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Edited Transcript of CY earnings conference call or presentation 1-Feb-18 9:30pm GMT

Q4 2017 Cypress Semiconductor Corp Earnings Call

SAN JOSE Mar 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Cypress Semiconductor Corp earnings conference call or presentation Thursday, February 1, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Colin Born

- Vice President of Corporate Development and Investor Relations

* Hassane El-Khoury

Cypress Semiconductor Corporation - President, CEO & Director

* Michael Balow

Cypress Semiconductor Corporation - EVP of Worldwide Sales & Applications

* Thad Trent

Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO

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Conference Call Participants

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* Blayne Peter Curtis

Barclays PLC, Research Division - Director and Senior Research Analyst

* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Mobile Computing

* Christopher Adam Jackson Rolland

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* Harlan Sur

JP Morgan Chase & Co, Research Division - Senior Analyst

* Harsh V. Kumar

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* John Nguyen Vinh

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* John William Pitzer

Credit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

* William Shalom Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to Cypress Semiconductor Fourth Quarter 2017 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. Colin Born, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

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Colin Born, - Vice President of Corporate Development and Investor Relations [2]

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Thank you. Good afternoon, and thank you for joining our Q4 2017 earnings conference call. With me today are Hassane El-Khoury, CEO; Thad Trent, CFO; and Mike Balow, our Executive Vice President of Sales and Applications. Hassane will make some introductory remarks, and Thad will provide a financial overview, and then we will take your questions.

All information discussed on our press release and on this call is based on preliminary unaudited results, and we encourage you to review our 10-K, once filed. During the call, management will be making statements that should be considered forward-looking, and as such, they are subject to a number of risks and uncertainties that could cause actual results to differ materially from results anticipated by the forward-looking statements. Please refer to our earnings release, the risk factors in our 10-K filed with the SEC and our other SEC filings for a more detailed discussion of these risks and uncertainties. All forward-looking statements are based on the information available to us as of today, and individuals are cautioned not to place undue reliance on our forward-looking statements. In addition, we undertake no obligation to update these statements.

Please note that the financial measures to be discussed by management today are non-GAAP measures, unless they are specifically identified as GAAP measures. Reconciliations of non-GAAP measures to their most comparable GAAP measures and certain limitations of using non-GAAP financial measures are included in the earnings press release issued today.

I will now turn the call over to Hassane.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [3]

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Thank you, Colin. Thank you all for joining us. Q4 was another solid quarter for Cypress and capped off a strong 2017. First, I would like to quickly look back in our 2017 success for covering our current business and an exciting outlook as we move into 2018.

Before I go into the details, I would like to thank our worldwide team for their exemplary execution and continuous focus on the Cypress 3.0 strategy. Their efforts delivered excellent results in 2017. We achieved 20% year-over-year revenue growth, made significant progress in our long-term gross margin expansion efforts exiting the year above the 45% mark and doubled our free cash flow compared to 2016. The drivers of our significant revenue growth in 2017 were exactly the same 3 growth drivers I laid out in our Analyst Day back in March.

First was wireless IoT, which continually exceeded our expectations and finished the year at a 46% growth, surpassing even the high end of the 35% to 40% range we shared on the last call. Remember, this is over the Q4 '16 annualized number. This business actually more than doubled since the acquisition of $189 million LTM. It was indeed a great year for our wireless IoT business, a significant positive for the new team in its first full year as part of the Cypress family. The second driver I outlined was automotive, which was up 16% year-over-year as we continue to execute our plan of expanding content and leveraging our strong brand reputation in this increasingly important market. The third driver I highlighted was USB-C, which more than quadrupled during 2017, boosted by the start of the broad ecosystem adoption and a major mobile phone platform launch. Overall, the year came together as planned. With a clear strategy, focus and a strong execution, we met or exceeded our commitments to shareholders and customers.

We ended the year with an excellent holiday season. 2017 was the year where IoT went mainstream and where Cypress Bluetooth, WiFi and USB-C connectivity, our PSoC MCUs and our memory were wrapped up in some of the most popular consumer electronics, holiday gifts of the year, including the smash hit, Nintendo Switch, a variety of Amazon voice-controlled products and a whole host of other connected devices, including drones, wearables and even connected toothbrushes. You may laugh as I first did. But believe me, these everyday consumer devices are actually starting to sell real volume, a testament that everything is getting connected, and we are just getting started.

As we look forward into 2018 and beyond, we still see strong momentum in the markets we participate in, particularly, the IoT connectivity market, which we project to have a CAGR of 16% to 18% as we continue to execute on our strategy of expanding our content at our existing customers with the addition of microcontroller and memory wins. Cross-selling at our IoT customers represents a huge opportunity to expand our content footprint at those same accounts with our existing products and technology. In fact, approximately 80% of our overall Q4 revenue was derived from customers who purchase from 2 or more product families. The relationships are strong. The channels are established. We are executing.

One of the fastest-growing markets in the IoT is the smart home with the recent proliferation of a wide variety of smart speakers. Cypress is firing on all cylinders in the smart home space, selling connectivity and/or PSoC MCUs solutions into Amazon Alexa, Google Home and Nest and SONOS platforms. Our strategy is to fan-out and cross-sell more content into these platforms. A great example is the SONOS 1 platform, which uses our PSoC-based capacitive sensing solution for the human interface as well as Cypress memory. We provide the best user experience from connectivity to interface and control. Our customers want their products to seamlessly fit in our everyday lives, that's why they win and we win.

The smart home of the future will have lights connected via Bluetooth Low Energy, or BLE. We've recently proven that BLE can be utilized in a robust and reliable mesh architecture, which makes it highly attractive compared to competing mesh standards, especially when customers already have a controller in their pockets, their smartphone. It just makes sense. LEDVANCE, a leader in lighting, use our Bluetooth SIG-certified mesh solution to rapidly enter the market with the industry's first consumer lighting product. They will be followed by a long list of customers deploying Bluetooth mesh for consumer and industrial application, many of whom are switching from ZigBee.

Another hot market in IoT is wearables. Market growth is driven by a wide variety of new devices coming to market for fitness, tracking, imaging and health, like the Oura Ring that we demonstrated at CES, which uses PSoC 6 Bluetooth solution for both connectivity and motion sensor processing. Once again, our growth in wearables will be boosted as we cross-sell additional Cypress content. A good example of this is the Fitbit ionic smartwatch, which leverages Cypress' Bluetooth and WiFi connectivity as well as PSoC's low power sensor processing.

Moving to personal audio. We've all seen the success of Bluetooth-enabled earbuds as demand has taken off worldwide. Fortunately for us, once again, our PSoC MCU and connectivity solutions are perfect for these platforms where the customers require very low power and also place a premium on the programmability of our MCU solutions in order to quickly get new earbuds products to market. Apple's AirPods with Cypress inside as evidenced by a recent teardown were trendsetters and established a new product category that is now quickly seen a wave of competing solution coming out of a large number of U.S. and Asian OEMs. We hold a very strong market share amongst these platforms, which you will see introduced as we move through 2018. Our audio success doesn't stop at smart speakers and earbuds, though, we also lead in to the connected and voice-enabled home appliances market, such as the recently announced LG Whisen ThinQ smart air conditioner, which uses a Cypress WiFi MCU for robust connectivity and natural language processing.

And then there's automotive. This market has been a focus for Cypress for over a decade. And we have a solid plan to continue growing our share and expanding our content at existing customers with a significant opportunity in connectivity. WiFi, Bluetooth and USB-C are all seeing a rapid increase in their attach rates, approaching 100% in new automotive designs. Even more exciting for Cypress is the fact that most new designs are expecting multiple wireless and wired connectivity ports per vehicle. In USB-C, for example, customers want it all over the car, a port in the front console and multi-port hub in the center console. And then of course, chargers for each rear seat. We continue to solidify our technology leadership with automotive customers by recently being the first to introduce 802.11ac Realtime Simultaneous Dual Band technology, or RSDB, which enables 2 unique and robust WiFi streams to run at full throughput simultaneously.

Beyond USB-C and wireless connectivity, Cypress also sees continued growth in our auto business for our NOR Memory Products going into ADAS where we have established reference design platform partnerships with all of the leading SoC vendors, allowing us to grow our share in auto NOR from 65% in 2017 to above 70% over the next few years.

Finally, we continue to see strength in deploying our solutions across all of our sales channels. Many of our customers get products through our distribution partners and rely on our powerful design and tools like WICED software for connectivity and PSoC Creator, IDE, for our microcontrollers. Indeed, both tools have seen increased adoption with developer usage up more than 50% in 2017 compared to 2016.

In summary, Cypress' business is stronger than ever. Our product offering is just right for an exciting wave of consumer, industrial and automotive platforms that are smarter, connected, secure, power-efficient and, of course, more accessible. It's all happening right now, and we are enabling it.

Now I'll turn it over into Thad to talk about our numbers.

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [4]

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Thanks, Hassane. I'm pleased to report yet another solid quarter of execution to cap off 2017. I'll start off by providing an overview of 2017, then Q4 results, and finally, wrap up with guidance for Q1, including our view on the demand environment.

As Hassane mentioned, we remain very confident in our Cypress 3.0 strategy of focusing on markets growing faster than the overall industry, which has resulted in healthy and more predictable revenue and strong cash flow generation. For 2017, we achieved record revenue of $2.33 billion, increasing 20% over 2016. Our automotive revenues grew 16% as we continue to increase our content in the car. And our broad-based MCU products increased 11% year-over-year. IoT wireless connectivity business grew 46% over our Q4 2016 run rate as we saw strength across the board in all of our IoT-focused markets, including auto, industrial and consumer. Our wired connectivity revenue increased 70% driven primarily by the adoption of ramping of USB-C. Our memory business decreased 1%, as expected, to $918.5 million in 2017 as we refocused this business on the high-value, noncommoditized end markets to drive gross margin expansion and moved many of our customers to long-term supply agreements.

In 2017, we increased our gross margin by 320 basis points as we improved our cost structure and focused on selling differentiated products in our target markets. Additionally, our operating expenses incurred -- increased at a slower pace than the revenue growth. This resulted in 2017 EPS of $0.89 per share, which increased over 4x faster than revenue as we continue to execute to our targeted business model. Free cash flow more than doubled to $349 million in 2017, allowing us to aggressively pay down debt to achieve a leverage ratio of 2.3x. So 2017 was a strong year of execution with significant improvement in all financial metrics.

Now moving to the results for the quarter. Q4 revenue of $598 million was ahead of the midpoint of our guidance and declined 1.2% sequentially, which is better-than-normal seasonality of down 3% to 4%. MCD revenue was $357.2 million, up 21% over Q4 2016 and down 4% from Q3 as we saw expected seasonal declines in wireless connectivity. Wired connectivity was up as USB-C customers continued to ramp and the adoption continues in a broad range of consumer platforms.

MPD revenue was $240.3 million, up 2% over Q4 2016 and up 4% from Q3 as we continue to see strength in healthy end market demand in the flash memory market. We have now secured approximately 70% of our flash business with long-term supply agreements, resulting in more favorable pricing trends.

So that brings me to gross margin. Our Q4 gross margin came in at 45.4%, an increase of 530 basis points from Q4 2016 and 240 basis points from last quarter. Gross margins increased in both MCD and MTD in Q4 at roughly the same rate as we accelerated many of our cost-reduction initiatives. As I mentioned previously, our 2017 gross margin improved 320 basis points over 2016. Approximately 2/3 of this expansion resulted from cost reduction and a mixed shift to higher-margin products in end markets. And the remainder resulted from improved pricing across the portfolio and specifically, in memory.

On the cost-reduction front, we again increased utilization with Fab 25 reaching 81% in Q4. And we improved our manufacturing efficiencies, resulting in lower product cost. This, once again, demonstrates our ability to execute our Cypress 3.0 strategy.

Let me give you some additional highlights for the quarter. Our Q4 operating expenses were $150 million or 25% of revenue as we continue to optimize our investments in our focused markets. Q4 operating margin improved to 20.2%, achieving our 20% target in our long-term model. This was our highest operating margin since 2011 and demonstrates the leverage in our model as we continue to focus on earnings growth and cash flow generation.

OIE was $14 million. Our non-GAAP tax expense in Q4 was $2.3 million. And obviously, there's a significant focus on taxes after the recently passed tax bill. In Q4, we recorded a onetime GAAP tax benefit of $8.6 million due to the repeal of corporate AMT and the remeasurement of certain deferred tax liabilities caused by the reduction in corporate tax rate. As we look forward, we do not expect tax reform to have a significant effect on our expected cash taxes and overall rate based on our initial estimates.

Moving on, our diluted share count was 369 million shares. This includes 12 million shares for the in-the-money portion of our convertible notes, and this resulted in net income of $105 million or $0.28 per share, above the high end of our guidance range.

Turning to the balance sheet. Cash and short-term investments totaled $152 million, and we have $450 million undrawn on our revolver. Cash from operations was $202 million, increasing 124% over Q4 2016. And free cash flow in Q4 increased to $194 million and represents 32% of revenue for the quarter.

Our accounts receivable at the end of the fourth quarter was $296 million, resulting in DSO of 45 days. Inventory, again, decreased $15 million sequentially to $272 million. And our days of inventory were flat at 76 days, and we expect to continue to drive down inventory as we execute to our target of 70 days.

Our Q4 non-GAAP EBITDA was $140 million, a new record again this quarter. And total debt is now $1.1 billion as we paid down $143 million in Q4. Our debt-to-EBITDA leverage is now 2.3x on an LTM basis, which exceeded our target of 3x exiting 2017. Also, in December, we proactively issued a new $150 million 2% convert to fund the conversion of the 2% Spansion convert that we inherited at the time of the merger. The Spansion convert was significantly in the money, causing share dilution of our stock price increases. This transaction was debt-neutral and had no impact to the current EPS but will minimize future share dilution going forward.

Our CapEx was $8 million, and depreciation was $19 million for the quarter. The dividend yield was 2.9% at the end of the quarter and continues to be one of the highest in the industry.

So turning to guidance for the first quarter. The demand environment remains healthy with strength across all of our end markets as we continue to drive content gains. Design activity remains robust with our overall design funnel increasing 31% year-on-year driven by a 55% increase in auto. We believe the flash memory market will remain supply-constrained through 2018 as demand in the market increases for low-density NOR for OLED displays. While we don't play in that market, we do see auto and industrial demand increasing in our embedded customers.

Our distribution channel, which accounted for 72% of our revenue in Q4, remains healthy. We finished the quarter with 7.5 weeks of inventory in the channel, in line with our target of 6 to 8 weeks. We entered the first quarter over 90% booked as our broad customer base is providing better visibility. The book to bill was 0.99, in line with our better than seasonal guide. While lead times have stabilized over the last 3 quarters after extending earlier in the year. So we're expecting Q1 revenue of $565 million to $595 million, which, at the midpoint, is down 3%, again, better than normal seasonal patterns of down 6% to 7% in the first quarter. This guidance reflects seasonality in the consumer end markets and memory performing better than seasonal.

As expected, our gross margins will decrease slightly in Q1 to approximately 45% due to seasonal declines and product mix. As always, margin will vary with utilization, product and customer mix. We expect Q1 operating expenses to be between $152 million and $154 million for the quarter. Net OIE will be approximately $14 million. Tax expense will be $4 million. CapEx is estimated to be $20 million, and depreciation of approximately $18 million for the quarter.

We anticipate the fully diluted share count to be 373 million shares. As a result, our earnings per share is expected to be in the range of $0.22 to $0.26 for the quarter. And at the midpoint of our guidance, our Q1 revenue is expected to increase 9% over Q1 of 2017, and our EPS is expected to increase 85% over the same period, demonstrating the leverage in our operating model.

To wrap things up, we're pleased to end 2017 on a high note with a record year of earnings and cash flow growth as our Cypress 3.0 strategy continues to unfold.

With that, I'll now turn the call back over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Harsh Kumar from Piper Jaffray, you may ask your question.

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Harsh V. Kumar, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [2]

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First of all, congratulations. Those are some pretty impressive financial metrics. I was very pleased with, particularly, the free cash flow at 32%. That's impressive, so congrats. Thad, in the past, you've given us some color on how much automotive was, how much industrial was, how much all those businesses were together. I was curious if you had some color on what those parts and pieces were in the quarter. And then as my follow-up, maybe you could give us -- I know you mentioned that memory will be better and consumer will be off. Specifically what within consumer will be off in March? And then how will auto and industrial perform in the March quarter?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [3]

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Yes. So our automotive business, we said, was up 16% year-over-year. So obviously, a boomer given that units in that same time period over -- worldwide were up in the low single digits at best. If you look at Q4, our auto was down slightly, up 2%. As we look forward into Q1, we expect that to come back as well based on what we're seeing right now. So it's just kind of the typical seasonality that we're seeing with the auto business. I think there was a question on consumer...

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [4]

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Yes. Consumer is across the board, obviously. Consumer, as expected, in general, will be done after the Q3 build. It will click back down just seasonally for a quarter, but then the strong quarters for that market, obviously, as expected, is Q2 and Q3, just like you saw it last year. But we're -- like I said, the funnel is strong. I gave a little bit of the ramps that are coming off in 2018, and that's going to be driven by a lot of new designs in the wearables space and specifically, in the home -- smart home space.

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Harsh V. Kumar, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [5]

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And Hassane, do you expect your industrial and auto to be up, flat or down in the March quarter?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [6]

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Well, if you look at it this quarter, it was about 47% of revenue. So that was -- as a percentage of the overall pie, it was smaller, but that's because you have the strong growth of consumer, primarily in IoT. I think as you go forward, you're going to see that auto and industrial slowly become a larger piece, but obviously, it's going to depend on the sell-through of the IoT application in the consumer market.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [7]

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And remember, my outlook for automotive that I highlighted in the March -- last March, was up 8% to 12%. Our Q1 looks like it's going to be up and to the right as we deliver throughout the year on that 8% to 12% growth. Industrial also will be growing slower pace. I always talked about GDP plus, think about as the 4% to 5% over a multiyear period. And we're going to start seeing some of that revenue coming in. Seasonally, I don't talk about quarter yet, but for the year, I can tell you, those markets will be up for us.

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Operator [8]

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John Pitzer from Credit Suisse, you may ask your question.

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John William Pitzer, Credit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [9]

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Just looking at the December quarter, gross margin upside, it looks like, at least relative to our model, now, I know you guys don't guide by division, but that memory was the biggest upside in the quarter, and that clearly kind of had a positive gross margin tailwind. Thad, I'm just kind of curious, as you look at kind of the gross margin leverage you saw on the December quarter, how would it look ex memory? And I guess, more importantly, as you marched (inaudible) exiting this calendar year at 48%-plus, how do we think about kind of memory as a percent of the mix relative to that gross margin target, and to the extent that memory might be coming down as a percent of the mix, the comfort level around being able to drive margin leverage outside of memory?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [10]

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Yes, John, your phone broke up a little bit, but I think we got your question. Just to point out in the quarter, the fourth quarter margin improved in both divisions at about the same rate. So we saw that across the board as we're able to improve our utilization and take costs out of our manufacturing processes. Clearly, there's a good favorable market on pricing on the memory side, so we saw a bump there as well. As we look forward, we're continuing to drive the growth out of the MCD division. And over time, you will see that the memory continues to decline. We talked about memory declines at 2% to 5%. So those margins now are -- those flash gross margins are now north of 40% in that side of things. But we're very confident with the mix moving into the higher gross margin focus areas of MCD that we continue to drive that up 48% target by the end of the year.

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John William Pitzer, Credit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [11]

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That's helpful. And then a follow-up to Hassane. When you look at the IoT business, I think, I should bear in mind year-over-year to sequential conversion, it seems like Q4 was down sequentially. So I think it's the first time you've seen sequential declines in that revenue since you bought the asset. One, is that correct? And I guess more importantly, you're still well above on a year-over-year basis at your long-term target CAGR of that business of high teens? As we move more to the high -- long-term CAGR, how would you help us think about seasonality of that business by quarter?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [12]

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Yes, I think, like I said, you're cutting out a little bit, but I think I got it. So yes, we saw -- we expected and, of course, we saw a seasonal decline in the IoT business in Q4 after a very strong Q3, which is really for a 65% consumer-exposed business. You're going to see the big build is -- for the holiday is in Q3. So all of that came in line, obviously, in '16, same quarter. We were up -- that was the momentum that we were building for what we delivered in 2017. As we look forward, I'm comfortable with the 17%, 16% to 18% growth, which I reiterated today. And that's going to be a multiyear period, but we'll see that same growth. Now in general, seasonality, Thad and I always said that this business, when it started to -- starts to mature, we're going to see the standard seasonality that we see as a general company because of the exposure to the same end markets. So we saw that starting in 2017 in the last quarter. You're going to see that a little bit in 2018. Overall, better. The guide for Q1 is better than seasonality. It's muted seasonality because there are some that are -- businesses that are growing. But overall, you can expect Q4 to be down quarter-on-quarter; Q1 to be slightly down quarter-on-quarter; the up quarters will be Q2, Q3; and then Q3 to Q4 will be slightly down. The levels that it's going to be down is really going to depend on the sell-through that I always talk about with these consumer products, specifically, as our customers shift through to the end markets.

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John William Pitzer, Credit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [13]

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That's helpful. And maybe if I could sneak one last one in. Thad, when you look at the CapEx to rev ratio in the December quarter, it's among the lowest, if not the lowest, that we've seen in the model, which is impressive given the top line growth you're showing. How do you think about kind of the CapEx to support the growth of the business from here?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [14]

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Yes. That's a great question. I'm glad you asked it. So the CapEx for the quarter was kind of artificially low. That's just a timing issue. So as we go forward, we think about our CapEx really being about 3% of revenue. And when you look back over the last couple of years, that's kind of where we've been. So it's keeping it at that level. Most of our CapEx is on maintenance CapEx. We're not investing in a lot of capacity. A couple of spots here and there, but it's really maintaining what we have, so that's why we can run a very low CapEx model.

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Operator [15]

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Rajvindra Gill from Needham & Company, you may ask your question.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [16]

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Thad, on the gross margins, excellent progress on the gross margins to get to 45% earlier than expected. Can you help us walk us through, again, the bridge to 48% coming into the -- exiting this year?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [17]

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Yes. Well, I gave some color on if you look year-over-year, right, with roughly 2/3 of the gross margin improvement coming from our cost initiatives, and we were able to accelerate that and deliver upside gross margins this quarter. As you look forward, you've got more of the same, right? We're continuing to cross-sell our own products. We're continuing to optimize our own manufacturing footprint inside and outside. And we'll continue to drive that piece of it. And I would say that as we look forward, the majority of this is in our control. It isn't necessarily that we've got to have some external factors that -- to help us get there. So it's more just blocking and tackling, which is what we've really been doing over the last year, 1.5 years when we laid out this plan. And that's why we're still maintaining that 47.9% exit rate.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [18]

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And your commentary around the overall demand environment being healthy, the lead times are starting to stabilize. Can you talk about how you view the kind of the overall semi cycle after a pretty robust year last year where the industry was caught off by a surprise a little bit towards this big capacity constraint. How would you characterize it as best as you can from your vantage point of the cycle this year?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [19]

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Yes. I think -- I mentioned, I think, when we met in Q4, I've been on the road for a few months. Our customers are echoing the same strength that we are seeing, walking into 2018. We don't see any areas of concern. I think all markets will be equally healthy. Now of course, I'm not saying that we're going to see another boom of the year like we did in 2017 as overall. But it is a very healthy demand environment, and we're very well positioned. Most of my conversation have been securing supply because of exactly what you said, everybody got caught off guard, and the supply situation was a little stressful. But right now, we're very well positioned to support the growth that we have outlined in 2018 across all of our markets.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst of Microcontrollers, Analog & Mixed Signal, Consumer IC & Multi-Market [20]

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And one last question, Hassane, on IoT. You talked about your 802.11 RSDB, the 2 WiFi streams that can run simultaneously and adding Bluetooth Low Energy into a mesh architecture. You kind of specifically mentioned that you're seeing customers switch from ZigBee. I was wondering if you could elaborate further on that. And how do you expect -- what's your anticipation of the new WiFi product that you're offering? How that will enable you to gain more share? And which markets do you think you'll be able to push that new standard further?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [21]

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Sure. So I'll say there are a couple of items in your question. So first on the mesh, obviously, I referenced ZigBee. So ZigBee has been in existence because of mesh. It's the only technology or wireless technology allowing us to do that. BLE, or Bluetooth Low Energy, SIG responded to that and delivered a mesh over BLE, which we have a product. Not only do we have a product; we actually have a product that is shipping revenue with a key customer for lighting, which is the sweet spot of ZigBee. Now the reason you see -- you're going to see that shift from ZigBee to BLE is because BLE is an already existing infrastructure. I made the comment, you have a BLE photo in your pocket. It's your phone. You don't need another hub. You don't need another translator from the consumer product to a ZigBee mesh network. So that's inherently why you're going to see a lot of customers who need ZigBee but want to take advantage of an ecosystem that's already out there, which is BLE-based. We're seeing that. We see that in the funnel. You're going to start seeing more of that design. Both consumer and industrial are starting to shift to BLE. On the WiFi side, specifically the RSDB, the 802.11ac RSDB, is specifically for automotive. It's the only product in existence that is able to do that in an automotive environment, both technical and, of course, the harsh environment. As more and more connected cars and more and more streaming and media happen in the car, the more you're going to see that penetration. We're engaged with 8 out of the top 8 OEMs already. You're going to see some exciting announcements coming up over the next couple of quarters. But that's very well positioned because it solves a very important problem, which is the connectivity within a vehicle. On AC, in general, outside of just RSDB, we already have a product, shipping the volume. Actually, the Nintendo, the Switch is an AC-based-product. So any time, as more and more demand for a high throughput and high-bandwidth media streaming is required, whether it's gaming or home, smart home like cameras, security cameras, you're going to see more and more of the AC requirement go there. We are in production. We're shipping volume, and we have a long laundry list of customers that will be ramping, that started in '17 and will continue in '18.

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Operator [22]

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Our next question comes from John Vinh from KeyBanc Capital Markets.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [23]

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Just a follow-up on IoT. You guys obviously did extremely well in terms of growing 46%, 2017. You're calling for a 17% growth this year. I'm just curious as to why you're calling for such a significant deceleration growth. Are you just being conservative? Or are there other kind of offsets that we should be thinking through?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [24]

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No -- none. You know me. I've been always talking about the 17% growth. It's growth, remember, off of a very, very larger base than even when I talked about it in March. So I always talked about a multiyear 17% growth. The year came out at 46%, and I'm sticking with the 17% growth on top of that. So you got to put that into perspective as far as the scale of that business or that business has achieved. Now what would a change be caused by? Just like you saw me do in 2017, we're in every design that any company wants to be in. We're in the name brands. We're in the things that are selling, and we're shipping. What would cause this number to go up or be stronger just like you saw in '17 is the sell-through that we are waiting to see from our end customers. Just like we did in '17, you'll see me update the numbers as we get more visibility. But you understand as this is a heavily consumer-exposed product. I always liked the visibility of when they start ramping, when we start seeing the ship-through, not what we ship to customers. You'll see me update these to a stronger number. I hope I'm going to have that problem where it's going to be stronger, but it's too early in the year to call that yet.

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John Nguyen Vinh, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [25]

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Great. My follow-up question for Thad. Obviously, you've done a good job at getting to the 20% operating margin, which is the low end of your target model. As you start to progress towards your 40% gross margin exiting the year, should we expect to see more additional leverage on the bottom line? Or is that something that we need to wait to when we get closer to 50% to see?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [26]

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We've -- our OpEx has been lagging the revenue growth, obviously. So if you look at the guide in the OpEx, it's going to -- creeping back up into that 26%. That's where we said we're going to run the company. But other than that, you see the margins, the gross margins continue to improve. We expect 100% fall-through of those incremental dollars, and that's the leverage. So that's how we think about '18 and even beyond is that there's significant earnings growth here as well as cash flow generation.

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Operator [27]

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Our next question comes from Vijay Rakesh from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [28]

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Great job on the quarter and guide and the gross margins. Good to see that. Just a question on the automotive side. You talked about USB-C getting traction in automotive. Just wondering how many OEMs you have ramping USB-C in 2018. And same on the IoT side, too. It looks like you're getting 802.11ac into automotive. And I think you had talked about Audi, Toyota and others. But just wondering how many OEMs you have ramping with the IoT side, too, in 2018.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [29]

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Yes. That's a good question. I don't have the exact number of OEMs off the top of my head. But it's very broad because I looked at it as a design-in for the wireless. As I mentioned, we're in 8 of the top 8 OEMs, and then it starts proliferating beyond the top 8. That's on the design-in. Obviously, the ramp-up or the production, we're going to start seeing that in 2018. But as far as specifically how many will be in the market in 2018, I don't have that currently. I'm sure we have it, I just don't have it on me. The other one for Type-C, that's still in design-in. You got to think about 1 to 2 years before you get that in the market. So we're not in that window yet. We have the design-ins already. We're in design activity with the OEMs going through the Tier 1. But that's going to be more lagging than the 802.11ac, which started design in 2016.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [30]

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Got it. And on the consumer side, and obviously, you're going to lap a full year of all these ramps with Nintendo and Apple and all that you saw from the second half, and especially as you look at Nintendo probably going to China, do you -- I mean, it looks like your guide for [16 to 18%] (corrected by company after the call) is still pretty conservative, right, as you look at 2018 given you probably have a benefit of a full year there?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [31]

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I don't know if everybody wants me to up the number in week 5 of the year. But, I mean, you're right. That's part of, Vijay, what I mentioned as I want to see the sell-through. As I get more comfortable with the sell-through over a couple of quarters, then you're going to start seeing me revise the numbers as we get more visibility. And, of course, we all see it at the same time. A lot of those customers go out and publicly talk about their volume increases that they are seeing based on the strong demand they see. Those are the types of signals that I'd like to see, especially in the consumer market. I have no worries or concerns on auto, industrial. That's a long visibility. We have a great funnel. We have a great design visibility on when they're going to ramp. The same is for consumer with the smart home, the gaming, all of these markets that we are in. But it's too early to call that because we need to get through the first quarter after the rebuild, after the Christmas or the holiday sale, and then we'll see how Q2, which is a strong quarter, followed by a strong Q3, will turn out. And you'll see me update or revise my outlook as I get more visibility on those.

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Operator [32]

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Our next question comes from Charlie Anderson with Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Mobile Computing [33]

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I wanted to ask on auto content in terms of connectivity. It sounds like many opportunities for USB-C. And then, obviously, you've got the new WiFi products. So I wonder kind of roughly what you're averaging today and content per vehicle in the connectivity side and where could it go and if you could maybe help segment out WiFi from USB-C in terms of the size of the opportunity, that'll be helpful. Then I've got a follow-up.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [34]

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Yes, sure. If you -- so I'll answer a couple of ways. If you look at -- just take the total volume of vehicles or take our revenue in automotive divided by the total number of vehicles, you're talking about $7 to $8. A couple of years ago, that was about $6 to $7. So it's been continuously growing. Because you have to remember, a lot of the emerging market automotive doesn't have the electronics content so that's what averages it down. And that's the reason I always look at the BMW as a point of reference because that's where really it all starts. We're already at the $79 of content in a 7 Series BMW that's based on the 2017 model. And, of course, as more content, both in USB and connectivity, starts to come in, in those vehicles over the next couple of years, that's $79 will just keep increasing. And the content that used to be in the BMW 7 Series will go into what I call a mainstream passenger vehicle like the Toyota Prius at $38 already. So if you don't average over the 90 million or 88 million vehicles over worldwide production, when we're talking about $79-plus as you get more and more of that content. Our addressable content, inclusive of the WiFi and all the connectivity that I highlighted today, is about $120 per car. So you can compare our progress towards that number, and we're -- as of 2017, we're about the $79 in a represented vehicle.

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Operator [35]

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Would you like to go to the next question?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [36]

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Yes, please.

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Operator [37]

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William Stein, you may ask your question, from SunTrust.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [38]

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First, Hassane, the revenue mix shifted a little bit more to memory than MCU in the quarter than I would have expected. Is that something that the company anticipated or you anticipated? And I wonder if you can comment as to the mix in that growth between ASP and units and your expectation for pricing over the next couple of quarters?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [39]

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Yes. So the first part of your question, the answer is yes. It was expected just because of the end exposure of these -- the memory versus the rest of the company. When you talk about memory, we have the industrial, automotive, which is our focus. That has not changed. We expected that to be exactly where it came in Q4 versus the rest with the wireless and the general connectivity, which is more of a consumer play, which the Q4 is a seasonally balanced quarter just based on end markets, nothing too out of the ordinary there. As far as ASPs, remember the commentary of the strength in the supply we have and still the constraint in the market based on the OLED, specifically for the NOR market, but the same applies to NAND. There's way more demand than there is supply still. We see that market still be supply-constrained through 2018. We have already secured about 70% of our business in long-term contracts. So we have great visibility on both ASPs and volume that will shift over the next year. I'd say the next year, long-term agreements are varying from, call it, 9 month, 12 month to up to 4 years in the case of automotive. So that gave us great visibility on the volume projections in the next year, 2018, and the ASPs that we have locked in. So I'm very comfortable with where it's going. I'm comfortable with why -- how we changed that business. The memory business is very, very different than it was just even a year ago, and that's all actively being managed. So it's all within our expectations.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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One more, if I can. Hassane, I think you mentioned that you have some new touch controller design wins in some of these consumer devices. I think you mentioned this specifically around connected home or maybe it was smart speakers. I recall that the company had exposure to touch in mobile, and I think you exited that business or sold it. Do you expect that market to play out differently in these connected consumer devices than it did in mobile?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [41]

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Yes. So let me just clarify. So you're absolutely right in your recollection. We did divest that business in July of 2015. We only divested the mobile TrueTouch business. So we kept the automotive and industrial business at Cypress, and that's been very, very strong. We're #1 in that market for car infotainment with our TrueTouch. My reference to -- in my prepared remarks today is the touch specifically based on PSoC capacitive sensing. So it's not the screen specifically that I'm referring to. A lot of these widgets like the SONOS speakers and a lot of the home appliance specifically want reliable capacitive sensing buttons, both low power, waterproof in the case of a home appliance, et cetera. That business has always been part of our PSoC franchise. We are #1 in capacitive sensing in that market. We're actually about 4x the #2 company. So that business is growing. We're going to see growth in that as part of our microcontroller reported number, which grew about 11% year-on-year in '17. So very strong growth across the board, enabled by being able to solve that button Human Machine Interface problem for our customers, and we got the greatest solution in the world.

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Operator [42]

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Our next question comes from Blayne Curtis from Barclays.

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [43]

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Maybe to start, I want to make sure I understood the guidance. On March, you said memory down less than seasonal, kind of an up-and-down probably equally but with NOR. It's probably down. I'm just -- I'm kind of curious, do you meant down but down less than normal or did you mean up? And then I have a follow-up.

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [44]

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I think for the Q1, you're looking at kind of flat to down, which is better than seasonal. Seasonal in memory is typically down. For Q1, it's typically down high single digits.

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [45]

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Got you. And then I just want to ask. Obviously, at that rate, it looks like the business is growing double digits versus the decline that you think it's a long-term trajectory. So could you explain some of the tightness? I'm just kind of curious your thoughts as to you have visibility that you're already thinking to be much better than that target this year. And then if you just talk about -- the market is tight. I'm just kind of curious your lead times and your tightness for your NOR products.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [46]

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Yes. This is Hassane. So as far as what we -- our expectation is for the memory, I've always talked about, in general, over a multiyear period declining 2% to 5%. Based on the strength we see and where our long-term agreements and where the supply situation that we have in the market today, we're expecting the memory actually to be about flat year-on-year, which is better than what we had projected. It doesn't change the long-term outlook, obviously, because we've had -- we are having a strong 2017 to '18. Overall, 2% to 5% down. Momentary in 2018, I'd say we'll -- we're expecting that to be about flat. So that's, I would say, related to the -- a lot of strength that we have. But also, you have to remember that we're highly exposed to the automotive market with 65% market share in NOR. That market is actually a very healthy market, and the memory content in it is growing. So that helps also offset. So that strength in the market will offset some of the declines in general. As far as lead times, lead times have been coming steadily down. I look at it from across the company, we're about 13?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [47]

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13 weeks on average. The flash lead times are stabilizing, but they are further out in the 13 weeks. But we saw lead times slip earlier in the year, 2017, but we're seeing them stabilize and come in now.

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Operator [48]

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Suji Desilva from Roth Capital, you may go ahead.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [49]

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Hassane, congrats on the strong results here. Can you help us understand where the USB-C business coming in as a percent of revenues exiting the year and, more importantly, how you think it will do exiting '18? There's a lot of tailwinds potentially with automotive, power delivery and smartphone headsets. Just want to get your thoughts on whether it will outgrow the company or grow with the company.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [50]

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Sure. So this is Hassane, Suji. Overall, USB-C came in about the same, 5% of revenue. As far as growth, the business will grow, but it will remain about -- call it, about 5% of total revenue, because the whole company is growing across all our product lines. And the growth is primarily going to be -- it's very broad. If you recall at CES, we had about 14 different products on display, all with USB-C. None of them were even a phone. That gives you the multiyear franchise that I keep talking about as far as we're just getting started in the ecosystem. That will keep growing. It's going to be a very nice and steady growth over the next few years. As far as the layering what you described for markets, we're going to see, obviously, the mobile and the computing started already. We talked about the 78 PC models today going to 120 through 2018. That will add to the growth of that business. For auto and industrial, you need to look at it as more at the outer years beyond the 2018 for my prior comments of latencies from design-in to revenue. But overall, growth is going to be in line with our expectation that I've had through 2017, and it came in exactly there. It's 5% and it will remain that because the whole company is growing proportionally, I would say.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [51]

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Okay, great. And then a bigger picture question on your IoT. I think that you guys are kind of being in plugged-in devices or kind of fairly large battery devices but less so in sort of small battery nodes. I mean, correct me if that perception is wrong. And are there opportunities for you guys with newer products in memory, maybe the F-RAM products you have or low-power WiFi or even energy harvesting? Was that part of the market growth? Or is it already growing and just I'm not aware of it?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [52]

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Yes. So overall, the growth is coming very, very broad. There isn't one aspect of it or another aspect submarket that's not growing. Now every time we report a quarter both Thad and I go through, it's broad. It's broad customers. And it's, more importantly, broad across markets. Now the reason across all of it is growing, number one, is low-power. It's a very big play. If I take the example of the wireless cameras, those are battery-powered, and they need to have 6-month plus battery life. We win for 2 reasons. We're able to provide the high-definition throughput with our ac product while we provide the low battery power for the longevity of the product. That goes all the way down across our memories. And you mentioned F-RAM, which is a great thing. Stay tuned, there will be more and more announcements of our low-power play, both in memory and the microcontrollers, coming up over the next couple of quarters, both from a customer but also from a product capability side. So that's our positioning there. It's low-power. Then on the other side, which is as important for a lot of connectivity products, is the focus on security. We have delivered integrated security in our microcontroller -- in our PSoC microcontroller products. That's already in production. One of the first products was announced actually at CES. It's the Oura Ring. And back to your point, I don't think it gets any smaller than a ring around your finger with a 7-day battery life based on our PSoC and our Bluetooth Low Energy. That's why we win. That's why we'll keep winning. We're setting the benchmark in the market for that technology.

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Operator [53]

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Craig Hettenbach from Morgan Stanley, you may ask your question.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [54]

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Just in the context of the robust automotive growth, up 16% year-over-year, as you move into 2018 here, Hassane, anything to note in terms of geographic skew or certain regions where you think you're seeing even better relative momentum?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [55]

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I missed that, which market specifically?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [56]

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Auto.

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [57]

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Auto. Everybody looks at auto month-to-month. I don't think -- I don't look at it that way. Overall, automotive will probably grow 2% to 3%, as it has for the last 2 decades, minus whatever fluctuations quarter-on-quarter. Our content is at 16%. We're going to still see acceleration of content beyond the unit volume. As far as overall worldwide footprint, a lot of our focus has been on Europe, Japan. Obviously, China is starting to grow for us from a much smaller base. So even if a lot of people talk about softness in vehicle production from China, it's still a positive for us from the base we're on. So our exposure in auto is going to be, across the board, equally distributed to all regions. I don't have concerns for a region today because a lot of our new models, the new incremental models we are in, are across all 4 regions.

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Michael Balow, Cypress Semiconductor Corporation - EVP of Worldwide Sales & Applications [58]

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This is Mike Balow. I'll just add a little bit to that. I think if you were to look at Cypress 2 or 3 years ago, it sounds right, Europe and Japan were really our primary focus. But we have done a lot now in the U.S., a lot with the ADAS applications, clusters in the U.S. and body. And then China, being an emerging market, a lot of traction in China as well.

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [59]

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And, Craig, just to clarify Hassane's point, our projections for automotive business are to grow 8% to 12%. And I talked about the design activity we've seen this year. Auto design activity increased 55%, so that gives us confidence in those outer years as continued growth.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [60]

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Got it. And then just a follow-up, Thad, just in the context of questions around the cycle. If you look at 7.5 weeks of inventory in the channel, that's still comfortably within your 6- to 8-week range. But as you manage that, do you think this year, you'll manage it around current levels? Or do you think you'll try to bring that down a little bit from a channel inventory perspective?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [61]

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No. It's right in our sweet spot. I mean, you can look back over, really, the last 2 to 3 years, and we've been right around that 7 -- slightly over 7 weeks. Not concerned about it going up in the 7.5 this quarter at all. When you actually peel back the onion and you look at it a little deeper, it's actually -- the reason it did increase from 7.2 to 7.5 is because we have a large ramp in customer that we've been moving inventory into the channel that will shift sell-through. That will normalize this quarter. In fact, we've already seen it normalize. So kind of back into that 7.2. But we're -- it's right in our sweet spot. We're totally comfortable. And keep in mind, our distis, they manage their inventory, right? We shift based on their demand. So we obviously monitor it. We don't like to get too much inventory out there. We don't want it to get too thin either. But it's right where we want it to be. So no concerns at all.

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Operator [62]

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Vivek Arya from Bank of America, you may go ahead.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [63]

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First question is on leverage. At 2.3x, that's already in your target model and you're generating very impressive cash, what's the next step in terms of use of cash? Is it to further delever the balance sheet? Or is it to consider buybacks? You already have a dividend. So what are the uses of cash (inaudible) that you're thinking of?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [64]

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So we've always said that when we get below at 2.5 range, which now we're below that, then we would -- we have complete flexibility, whether it's initiating the buybacks again, whether it's M&A activity. And you've seen us with a -- continue to pay down debt using all the excess free cash flow after the dividend to pay down that debt. We still have a bias towards that, but obviously, we will be opportunistic as other investment opportunities come up.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [65]

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I see. And then in terms of the business mix, we are seeing consumer outgrow some of the other segments. Hassane, do you have a target mix in mind from an end market perspective? And let's say consumer does continue to outgrow everything else, then are there any implications on gross or operating margins that we should keep in mind?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [66]

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Yes. No, there is no, I would call it, hard target. It's the number we monitor, obviously, just to make sure that we are growing across all of the markets. Like Thad gave the number for the funnel growth for automotive, 55%, that's a very impressive number. And that will start contributing to revenue over the next 2, 3, 4 years. So as far as percent revenue that -- our percent of revenue that I'm targeting, I'm very comfortable in the up -- high-40s, mid-50s percent for auto and industrial. That's where we've always been and we oscillate depending on the consumer. Now as far as implications, I'm not worried about any of that because, remember, we're talking about the consumer where it's the high-end consumers, the profitable consumer, not the very commoditized consumer. The Nintendo Switch, being a consumer. The Amazon, Alexas, the home -- the smart home products, all of these are under consumer, but those are very good businesses and very good margins to be in for us. So there are not going to be an implication. And look, with the mix we saw in the prior quarter, in Q4, and look at our margin. Our focus is margin. Our focus is growth on the top line. But more importantly, our focus is the healthy growth that is accretive to margin. And obviously, you saw the leverage in the financials. That's going to generate the cash flow that we need.

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Michael Balow, Cypress Semiconductor Corporation - EVP of Worldwide Sales & Applications [67]

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Vivek, this is Mike Balow. I might just add one more to Hassane's comment on the consumer side. So today, you can also look at a lot of the products that we've brought out, our very innovative products, and consumer tends to adopt things sooner and they get time to market much quicker. So there will be a little bit of a lag in some of this, where design in automotive and industrial design cycles tend to be a little bit longer in adoption. This also takes a little bit longer to get adoption. So I'm very confident that a lot of the products that you're seeing consumer ramps will also ramp in industrial and automotive.

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Operator [68]

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Harlan Sur from JPMorgan, you may go ahead.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [69]

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Congratulations on a solid 2017 and the continued solid execution here, guys. On the flash business, I believe you said gross margins kind of north of 40%. As you think about the pricing environment, the continued cost efficiencies and just the team's overall better visibility, the margin trend is looking to kind of move higher here. Can you kind of help us quantify a potential range? Is kind of mid- to high-40 percentage range or better a potential for exiting this year?

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [70]

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Are you asking specifically in the flash business?

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [71]

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Yes, flash business.

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Thad Trent, Cypress Semiconductor Corporation - Executive VP of Finance & Administration and CFO [72]

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Yes. So we've always said that we can get the flash margins into the 40s. We're there now. We're north of 40%. As we go forward, we'll continue to cost up. But I don't -- you're not going to see this get up into a 50% range. That market just doesn't support that.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [73]

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Got it. And then on the wireless IoT and the dollar content expansion, you talked about cross-selling opportunities. But we're also seeing more and more of these connectivity devices supporting not just WiFi or just Bluetooth but both wireless interfaces in a single platform, which is good for your combo solution. I think you recently told us that combo, as a percentage of the overall mix, has gone from like 25% to 50%. Hassane, do you still see that mix continuing to go up? And is that going to continue to be a potential revenue driver here for the IoT business?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [74]

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Yes. It's about -- so the answer is yes. It's about 50% of the overall. It doubled since the time of the acquisition, basically, exactly the team or the trend that you referred to. All customers and all products want both of them. The BLE is to connect through your phone and configure and then connect to the Internet through WiFi. That's really the use case that's making this a compelling solution. We're going to see that, call it, 50%, plus or minus, give or take, depending on what products ramp for the quarter. But overall, remember, that's going to remain a percent of a growing dollar content overall as far as revenue. That business is growing. It grew 46%. And the content grew. We're going to see that remain about 50%, like I said, give or take, depending on the product ramps but of a much higher base of revenue.

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Operator [75]

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And our last question comes from Christopher Rolland with Susquehanna International Group.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [76]

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Congrats on the results and particularly gross margin. So for USB Type-C adoption for handsets, for example, some of our data showed a really strong ramp at the beginning of last year and perhaps a pause at the end of last year in terms of attach rates. First of all, is there any reason that you guys can kind of explain this pause if you do see it? And then secondly, do you think that handset OEMs might be pausing because they're looking to incorporate both Type-C and USB PD into their phones at the same time when they redesign these power and connectivity systems?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [77]

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Chris, it's Hassane. So if you remember my commentary through 2017, I've always said the ramp will actually be in the second half of 2017. The first -- the beginning of '17, when you start seeing a lot of these announcements and a lot of these deployments, of course, it follows Mobile World Congress. We're the first in a lot of the announcement. But for us, I've always said the actual ramp for Type-C, meaningful ramp for Type-C in the market will be in the second half, and that came exactly as expected. And we all know kind of a lot of the products that we are in. USB-C, if you want to look at it as slowed down a little bit or what's going to be in '18, it's going to be, what I call, the multiyear franchise. The whole world is going to go to Type-C. It just happened that the phones are there first. The PCs are more and more -- you're going to see more and more deployment. But more importantly, for us, where we play is that broad market from the cables to the chargers. We do power delivery. We do the power adapter of products to date also. And we see that trend going up as more and more customers either choose to put that in the box or outside the box. I'm not worried about the fluctuations quarter-on-quarter or specifically within a market, because when you look at the Type-C trend, it is growing and it is getting fanned out across a lot of markets. So that -- you have to look at it as a broad ecosystem across all markets to see if there's traction or not. And I can tell you, based on that, there is a lot of traction in '17 and there will be in '18 as well.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [78]

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Okay. I guess, just on a follow-up on that. Would you expect even more acceleration on USB Type-C when USB PD is kind of finalized and starts to ramp as well?

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Hassane El-Khoury, Cypress Semiconductor Corporation - President, CEO & Director [79]

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I think what I'm starting with, the acceleration, right? I think today, that is already in the market. We delivered today PD in some of our customers' product. You're going to see more of these design wins becoming public over the next 2 or 3 quarters. But I wouldn't say it's a acceleration. It's going to be a growth and multiyear deployment of it. So I'm not expecting "a pop" because of a deployment of PD versus what we see in a Type-C because it's just going to go with what the market and the end use case is today. We see the growth. It is very healthy. We're participating in it. But it's not going to be a sharp need from what we have seen in 2017, okay?

So thank you all for joining us today. Our Cypress 3.0 strategy is hitting stride as evidenced by our strong revenue, earnings and cash flow this quarter. Our technology and products are very well positioned for the exciting IoT opportunity before us, and we have the right team to execute our plan. We will be at several conferences and trade shows over the next couple of months. If you thought we are making progress in our focused markets already, wait until you see what we have in store for everyone at Embedded World in Nuremberg, Germany, starting on February 27. We never stop. We look forward to seeing many of you soon. Good night.

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Operator [80]

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And thank you for your participation on today's Cypress Semiconductor conference call.