Question-and-Answer Session
Operator
Yes, thank you. Our first question comes from the line of Chris Blansett. Please state your company followed by your question.
Christopher Blansett - J. P. Morgan
J. P. Morgan. Thanks. I appreciate the question. I remember speaking to Ken in the past year, based with the expectations he indicated that the margins would probably peak out in the mid 20s, so obviously you’re above that. So what has changed since that time frame and should we potentially look at better peak margins going forward?
Joanne Solomon
Chris, thanks for the question. It’s always hard to call what a peak is. So really we’re guiding Q1 revenues to be down seasonally so our gross margin expectation will come down as well. So we are turning higher gross margin levels for the future. Product mix, revenue volumes, the pricing environment, all contribute to gross margin fluctuations. If we look at 2007 as a percentage of revenue, materials was about 38%, direct labor was about 16%, and depreciation was about 8% and the other costs were about 13%. If we continue our prudent investment strategy, depreciation will be test in check. The benefit of spreading this cost over a larger revenue base will benefit our gross margins. So continued favorable quarters like Q4 ’07 will definitely yield opportunities [refer] to gross margin expansion.
James Kim
Chris, this is Jim, I like to add there again. The really important part of utilization, with the fixed investment a given time and then suddenly customer demand increases or loading increase, obviously our margin will improve. The secret is how we do that every quarter.
Christopher Blansett - J. P. Morgan
Kind of along those lines, if you assume your product mix stays constant, do you have a peak amount of revenue you can generate today, if you can give us a number on that or an idea?
James Kim
I would say we could get up probably today I have a capacity of $760 million, something like that maybe even higher if everything is perfectly done.
Operator
Thank you. Our next question comes from line of Timothy Arcuri. Please state your company followed by your question.
Timothy Arcuri - Citi
Citi. Thanks. Joanne, what do you think that the variability is going to be on gross margin as revenue scales down here? certainly in Q1, I guess I’m looking even beyond Q1. I go back to my year-over-year end analysis, if you look at in the Q2 and if revenues were down again in Q2 and they were down, say a material number, say 5% to 10%. What’s the variability will there be on the margin line?
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