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Cypress Semiconductor (NASDAQ:CY)
Q2 2018 Earnings Conference Call
Jul. 26, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Cypress Semiconductor second-quarter 2018 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.

Colin Born -- Vice President of Corporate Development and Investor Relations

Thanks, Michelle. Good afternoon, everyone, and thank you for joining our second-quarter 2018 earnings conference call. With me today are Hassane El-Khoury, our CEO; Thad Trent, our CFO; and Mike Balow, our executive vice president of sales and applications. Hassane will make some introductory remarks, Thad will provide a financial overview and then we will take your questions.

All information discussed in our press release and on this call is based on preliminary unaudited results, and we encourage you to review our 10-Q once it is filed. During the call, management will make statements about our third-quarter guidance, our long-term financial model and other future matters that should be considered forward-thinking -- forward-looking, excuse me. Actual results might differ materially from the results anticipated in our forward-looking statements. Please refer to our earnings release, the risk factors in our most recent 10-K filed with the SEC and our other SEC filings for a more detailed discussion of risks and uncertainties that could cause these differences.

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, 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 non-GAAP financial measures are included in our earnings press release and our investor presentation deck, both of which are dated today and available on our website at investors.cypress.com.

I will now turn the call over to Hassane.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Thank you, Colin, and thanks, everyone, for joining us today. We had another solid quarter in Q2, setting multiple revenue records for Cypress for total company, PSoC MCU and Bluetooth/WiFi combo. The Bluetooth/WiFi combo revenue now represents 55% of our overall wireless IoT revenues in Q2. The team's executing well on our plan to deliver a road map of new connect, compute and store solutions for exciting high-growth opportunities in our focus markets at attractive gross margin, a reflection of our strong commitment to couple revenue growth with even higher levels of earnings growth.

I'm pleased to report that we continue to gain share across the board. We outgrew the overall 32-bit MCU market by over two times in 2017, increasing 33% over 2016. We also have outpaced the wireless IoT market by more than two times, growing 46% in 2017 over our annualized Q4 run rate exiting '16. Our wireless IoT business is on track to outgrow by our target of 16% to 18% year over year in the second half of 2018.

Let's start with automotive business, which spans all of our technological capabilities to connect, compute and store. Cypress' automotive business is built on a solid foundation of more than 15 years of investment to earn the trust and business of all OEM and Tier 1 customers worldwide who value our reputation for delivering innovative products with outstanding quality and reliability. We hold the No. 1 market share position in our focus categories in automotive, including wireless connectivity, instrument cluster MCUs, NOR memory and touch interface solution for in-car infotainment.

Building on our attractive market position in automotive, we continue gaining strength through our investments in innovation and technology. In wireless IoT connectivity, Cypress is winning in high-growth infotainment application with our 802.11ac combo solution that delivers robust WiFi and Bluetooth connectivity with the industry's only RSDB, or Realtime Simultaneous Dual Band technology, in production to enable multiple users to connect and stream any content to their devices simultaneously. Cypress' RSDB momentum continues as announced last week with Pioneer, introducing a new infotainment platform with our RSDB combo solution to allow Apple CarPlay and Android Auto to operate concurrently without degradation caused by switching back and forth between bands. In wired connectivity, the automotive industry is transitioning to USB-C over the next few years.

Cypress is leveraging our global leadership in USB-C to give our customers the most compelling solutions for USB connectivity and charging in the car. For failsafe storage, our leadership position with NOR memory solutions is solidified with reference designs secured across all of the top GPU or SoC-based ADAS platforms, securing our leadership position for boot code memory in the increasingly important autonomous driving market. As ADAS complexity increases, so do the NOR and RAM requirements. Automobiles with advanced ADAS systems equipped with multiple externally facing cameras for objects and lane detection require three to five times more or $5 to $10 more in external NOR and RAM content per car.

We are expecting the attach rate of these advanced ADAS systems to grow from 24% of cars today to 49% by 2023, representing another attractive growth opportunity for Cypress. Finally, our MCU solutions are enabling automotive customers to bring advanced instrument clusters into the value segment of their markets as they convert old analog gauges to digital displays. Adding to our attractive MCU position in automotive is our new Traveo II controller, which is gaining excellent momentum in the industry to maintain our MCU leadership in the instrument cluster market and establish a new leadership position in the body electronics market. The automotive industry's steady march toward autonomous vehicles will increase demand for more sophisticated instrument clusters, more connectivity and advanced ADAS solutions.

These trends support our outlook of 8% to 12% long-term growth for Cypress' automotive business, which exceeds that of the industry. Turning to the consumer side of our business. We continue winning customer platforms for smart home and wearable applications where we offer the industry's most complete product portfolio, spanning all the major functional blocks for embedded IoT systems, ranging from connect, to compute, to store. The breadth of our solutions drive synergies for our sales team who can now sell more products to the same customers.

In fact, revenue from customers purchasing from two or more technology families was up 11% quarter-over-quarter as we continue to be aggressive in cross-selling through our global channel. Our strategy in the consumer space is to focus on leading customers in each segment such as smart home, white goods, wearable, audio and remote controls. These customers leverage the premium performance and reliability of our products, such as the superior WiFi/Bluetooth coexistence or the ultra-low power connectivity of our new 28-nanometer 11ac connectivity solutions or the advanced security offered by the dual core architecture of our new 40-nanometer PSoC 6, which, by the way, is designed into over 50 platforms spanning a wide variety of consumer and industrial end markets, some of which will be on shelves for the 2018 holiday. Winning platform designs with these leading customers allows us to increase the stickiness of our business and extend our design win life cycles as developers focus on expanding the number of applications derived from the same core designs.

As an example, LG has been working with Cypress to build upon there ThinQ platform since 2017 with a WiFi-connected ThinQ smart air conditioner and expanding, most recently, with the announcement of a family of smart washing machines connected with Cypress' WiFi and Bluetooth. This is just one of many examples of customers fanning out to use Cypress' MCU and connectivity solutions across their broadening range of connected consumer products under a single OEM brand name. Looking at the second half, we are particularly optimistic about voice-enabled products with Cypress inside. Beyond smart speakers, developers are racing to create new products powered by voice control, including new kinds of smart remote controls.

More to come on these applications later this year. In wired connectivity, momentum for USB-C grows. Our multiyear franchise of USB-C solutions continues to see broad adoption across a variety of platforms including PCs, phones, power chargers, power docks and graphics card, to name just a few. In fact, we have 450 end-customer products shipping with Cypress USB-C, up from 253 in Q2 of '17.

Focusing specifically on our portfolio of memory solutions for high-performance failsafe storage, I would like to highlight how we have successfully executed on the transformation of our flash business over the last two years. We have shifted away from the commoditized market and focused on failsafe storage solutions in mission-critical applications with longer design cycles and higher margins. Now that over 70% of our storage revenue comes from customers on long-term contracts and approximately half of our NOR revenue comes from automotive, we are positioned to be far less vulnerable to the pricing gyrations notorious within commodity memory businesses. With the exponential rise of smart connected IoT product, people are growing more and more dependent on artificial intelligence, voice control and other technologies.

When developers know that system failure is not an option, they turn to Cypress for highly reliable storage solutions. We are the market share leader in failsafe high-quality, high-density storage products that operate in harsh conditions and work all the time, every time. Since the fourth quarter of 2016, when we embarked on restructuring our memory business, our consumer revenue exposure has declined from 28% to only 17% last quarter. During this time, we focused our Austin Fab capacity to serve customer segments that are both growing and value Cypress quality such as automotive, industrial and wireless infrastructure.

This repositioning has allowed our MPD division to achieve three consecutive quarters of growth, and we are on track for a fourth in Q3. In closing, we are executing on our plan to enable our customers to connect, compute and store with our innovative solutions for automotive, consumer and industrial applications. It is truly an exciting time for Cypress. I'll now turn it over to Thad to talk more about our numbers.

Thad Trent -- Chief Financial Officer

Thanks, Hassane. I'm pleased to report another solid quarter, achieving multiple records in revenue, operating income as we continue to execute our Cypress 3.0 strategy. As Hassane mentioned, we are gaining share on our focus markets across the portfolio, driving strong financial performance in both our divisions. Q2 revenue of $624.1 million increased 5% year over year and performed at the high end of normal seasonal patterns, increasing 7% sequentially in Q2.

We saw year-over-year growth in all product lines, and our automotive business increased 5% year over year as we gained content in the car. Q2 non-GAAP EPS was $0.33, a 57% increase over Q2 of 2017, demonstrating the leverage of our model. Finally, we again improved gross margins to 46.3%, a 540-basis-point improvement year over year and the highest gross margin since the Spansion merger. I'll walk through each of the drivers, including the demand environment, our gross margin improvement and additional details on our financials.

So first, the demand environment. The environment remains healthy and stable across our focus markets as we continue to drive content gains. Lead times have stabilized, and customer order patterns are consistent and more predictable. Design activity remains robust, increasing 28% year over year, and this growth is fairly evenly distributed across our major business lines.

We believe the flash memory market will remain supply constrained through 2018 as demand remains stable. Our distribution channel, which accounted for 70% of our revenue in Q2, remains healthy as the weeks of inventory decreased to 7.7 weeks in line with our six to eight-week target. And turning to the divisions. MCD revenue was $368.5 million, up 9% sequentially from Q1 as expected due to strength in wireless IoT and microcontrollers.

In fact, our microcontroller business achieved a record revenue level in the first half of 2018, increasing 7% over the same period in 2017, primarily due to the growth of our PSoC products as we continue to convert customers from legacy MCUs to our higher-margin PSoC products. MPD revenue was $255.6 million, up 4% sequentially from Q1 as we continue to see strength and healthy end-market demand in the flash memory, particularly from our 4.5 and 5G infrastructure and industrial customers. With the repositioning of this business and more stable and predictable end markets, we now expect MPD revenue to grow high single-digit percentages in 2018. So that brings me to gross margin.

We continue to execute well on our gross margin expansion plans. Our Q2 gross margins came in at 46.3%, increasing 540 basis points over Q2 2017. We achieved this increase through the many gross margin and cost-cutting initiatives we have been discussing over the last year as well as favorable changes in customer and product mix. We continue to increase loadings in Fab 25, with utilization increasing to 83% from 74% in Q1.

As a reminder, full utilization is approximately 85%, and we expect to operate in this range going forward as we manufacture approximately 35% of our products in Fab 25, giving us flexibility to move outside production inside as needed. So let me give you some additional numbers for your model. Our Q2 operating expenses were $150 million or 24% of revenue. This was below Q1, primarily due to timing of spending on new projects.

We also achieved record operating income at $139.4 million or 22% of revenue. This improved 690 basis points over Q2 2017 and again demonstrates the leverage in our business model. OIE was $11 million. Our non-GAAP tax expense in Q2 was $3 million.

Our diluted share count was 376 million shares, which includes 3.1 million shares for the in-the-money portion of our convertible notes. This resulted in a net income of $125 million or $0.33 per share, above the high end of our guidance range. Turning to the balance sheet. Cash and short-term investments totaled $113 million, and we had $540 million undrawn on our revolver.

Accounts receivable increased to $405 million, and DSO improved from 61 days in Q1 to 59 days in Q2. Cash from operations was $111 million, which increased 3.4 times over the Q2 run rate in 2017. Net inventory increased $11 million sequentially to $287 million with increases in MCD to support the Q3 revenue ramp, while MPD was down sequentially. Our days of inventory were down from Q1 to 78 days.

Our Q2 non-GAAP EBITDA was a record $156 million or 25% of revenue. CAPEX was $26 million, up $8 million from Q1 due primarily to onetime back-end test capacity purchases. And depreciation was $16 million for the quarter. Total debt was $953 million as we paid down $64 million in Q2, and our debt-to-EBITDA leverage is now at 1.7 times on an LTM basis.

We also reinitiated our stock buyback program for the first time since Q1 of 2016. We repurchased $10 million in shares during Q2 and have $201 million remaining on the $450 million authorized buyback. For the quarter, we returned 58% of our free cash flow to shareholders through this buyback and the dividend. With our debt leverage now below two times, our long-term model is to return 50% of free cash flow to shareholders.

And the dividend yield was 2.8% at the end of the quarter and continues to be one of the highest in the industry. So let me turn to guidance for the third quarter. We ended the quarter over 90% booked as our broad customer base is providing better visibility. The book to bill was 1.04, with record levels of backlog in MCD.

As I mentioned, lead times have stabilized in the first half of 2018 after hitting peaks in late 2017. We're expecting Q3 revenue of $655 million to $685 million which, at the midpoint, is up 7%. And this is above the normal seasonal patterns of up 3% to 4% in the third quarter. This guidance reflects growth across all product lines in MCD driven by microcontroller, wireless IoT and USB-C.

At this point, we expect minimal impact from the trade wars in tariffs. It's important to note that the tariffs are subject to public comments through the end of July. If they do go into effect, approximately 1.5% of our revenue is imported from China to the U.S., and we would be subject to the 25% tariff. We'll continue to monitor and evaluate our supply chain and end customers as more information becomes available.

So moving to gross margins. Our Q3 gross margin is expected to be approximately 47% and will vary with product and customer mix. We expect Q3 operating expenses between $156 million and $158 million for the quarter as we increase spending on projects in our focus markets. Net OIE will be approximately $12 million.

Tax expenses will be $3 million. CAPEX is estimated to be $20 million and depreciation of approximately $17 million. We anticipate the fully diluted share count to be 379 million shares. As a result, earnings per share is expected to be in the range of $0.36 to $0.40 for the quarter.

So to wrap things up. Our product portfolio of connect, compute and store solutions for embedded IoT systems continues to drive our financial performance as our teams across the globe execute on our Cypress 3.0 strategy. As we look forward, we remain committed to above-market revenue growth, coupled with even higher levels of earnings growth. With that, I'll now turn the call over to the operator for Q&A. 

Questions and Answers:

Operator

Thank you, sir. [Operator instructions] John Pitzer from Credit Suisse. You may go ahead.

Thad Trent -- Chief Financial Officer

John, are you there?

Operator

Your line is open.

Thad Trent -- Chief Financial Officer

Operator, we're not hearing John.

Operator

[Operator instructions] Would you like to go to the next question, sir?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes, please.

Operator

Vivek Arya from Bank of America Merrill Lynch. You may go ahead.

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

Hi, this is Adam Gonzalez on for Vivek. Thanks for taking my question and congrats on the solid results. Can you just remind us what the path is to 50% gross margin? I know that you guys are on track for that 48% target you had laid out for the year end. But what's the path to 50%? And what leverage do you have to perhaps get margins higher than that?

Thad Trent -- Chief Financial Officer

Yes. So let me make sure I calibrate you on the improvements that we've gone through, right? If you look over a multiyear period -- and I always tell everybody, you shouldn't look at our improvement kind of quarter on quarter, you should look over a longer period of time. About two-thirds of our improvement has really come from cost and mix shift, one-third has come from pricing over the last, let's call it, 12 months to 18 months. So as we go forward, getting to that 50% target, which is our long-term target, you've got a couple of drivers, you have more playing out in terms of what we've been working on because these things don't happen with a 90-day time frame, so they happen over long periods of time.

And then you also have ramping of new products that are at attractive margins, that are at the corporate goal or higher. And as we continue to drive those products, we'll continue to move toward that 50% target. And that's really how we plan on closing the gap there.

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks. And then as a follow-up, you had cited on automotive, that it grew 5% year on year. I know this is somewhat of a deceleration from, I think, the low teens you had been growing at.

I'm just wondering if you're seeing any negative impact from some of the tightness in passive components that some of your peers have been citing?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

No. This is Hassane. We haven't been impacted with that. Obviously, we're closely working with our customers.

And so far, most of our customers, to a first order, have all gotten what they need, especially for the ramp into Q3 and Q4. So just to comment on the 5%, the build-out quarters are Q3 and Q4 in automotive. So when you talk about the growth in teens that we've been talking about, you have to look at automotive not quarter on quarter or you have to look at it as a year on year. So we're still very comfortable in the 8% to 12% that we've been targeting.

This quarter is still up from last year. But I think you have to forward look a little bit in the Q3 and Q4 quarters for the build-out that our customers will do. Typically, new model year cars for 2019 will hit the showrooms in the September, October time frame. So that gives you a little bit of when we see the build-out, which is typically in Q3.

Operator

Thank you. Our next question comes from Anthony Stoss with Craig-Hallum. You may go ahead.

Anthony Stoss -- Craig-Hallum Capital Group -- Analyst

Hi, guys. My congrats on the strong results. Hassane, can you comment a little bit more about what you expect from your USB type C ramps in the second half of the year? Do you think it's predominantly smartphone-related or a combination of smartphones and PCs? And secondly, on the NOR side, now that you're expecting to grow high single digits through 2018, any thoughts on if you think that might accelerate in 2019? Thanks.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Sure. So on the USB-C, it's across the board. I mentioned a few examples of the design wins that we have going -- that have -- in production today, which goes from PCs, phones, docking stations and power adapters. So the ramp is going to be across the board.

Obviously, a little bit of strength in the mobile segment will overshadow, just by on a volume, the rest of them. But the growth, as far as design wins and customer coverage, is very broad. But it will be, obviously, more on the mobile than others, just pure volume. For the NOR, we have been moving to automotive.

We have all the design wins in automotive that either I talk about directly like the Bosch from a few quarters ago or I hint at just because of some nondisclosures with our customers. That is going to take time to play out as far as revenue ramp. Specifically, when you talk about ADAS, when you talk about automotive, which is where our exposure is, you're going to see that toward mid-2019. And that will fuel 2019 and beyond as far as the growth for the automotive NOR.

The strength that we're seeing today is really on the 5G build-out that we're seeing across the world. That's a strength that you would notice in our enterprise segment. That's driven by that build-out that we're seeing today. And that will continue, obviously, through '19 and a little bit beyond.

Anthony Stoss -- Craig-Hallum Capital Group -- Analyst

Great results, guys. Thank you.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Thank you.

Operator

Thank you. Rajvindra Gill from Needham & Company. You may go ahead.

Rajvindra Gill -- Needham & Company LLC -- Analyst

Yes. Thanks. And a couple of congrats. Very good momentum across all fronts.

The data -- I was wondering if you could clarify the wireless IoT business. So you expect that to outgrow the 16% to 18% target? I was wondering if you could just quickly clarify on the IoT forecast.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. That was -- I'll answer that. It's on track to grow by our target of 16% to 18%. I might have misspoke when I went through my remarks.

But we are expecting it to be right where we expected it to be when we outlined our IoT wireless plan. I think that's the visibility we have today.

Rajvindra Gill -- Needham & Company LLC -- Analyst

OK, good. And the mix of the wireless IoT, I know, had been shifting a little bit toward auto and industrial whereas consumer is still the bulk of that. But I was wondering if you could maybe talk a little bit about what you're seeing within those specific subsegments. I know your customer portion of that is quite sticky in terms of customers going on to next-generation product releases.

I was wondering if you'd give any clarity on what you're seeing kind of going to the second half of this year, what might be different from what you saw last year in IoT.

Thad Trent -- Chief Financial Officer

So Raji, I'll give you the breakdown of the business, and then I'll let Hassane talk about specifics on the customers. Roughly about 20% of that wireless IoT is automotive today. We've got another 20% that's industrial, and the remainder is consumer and enterprise. So clearly we've seen a lot of great traction in automotive.

Just as a reminder, when we acquired that business in 2016, it was 10% automotive. So we've done a great job of deploying that quickly into our channel and getting design wins and turning those into revenue. And obviously, the consumer is the fastest time to market, and that's where you've seen the growth really in 2017. I'll let Hassane talk customers.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. I mean, at the end customers, you've seen us talking about, obviously, the Audi a few quarters ago. We have the Pioneer. We will start talking more and more about specific customers, specific use cases as our customers feel comfortable and they announce their end products.

But the comment you made, we win the platforms, it's very sticky just because of -- think about the coexistence and the backwards compatibility that every customers have to do because that car, when you park it, needs to work with every single router that is available in a typical home or a typical garage. That provides us stickiness. We see that also in our consumer segment even. Specifically, the example I gave with LG where, last year, we were designed in their -- what they call the ThinQ platform, which adds AI to a lot of the home appliances.

The -- I had mentioned I think last year, the air conditioning example. And to this year, they followed with a washing machine. And their road map is tied to our WiFi. And that's the beauty of my reference to the stickiness of that business.

Operator

Thank you. Our next question comes from Vijay Rakesh from Mizuho. You may go ahead.

Vijay Rakesh -- Mizuho Securities -- Analyst

Hi, guys. Good quarter. I'm just wondering, when you look at automotive, if you could give some color from a unit or a dollar content perspective how you see microcontroller content going from, let's say, a level 2 car here to, let's say, level 3, level 4, maybe microcontroller and memory. Thanks.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. So the -- it's a tough question to answer, but I'll give you some color. You might have more insight for it, too. So I gave the example of a typical ADAS, whether it's level 3, level 4, level 5, just based on the usage of the camera.

So we're exposed to the camera, and we're exposed to the main board SoC, of which it doesn't matter on what level. Typically there will be one, when you go level 3, 4 and 5. So that was the numbers, the 5 to 10 additional memory in a typical system, and the growth is going to be more on the penetration of those systems in the commercial vehicle market. On microcontroller, specifically for us, for Cypress, we don't play in the microcontroller for the ADAS system, the cameras and the SoCs or the GPUs.

Our growth is on the interior of the car or the passenger compartment, which is where most of the growth is coming. And the example I give everybody why we're seeing that 8% to 12% growth across our automotive business is, as the car drives itself, the differentiation for the OEMs is going to happen in the body of the vehicle. That's where we're seeing a lot of investment in R&D happening from our customers, and those are the microcontrollers, specifically, our Traveo II, that is going into these designs. We've had a very healthy design funnel for Traveo II, and that's going to generate revenue, I think into '20, '21 and beyond.

So the memory specifically is for the ADAS. Our microcontroller growth will be in the body and not necessarily tied to any levels of autonomy, which puts the growth for us on the microcontroller starting today. We don't have to wait for any ADAS deployment or penetration.

Vijay Rakesh -- Mizuho Securities -- Analyst

Got it. And just one last -- a second question. If you look at the automotive side, you mentioned first half is more like a timing of ramp but second half should be stronger. Is that the case? And so you should still hit that 10% to 12% growth trajectory on the automotive side.

Is that fair?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes, that's correct. The second half will be stronger in automotive, fitting our long-term model of the 8% to 12%.

Operator

Thank you. Our next question comes from Karl Ackerman with Cowen and Company.

Karl Ackerman -- Cowen and Co. -- Analyst

Hi. Good afternoon, gentlemen. I had two questions. So I first want to focus on connectivity.

You talked about your design wins in USB-C, but many design wins in connectivity -- well, I guess, could you clarify the number of design wins you are tracking year to date within connectivity versus the same period last year? And perhaps, as a follow-up, do you think the proliferation of USB-C connectivity across Asia-based Android smartphone manufacturers alone can drive 30% growth for your wired business this year?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

OK, I'll try to answer the -- so we're not -- I haven't talked about specifically our connectivity, both wired and wireless. The comment I made is regarding the wired, which is the USB-C, to highlight the -- not the strength of the ramp but the breadth of the ramp and the confidence we have because this is all in the revenue today. As far as the funnel, in general, I don't disclose funnel data because every company's got a different funnel metric, and it's not apples to apples. So it just muddies the water.

What I can tell you is our design activity -- and that's a comment I've made in prior calls, too, our design activity comfortably supports our 16% to 18% growth for that connectivity business, and we've been delivering or exceeding that since we've outlined that plan. So I have no worries about, number one, the visibility; and number two, the growth rate of that business. The second part of the question was? Can you remind me of the second?

Karl Ackerman -- Cowen and Co. -- Analyst

Sure. The second part of the question was just about...

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Oh, the Android.

Karl Ackerman -- Cowen and Co. -- Analyst

Yes. Just how to you think about the growth of USB-C just from Android smartphones?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. So we -- you don't hear me talk about mobile outside of our neighbor customer here with Apple, you don't hear me talking about any other phone or any other system, whether it's Android or other, with type C because we don't target the mobile market with our type C. Apple is a strategic customer for us outside of just the connectivity. We support them, of course.

But mobile is not a focus segment for us with type C. So all the growth is happening on, one, mobile platform but, more importantly, it's that breadth that I highlighted with the 450 designs that are going into production. That's a strategic direction for the company. So therefore, we're not tied to any growth, strong or not, that is tied to the Android platform specifically.

Operator

Thank you. Our next question comes from Craig Hettenbach from Morgan Stanley. You may go ahead.

Craig Hettenbach -- Morgan Stanley -- Analyst

Thank you. A question for Thad. Just given the above seasonal outlook for Q3, you talked about it, I think 300 basis points or more above typical seasonality. Any early look into Q4? Like should Q4 track normal seasonality? Or how are you seeing kind of the transition from Q3 to Q4?

Thad Trent -- Chief Financial Officer

Yes. As you know, we don't guide beyond one quarter. But to give you kind of early indications on what we're seeing, it's kind of that normal seasonal. Typically, the Q4 is down 3% to 4%.

I think we're probably, based on some visibility we have today, is kind of on the lower end of that normal seasonality.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And then just a question for Hassane and considering your automotive background as well. As you think through kind of the bigger picture of the tariffs, any particular variables you look at in terms of from a production or potential disruptions that you would monitor pretty closely as these talks evolve?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes, of course. I mean, we -- I monitor it very closely, both the OEMs and, more importantly, the Tier 1s because the Tier 1s will give us a little bit of a head start as far as what their ordering patterns are. So I look at this. I used to look at it weekly, I look at it daily now just because of the changes and the fast pace of the changes.

A lot of things came to light yesterday in a lot of the Detroit-based companies' earnings. But also they gave a lot of some decisions where some said they will not be passing it on, some said they will clearly pass it on. Obviously, those decisions will have different impact on the end market. So it's still too soon to say which way we're going to go.

But I can tell you I'm heavily involved both from here but heavily involved in conversations with our customers directly just to make sure that they are getting what they need. As of now, basically, within the guide that Thad has given, all of what we know, all of our, call it, balancing approach to the guide has all that baked into it. Anything new that comes out, obviously, you'll hear about it from all of my peers as well as myself. But for now, the guide is based on a lot of that visibility that's already publicly available outside.

Operator

Thank. you. Blayne Curtis from Barclays. You may go ahead.

Tom O'Malley -- Barclays Investment Bank -- Analyst

Hi, guys. This is Tom O'Malley on for Blayne Curtis. Congrats on the good results. I just wanted to turn to memory really quick.

You guys had some pretty strong results in June. Could you kind of dive into the different segments and where you saw strength, and obviously, up-ticking the full-year guide to high single digits, where you continue to see strength for the rest of the year?

Thad Trent -- Chief Financial Officer

Yes, Tom. It's Thad. So if you look at what's happened, and Hassane mentioned it earlier, and it's really the enterprise that's driving a lot of this right now, the 5G build-out. So we're seeing strength there.

It's broad as well. But if you look at our Memory Products overall, you're seeing it heavily weighted, in terms of the growth, really in industrial and enterprise in the short term. And then as Hassane said, longer term, it's really the automotive growth that we would see kicking in later in 2019 and beyond.

Tom O'Malley -- Barclays Investment Bank -- Analyst

Great, that's helpful. And then secondly, on the buyback program, you guys mentioned you repurchased $10 million in Q2. Do you guys continue to plan to be aggressive with that? You obviously have over $200 million remaining, how do you view the share buybacks? And do you think that we should see some more in the next couple of quarters?

Thad Trent -- Chief Financial Officer

Yes. So I laid out our policy, right, that 50% of free cash flow returned to shareholders through the buyback and dividend. This quarter, it was 58%. And we bought back -- just to be clear, we bought back $10 million worth.

But as we go forward, now with our leverage down below two, it gives us that flexibility to start buying back shares. And I think you'll see us do that and kind of maintaining that 50% ratio there between the two.

Operator

Thank you. Our next question comes from William Stein with SunTrust. You may go ahead.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking my questions. I'll add my congratulations on the nice results and outlook. I want to ask two questions about the wireless portfolio.

You've obviously done a great job of ramping this IoT low power Bluetooth and WiFi. I'm wondering if the company has any exposure to these new protocols that are, I think, designed specifically for IoT, NB-IoT and Cat M1. Is that something you're developing or could potentially acquire? Or do you see that as a meaningful market for Cypress?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes, this is Hassane. So obviously, we're looking at the opportunity for the Narrowband IoT specifically or Cat M. We're continuously monitoring assets that are available outside while we look at it. It's not anything, I would say, urgent just because the market is not there yet.

And when it's -- the market is going to take, call it, two to three years to develop, which gives us time to focus on really what our core growth is, which is the WiFi and Bluetooth connectivity, which is the only ecosystem today that is broadly deployed. But we're monitoring it. I can't give you more information today just because of the strategic aspect of -- and the internal aspect of it, of what we're doing on it, whether organic or inorganic. But I'll leave it at that.

It's not time-urgent. It gives us time. What we are doing today, however, is we are engaging with partners on -- and our customers because our microcontroller services that market. It doesn't have to be -- the radio doesn't have to be owned by us, there are a few other specific radio protocols that play in the IoT, in more niche-y.

We have the microcontrollers that sit next to these radios. And we have been heavily engaged with partners until that market obviously develops and becomes meaningful for us to talk about how do we bring it in if we want to bring it in. So that's on really that -- where we are with other radios today.

William Stein -- SunTrust Robinson Humphrey -- Analyst

That helps. One question on competition in the WiFi/Bluetooth combo market that you participate in today where you're getting this great growth. My recollection is that the acquisition you did of the Broadcom IoT asset enables Broadcom and Cypress, at some point, to compete in each other's markets. Can you remind us or disclose to us when that time comes? Is that still many years away? Or is that something perhaps we should think as closer in?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. So that is next year. The time line is next year. However, obviously, since the acquisition, there are many things that changed.

Just to highlight on the competitive nature of it, even if Broadcom decides -- I wouldn't know how they would, but decides to enter the market, the software that came with it, the software is not shared. The software is owned and is proprietary to Cypress today, meaning there is no software capability that remained at Broadcom. What remained, obviously, are the products. Since then, we have diverged the road map.

We are focusing on ultra-low power, small footprint radio controllers with embedded microcontrollers, which is not the mainstream that Broadcom does. So inherently, although -- and again, this is my opinion as I sit here today, knowing the market dynamic, although they might have the same product, since the time of the acquisition, that product road map, everything we are winning with today is different, is developed here at Cypress. It is not something that came in from the outside. The software, which remains the biggest challenge, whether it's Broadcom or Qualcomm or MediaTek, which are the other competitors in that market, the software remains the biggest barrier of entry.

Unless you have ease-of-use software that people with 100,000 units, not 10 million cellphones, can use, you will not be able to penetrate that market. We have that. We've developed that. We've evolved it since the time of the acquisition.

So I'd say I'm comfortable with where we sit today as far as the competitiveness, even if Broadcom does decide to come in.

Operator

Thank you. Our next question comes from Harsh Kumar from Piper Jaffray. You may go ahead, sir.

Harsh Kumar -- Piper Jaffray -- Analyst

Yes. Hey, guys. First of all, congratulations, a solid guide, solid results. Hassane, I had a quick question for you on automotive.

Several companies here, Mercedes and then GM, I think this week called out for slightly slower growth. When you look at your plays, content versus SAAR, how do you look at that? And what is the balance between those 2 from your standpoint?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

So we -- that's a good question. So we -- I've always -- in the forecasting that I've given or the projected growth that I've given, 8% to 12%, that assumes about a 3% SAAR, which is kind of -- over the last decade, with the ups and downs and different seed, it's been about 3%, give or take 0.5%. So that's what I base the content growth and the Cypress growth on. Now if you look at the semiconductor growth, most of it starts with the higher-end vehicles.

If you read the commentary from all the OEMs, a lot of them have put more and more focus on the, call it, the premium and the high brand, which have most of the content where we play first. A lot of them have also said that they're going to lift their medium-range vehicles, lift it with premium-level features. Like the Toyota Camry, they decided to move away from gauges and put premium instrument cluster in there, and they happen to use Cypress products. That's the dynamic I look at.

I've always said, even if the SAAR drops slightly based on the issue of the day, which is tariffs today, we will still grow at that aggressive rate, which is higher than the SAAR and higher than the semi content rate. That's how we've positioned the company. That's why we defined the strategy that I keep talking about is because these things happen, ups and downs. We want to make sure we are not proportionally impacted with it, and we will maintain our growth even if that happens.

And you are seeing it today.

Harsh Kumar -- Piper Jaffray -- Analyst

Very helpful, Hassane. And then my follow-up was on USB-C. I think last time you and I met, you mentioned something along the lines of P&D, which is power adoption and delivery. Could you maybe talk about what that means to you guys as an opportunity and some of the applications they're in?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Sure. So most -- a lot of the applications today are starting to put power delivery, whether it's for the power adapter or whether it's for a device level, right? So power delivery is starting to become a highly penetrated feature into the type C market. We have specific products, our type C products, that come with power delivery. We have some that do not.

So it really depends -- it's a customer choice. And we have some that come with neither, which is for the cable marker. So we have products specifically that go into cable. So we're pretty well positioned across all of the use cases of our customers.

We have the complete portfolio. If you recall in my Analyst Day, I really wanted to highlight, the way you win with type C is you have to be able to provide that complete portfolio from the device to the power, to the cable, to the multiport docking stations, etc. Because our customers, if you think about it like the PC guy, has all of these devices. They don't want to go to three vendors, they want to be able to go to one vendor.

That's strategically how we decided to go to market. And based on the design-in or customer footprint data that I gave out on the call, the 450, that's working pretty well for us.

Operator

Thank you. And our last question comes from Suji Desilva with Roth Capital. Thank you, sir.

Suji Desilva -- ROTH Capital -- Analyst

Hi, Hassane, congratulations on the strong results here. On the connectivity IoT business, when you first acquired it, the growth thereafter came from maybe getting new customers, some new categories like wearables and smart speakers coming in. As you look ahead to the 16% to 18% year-over-year growth, what's the profile these days, Hassane, in terms of are you needing new customers, new programs come on? Or is the existing base of customers kind of like-for-like growth going to help drive the 16% to 18%?

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Yes. It's actually both. So I'll -- one of them is existing customers where I use the term platform. So existing customers, they're deploying our products on new and new platforms.

So it's not necessarily pulling more volume on the same project, but they take the same platform, and they put it on a new product. The LG is the perfect example for us where we enjoyed the air conditioning revenue when it first started. Now we're adding to that revenue incrementally the washing machine. That's a platform deployment.

I consider those existing customers different deployment and broader deployment. We are also gaining new customers. And that, I track from new customers acquired and software installation. I think that the last time I gave that number, it was a 50% increase.

So even if you go back to new software downloads for customers, last quarter, I think year on year, it was about 50% increase. I don't have the numbers this quarter, but it gives you an indication that even new customer growth is happening at a much faster pace. Both of these together sets us up for the growth that I projected last year on a multiyear growth of the 16% to 18%.

Mike Balow -- Executive Vice President of Sales and Applications

So this is Mike Balow. I'll add one last comment to that. With a new customer, we're getting a lot of nontraditional semiconductor customers in that space as well. People that historically hadn't had a device that wasn't connected.

But now, with all the smart home and those kind of applications, we're getting a lot more customers that just hadn't even done semiconductors in the past. So that's led to a lot of growth as well.

Suji Desilva -- ROTH Capital -- Analyst

Very helpful, Mike. And then also on the manufacturing, the back-end constraints, you upped the CAPEX floor. Is that potentially a risk going forward, a potential further constraint? I know the lead times in some of that equipment can be very long, so I'd like to know your thoughts there.

Thad Trent -- Chief Financial Officer

No. This is Thad. So if you remember last quarter, we took our utilization down slightly to kind of clear out the bubble. And this was bringing on the capacity to make sure we have the front end and the back end matched in terms of capacity.

You'll see our CAPEX kind of go back into those normal levels again, that's why I guided to the $20 million for Q3. So it's kind of business as usual from this point. That's why I called it a one-time capacity increase there.

Operator

Thank you. I would now like to turn the conference back over to Hassane for any closing comments.

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Thank you all for joining us today. I'm very pleased with the team's performance so far in 2018 as we continue to hit new financial records and bring complete and innovative solutions to our customers. We will be at the KeyBanc conference in Vail next month, the Piper Jaffray and Deutsche Bank conferences in September. We look forward to seeing many of you on the road.

Good night.

Operator

[Operator signoff]

Duration: 53 minutes

Call Participants:

Colin Born -- Vice President of Corporate Development and Investor Relations

Hassane El-Khoury -- Executive Vice President of Sales and Applications

Thad Trent -- Chief Financial Officer

Adam Gonzalez -- Bank of America Merrill Lynch -- Analyst

Anthony Stoss -- Craig-Hallum Capital Group -- Analyst

Rajvindra Gill -- Needham & Company LLC -- Analyst

Vijay Rakesh -- Mizuho Securities -- Analyst

Karl Ackerman -- Cowen and Co. -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Tom O'Malley -- Barclays Investment Bank -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Suji Desilva -- ROTH Capital -- Analyst

Mike Balow -- Executive Vice President of Sales and Applications

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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