win reasonable share growth to compensate for the numbers you've just described, which you're about right.

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

Got it. And then a housekeeping question on MPD. You guys mentioned the patent sale. I wondered if you could give the amount of that in terms of the -- then we can also see the impact on gross margin. And any more color on what patents you sold, and to who and why?

Brad W. Buss

It was a couple million bucks. It actually was in the timing group, that's part of MPD. And no, we're not going to tell you who we sold them to.

Operator

And our next question comes from Dale Pfau.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Cantor Fitzgerald. Most of my questions have been asked, but maybe a question for T.J. as -- since you've talked to so many customers and you're fairly outspoken. Just have great themes on the macro. Could you tell us a little bit what do you think is the biggest impact here is, is it Europe, is it the slowdown in China, or is it really the fiscal cliff? So that we can try and get a gauge, if one of those things happen, how much of an impact does that have to your business? Which is -- which do you think is more important to your business?

T. J. Rodgers

You give me a lot more credit than I deserve. Just if I want to talk on the macro, I think, it's pretty simple. I think if we continue with the governments of the country, and I mean federal, state and local are consuming almost 50% of gross domestic products, almost half of every dollar that every man or woman makes in the economy, then the economy will continue to bump along the bottom. And we'll have sort of hollow recoveries like we have now, which still have a lot of people out of work. And I think that a lot of that hinges on the upcoming election. I mean, I kind of have a football mentality about it. I don't worry about the things I can't control, and I work inside to try to make what I can control the best it can be for the situation I'm in. Sorry, I couldn't give you any sure like an answer on that one.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Where are you focusing your energies then geographically?

T. J. Rodgers

That's easy. We used to sell our stuff in North America; and then there's some stuff that went to Japan, they were big; and then there's stuff that went to Europe, and they were never big for us. They were just like 10%. Even though they were bigger part of the market, they have their own chip companies, they bought from their own [indiscernible], they were like 10%. Today, we ship, if you don't count Japan, 60% of our stuff to far east, primarily China; and if you did count Japan, it's even higher than that, like 70%. So we're -- with our headcount in China is now over 150 and rising, we could design in China. We have apps engineers in China. We -- and we're trying to learn how business is done there. So that's a lesson. We talked before about pricing here and pricing there. The fact is if you take my analogy solar, the fact is they crank a lot of solar in China, and that sets the price worldwide. And that's true for cell phone chips a well. So the pricing gets set at some base level, which is sort of your China-based good-enough product, and you know some of those companies. And then you engineer and make your product better, you engineer and make your quality better, and then you go and get another dime. And because your product is better, you can offer advantages. And you got some stability that kind of maybe the other guys don't. That's the name of the game right now in the semiconductor industry.

Operator

And our next question comes from Sidney Ho.

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

Nomura Securities. So the mix adjusted and excluding Ramtron, how should we think about seasonality in Q1? And just want to see if you think there is an over-correction in Q4 do you think, as you're really shipping to end consumption, or maybe is it too early to tell?

T. J. Rodgers

I think it's too early to tell. I mean, we're still trying to figure it out. The lead times are way too short, and we're -- like I said, we're going through the planning process as we speak. But to be honest, when we get done planning, we still won't know. We've got a few months' worth of backlog, and to predict what's going to happen in March is almost impossible. And by the way, based on the election, that we've talked about, it could be very, very different. Typically, the semiconductor industry wakes up in February, has the great March in anticipation of a good summer quarter and the Christmas season. The third quarter is good in anticipation of Chinese New Year. And so the second and third quarters tend to be good, the fourth quarter tends to be good but down a little bit from the third quarter. And the first quarter tends to be the hole. And then you just take that entire sea, what you kind of think about is the wave, and you move the wave up or down, takes the sea [ph] depending upon what the tide is doing, and we don't know what the tide is going to be doing then. I think the first opportunity for better finances is at the end of the first quarter, looking in the second quarter next year. But we just simply absolutely do not have visibility.

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

Okay. A follow-up to that. You mentioned channel inventory is actually up to about 7 weeks. And if I'm not mistaken, that's the first time it increases since maybe Q4 of 2010. And most companies, semi companies, including yourself, are talking about customers being more cautious. Just curious what do you think your distributors are seeing that makes them more willing to take on inventory, especially if Q1 maybe is a typically down quarter?

T. J. Rodgers

It was actually the second quarter. I mean, they were probably coming off pretty low level. And don't forget, that 7 is based on the dollars. And there is a big chunk of phantom that's in those dollars, hence, the reason why I gave you the unit number as well, which is about half the number, albeit still up. And I think it's just most of the guys are rebalancing their inventory, getting into where they want to be. We've had a couple of new distis come in, and we talked about CAD [ph] coming on, so they're taking in some inventory in that. So nothing that I am concerned about. We're monitoring those levels as they are, they don't want to hold any more inventory than they need. I mean, they're pretty tight on that. So and it's well within the model that we want them to be.

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

Okay. One last question. You guys have done a pretty good job on the gross margin, but operating margin is clearly lagging, especially in the PSD, I think, is probably the low single-digit range right now. Can you give us a framework as to what kind of level you need to get back to, to maybe 25%, 30% operating margins, what kind of leverage you have? I know you talked about the utilization, as well as OpEx. Just in other words, I guess, how should we think about incremental margins from here?

T. J. Rodgers

I think very good. I mean, in general, right, if you look at it even in this quarter, we are able to grow the operating income, plus the EPS, far greater than the revenue. I think our follow-through will be very high, north of 75%. Then that revenue goes back up. And I think we need to get to that 2 25 [ph] to 2 40 [ph] range to probably get back up into those areas that you've talked about. We have a margin in the company that we don't report. It's called product margin, and it basically is gross margin relative to manufacturing costs with no overhead, either manufacturing or division overhead in that. That number is north of 70. You can use 0.70 for an approximation. And that, in effect, is our follow-through [indiscernible]. So to a really good approximation, you can take our current revenue and our current profitability and take 0.70 from the top line and the bottom line. And I can tell you, when I'm doing calculations, that's exactly the calculation I use.

Brad W. Buss

We don't have a need to -- for that kind of OpEx and to driving the revenue. The designs Chris talked about, we've rolled out some pretty substantial new products from USB 3.0 all the way through touch. We're doing stuff, really, in every division. So there's no big huge uptick in OpEx that have come to support that revenue increase.

Christopher A. Seams

Let me give a little bit of color to operating expense and the expense control in general. I described the Hiring Auction earlier. Right now, the way it works is for every $100, it comes -- at salary equivalent, it comes into the Hiring Auction. The equivalent salaries of approximately 70 per week. Right now, what we do is we put $30 away for new hires, new college graduates for next year. We spend about [ph] 40%, meaning, we're hiring only 40% of the dollars that leave and then reporting 30% on the bottom line. That is we are currently in a controlled shrinkage mode. If things start to turn around, the first thing we will do is we'll go to 100% mode as we will replace $100 of expenditure with $100 of expenditure. And only after a period like that, when I'm presented with opportunities, if I can hire this group of X people in Beijing, who are available from such and such a company to work on motor control, and I want to get 6 guys, only then, plus a good story, will cause us then to go and start actually adding the headcount. So right now, we are and had been in a controlled shrinkage mode for 2 years. The amazing thing was we figured it couldn't last. We could eventually get to some crisis point, and the company is running leaner and meaner and better than it was 2 years ago. So our turnaround spending mode is going to be to go back to the curve.

Operator

Our last question comes from Liwen Zhang.

Liwen Zhang

Blaylock Robert Van. Actually, my questions have been answered.

T. J. Rodgers

Thank you very much for joining our call.

Operator

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

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