萊迪思半導體 (LSCC) 2003 Q1 法說會逐字稿

Good afternoon and welcome to today's conference call.

Copies of the Lattice Semiconductor first-quarter ending March 31st 2003 earnings press release may be obtained from the company's web site, which is www.Latticesemi.com.

This call is being recorded and is being broadcast live over the internet on 24.com.

A live broadcast and replay of the call will be available on the Lattice investor relations web site, www.Latticesemi.com until April 29th, 2003.

At this time I would like to turn the call over to the Senior Vice President and Chief Financial Officer, Steve Skaggs.

Please go ahead, sir.

Thank you, and good afternoon, everyone.

Joining me on the call today are Cyrus Tsui, our CEO, Steve Laub, our president, and Rodney Sloss, our Vice President of Finance.

Before we begin, I would like to read a safe harbor statement, and then I will provide a financial review and our outlook.

Steve Laub will then provide a business review, after which we will hold a question-and-answer session.

This conference call may contain forward-looking statements within the meaning of the federal securities laws, including statements about our future quarterly financial results, revenues, customers, product offerings, and our ability to compete.

Investors are cautioned that actual events and results could differ materially from these statements as a result of a number of factors including general economic conditions, overall semiconductor market conditions, market acceptance and demand for our new products, our dependencies on our silicone wafer suppliers, the impact of competitive products and pricing, technological and product development risks.

Please refer to our current filings with the SEC for a further description of these risk factors.

I would now like to review our statement of operations for the first calendar quarter of 2003.

Revenue for the quarter was $58.3 million, up one percent sequentially from last quarter.

During the first quarter, CPLD product revenue accounted for $40.7 million, or 70 percent of total revenue, and grew four percent sequentially.

FPGA product revenue contributed $8.4 million or 14 percent of revenue and declined nine percent sequentially.

Low-density simple PLD products accounted for $9.2 million, or 16 percent of revenue, and declined one percent sequentially.

For the quarter, the Americas made up 41 percent of revenue, Europe 29 percent, and Asia 30 percent.

Revenue by end market for the quarter was as follows: Communications, 44 percent of revenue; computing, 21 percent; and industrial/other, 35 percent.

Revenue mix by channel for the quarter was as follows: Direct, 54 percent of revenue; and distribution, 46 percent.

Finally, turns business for the quarter was in the mid-60 percent range.

Proceeding with the rest of the statement of operations, gross margin for the quarter was 60.2 percent, up slightly from the 60.1 percent reported last quarter.

Quarterly R&D expense was $21.8 million, essentially flat when compared to last quarter, and quarterly SG&A expense was $12.5 million, up slightly from the $12.3 million last quarter, due to the increased revenue level and new product introduction activities.

Other income for the March quarter was $1.5 million, down from the $2.3 million reported last quarter.

During the last quarter, we repurchased $32.8 million in face value of our convertible notes.

March quarterly GAAP net loss was $18.8 million, or 17 cents per share.

Quarterly intangible asset amortization was $21.1 million.

On a non-GAAP basis, earnings were $2.3 million, or two cents per share.

Non-GAAP earnings exclude the impact of intangible asset amortization.

Last quarter, the December quarter, on a non-GAAP basis, we reported earnings of $6.4 million, or six cents per share.

However, this amount also included a tax shield which we are no longer reporting.

On a comparable basis, the non-GAAP earnings for last quarter, excluding the tax shield, were $2.1 million, or two cents per share.

So on an apples-to-apples basis, non-GAAP earnings grew eight percent sequentially.

Turning now to the balance sheet, cash and short-term investments at the end of the March quarter decreased $24 million to $253 million.

Depreciation for the quarter was $4.7 million, and we spent $3.2 million on capital expenditure.

During the quarter, we used $29.6 million in cash to repurchase the outstanding convertible notes I discussed.

Netting all this together, the aforementioned items, cash flow from operating activities was a positive $8.8 million.

Inventory declined to $52 million from the $46 million reported in the December quarter.

We have now decreased our inventory levels for eight consecutive quarters.

At present, our inventory levels represent 6.7 months of current cost of sales, which compares to our target of four to five months.

Yes, Steve.

You meant to read declined from $56 million reported last quarter, not $46.

Correct. $56.

Sorry.

Turning now to a discussion of our financial outlook, we entered this second quarter with a slightly lower backlog, and continued limited visibility.

Due to seasonal factors, we expect a slightly higher level of turns business for the second quarter.

Although we remain concerned about the fragile state of the global economy, our best estimate at present is for the June quarter revenue to be essentially flat on a sequential basis.

Given our lack of visibility, we will once again limit our guidance only to the next calendar quarter.

For the rest of the P&L, we currently have the following expectations for the June 2003 quarter: We expect gross margin as a percentage of revenue to be flat.

We also expect operating expenses to be flat.

Intangible asset amortization will be approximately $18.6 million.

And we expect other income to be approximately $1 million as we anticipate being less active in the open market repurchases of our convertible notes.

We will not report any tax provision in the June quarter, and finally, the total shares outstanding should be relatively flat.

With that, I would like now to turn the call over to our president, Steve Laub, for his comments on the business.

Steve?

Thank you, Steve.

Good afternoon, everyone.

I'll begin my discussion with respect to comments on the first quarter's results.

As already stated, our overall revenues grew one percent sequentially to $58.3 million, driven by a four percent sequential growth in CPLD revenues and a decline of approximately nine percent in FPGA revenue.

Chiefly, revenue growth was broad-based and driven by overall market growth.

From an end market perspective, growth came primarily from the industrial and other end markets, including instrumentation, consumer, medical, and automotive.

From a product standpoint, we continue to experience rapid growth of our BFW product line, and especially our ispMACH4000product family which grew by over 100 percent sequentially.

In addition, we are confident regarding ongoing customer acceptance of our CPLD products as we achieved the highest level of design wins for our CPLD products since the first quarter of 2001.

FPGA revenues, after growing 28 percent sequentially, from Q3 to Q4, in 2002, declined by nine percent during the past quarter.

Given the rapid growth in Q4, and the nonlinear or lumpy nature of these revenues, we did not expect the rapid growth to be sustained.

If you compare Lattice's FPGA revenues last quarter as compared to those in Q3 of last year, they're up over 17 percent, and FPGA revenues during the past six months are up 24 percent as compared to those during the prior six months.

The results we experienced this past quarter is consistent with our comments on last quarter's conference call when we stated that while we expect FPGA/FPSC revenues to be up for the year, they would not necessarily be up sequentially every quarter.

Going forward, we continue to be bullish on the growth outlook for this business.

FPSC design-ins set record levels this past quarter and have more than doubled since the second quarter of 2002, the first full quarter that we were selling these products.

Furthermore, our recently released XP products continue to generate tremendous interest and also generated record design-ins.

Sales by end-market this past quarter continue to show growth in the industrial and other end-market segments as they climbed from 29 percent to 35 percent of total sales, and a continued decline in the communications portion of our marketplace from 45 percent down to 44 percent of total sales.

We believe this is primarily due to the efforts of our sales diversification program we began approximately one-and-a-half years ago.

Our average can (ph) systematically identify and target our sales efforts towards the largest PLD users outside of the communications marketplace based on the belief that they will provide the highest growth opportunities over the near term.

During the past quarter, we released two new products with the goals of expanding the programmable solutions marketplace, diversifying our customer base, and extending our reach to end customers.

The first is our ispMACH4000Z product family.

This product family combines our high-performance ispMACH4000 architecture with the industry's lowest power consumption, the outstanding combination for portable and hand-held products.

In addition to strengthening our position in CPLDs, this product line also supports our objective of diversifying our end markets and expanding our sales to the consumer marketplace.

The ispMACH4000Z has been enthusiastically embraced by many customers who previously had very limited choices for zero power CPLDs.

Furthermore, we also recently introduced the world's first mixed-signal PLD, the ISP pack power manager product, which combines programmable logic and programmable analog technologies to provide an optimized solution for power supply management and supervisory functions.

These products solve the difficult problems faced by our customers who have multiple supply voltages on their boards.

For example, some combination of five volt, 3.3 volt, 2.5 volt, 1.8, 1.5 or 1.3 volt.

In today's marketplace, a vast majority of digital systems use several supply voltages.

These customers are found in a broad cross-section of end-markets, including industrial, consumer, communications, and computational.

This new mixed single PLD fulfills our goal of extending programmable solutions into new markets, thereby expanding our available market where we can uniquely serve.

The PAC power manager was formally released in January of this year and has already received a strong acceptance as evidenced by design-in activity from our customers.

More recently, just this past week, we introduced a new SERDES FPGA product, the ORT 42 G 5.

This product is a 4-channel version of our popular 8-channel ORT 82 G 5.

It offers the same industry-leading performance at 3.7 gigabits per second per channel and high quality as the 8-channel version and provides a solution for those customers that need fewer channels and at lower cost.

This device will build our leadership position in the industry's leading devices that combine programmable logic and high-speed I/O, especially SERDES technology in a single chip.

As a measure of our continued innovation and investment in SERDES technology, Lattice will be announcing new SERDES technology product solutions this quarter.

And while the business environment for our industry and ourselves continues to be subdued, the technology that Lattice is offering to our customers is every bit as valuable and as compelling.

We believe that with these products, Lattice has the largest market opportunities available to it in its history as a more competitive supplier and has laid the foundation for our revenue growth for the second half of 2003 and 2004.

I will now open discussion up to questions.

Commentator, would you please begin the question-and-answer period?

Hello?

Hello?

Our question-and-answer period today will be conducted electronically.

If you'd like to ask a question, simply press the star key, followed by the digit one on your touch-tone phone.

Again, that's star one to ask a question.

We'll take your questions in the order that you signal today.

We'll go first to Chris Danely with JP Morgan.

Yes.

This is Brian Hynes for Chris Danely.

Question on - in Q2.

Are you guys expecting a similar trend of FPGAs going down and CPLDs going up, or are both going to be flat?

Just what's your sense on that?

The sense for our business in Q2 is that you should expect that CPLD will see some growth.

SPLD perhaps a slight decline, and FPGA probably reasonably flat for Q2.

Okay.

Thanks.

That's our expectation right now.

You know, again, a lot of the FPGA business is, you know, prototyping type of business and so a lot of that is actually hard to predict, but it's that kind of business versus production business.

So to the extent that there might be some - some pilot production or some prototyping purchase orders that come in during the quarter, that obviously could influence the number in hopefully a positive manner.

All right.

Thanks

And before we move on, we would like to remind everyone to please limit yourself to one question, and if we have time we will come back to you for a follow-up.

We'll go now to David Duley with Wells Fargo.

Good afternoon.

Just a couple of things here.

Could you talk a little bit about inventory levels?

I noticed overall inventory was down, but I think in distribution, it was up, but I think that's exactly what Xi link (ph) saw and I wondered if you could comment on that, as well as Xi link's (ph) talked about their CPLD business and the competitive position.

Maybe you could give us a comment there.

I'll comment first on the second part of the question, the CPLD business and I'll let Mr. Skaggs come on the inventory level.

On the CPLD business, specifically I think what they talked about was they'd experienced good growth in the business.

I think a lot of that growth is coming from portable applications.

Some of the very low-power applications of which their product has been particularly focused on.

From the standpoint of what we see, we're actually delighted to see, you know, very rapid growth in CPLD business which I think actually for them was faster than for the FPGA business, and we all - as we also saw, the growth in the CPLD business, as well.

From the standpoint they compete in a part of that marketplace which, until recently, we did not compete in, which is the low-power part of the marketplace.

With our 4000Z product, which we released just at the beginning of this year, so just about three months ago, we're now competing directly in that marketplace with a product that is both higher performance and lower power than their product.

So we're glad to see that marketplace growing, and we think that for us, it will be a source of growth, as well.

Steve, on the inventory question?

As I mentioned, inventory was down from 56 million to 52 million.

Actually a little less than 52 million on a sequential basis, about a $4.5 million reduction.

We've discussed our inventory levels throughout the downturn, and I think as I mentioned, we've been successful for eight consecutive quarters in managing our inventory levels down without taking a one-time write-off in the inventory, and we'll continue to manage the inventory down consistent with the revenue levels.

So I really think that is a continuation of the trend that we've been discussing for the last two years now.

David, you did note a minor change on deferred income on sales to distributors.

It went up about a $1 million sequentially, really just reflects the ordering patterns of our distributors.

Inventory levels in the distribution channel remain under two months, so they're quite healthy, and as you and I think everybody else knows who follows our company, we do not report revenue of distribution sales until the actual product is sold off the shelves of our distributors.

So really, as long as the inventory levels are healthy, which they are, the absolute inventory amount doesn't really mean much with respect to our financial results.

Any replenishment of inventory levels just because, you know, maybe your distributors feel that the environment is getting slightly better?

I'm - I think the overall environment may be getting slightly better, but fundamental driving force behind the distribution building our inventory is because really the inventories are bone dry out there, so at this level of inventory, it's relatively difficult to do that sort of fulfillment jobs as a distribution plays a key role in that.

So I think that that inventory replenishment is more or less reflecting the need to build a little bit more inventory, even at the subdued level of semiconductor activities.

Thank you, Cyrus.

We'll go next to Hans Mosesmann with SoundView Technology.

Yes.

Thank you.

Steve, a couple of questions.

Can you comment on linearity throughout the quarter, and regarding CPLDs, do you think you're holding market share?

Thanks.

With respect to linearity, our business is actually quite steady throughout the quarter, you know, January, February, March, so we didn't see any particular areas where business either strengthened or business - periods when it actually weakened.

It's been pretty steady throughout the entire period.

With respect to CPLD and C PLD market share, from what we gathered, certainly during last year, 2002, as compared to the market leader, Altera, our understanding and our sense was, based on what was being reported, that we regained momentum against Altera in the second half of last year.

Obviously until they report this quarter, we won't know if that's been continued.

With respect to Xi links (ph), it's been harder to actually be able to measure against them because often they haven't been reporting their CPLD numbers.

Clearly they apparently had a strong quarter this past quarter with respect to CPLD growth, and so again, as we looked at that, we see that - you see actually two positives from it, as I mentioned earlier.

One, it shows that the CPLD market is growing quite smartly, or at least had a strong rebound this past quarter, which we think is good, and it was also an area that we historically have not been participated in, which we are now participating in.

So it's also an opportunity for us to really extend our market opportunity and our market growth.

But this past quarter, they grew faster than we did, so I wouldn't dispute that.

This past year, we think we continued to grain share against the leader, Altera.

Okay.

Thank you.

And we'll go next to Mark Edelstone with Morgan Stanley.

Good afternoon, guys.

Two questions.

The first one is very simple.

Just what's the turns need for revenues to be flat in the second quarter?

And then I had a question on FPGAs, and Steve or Cyrus, just really wanted to kind of get your sense as to what you think the FPGA and FPSC ramp looks like for you guys right now based on the design wins that you've had to date and the momentum you're building in the marketplace?

With respect to turns business, turns last quarter was, as I think Steve mentioned in his opening comments, was in the mid-60s.

Our expectation is that that it would be flat this quarter.

It's about - probably about the same or maybe slightly higher than, maybe one percent or two percent higher than what it was.

So it's not significantly different last quarter versus the expectation for this quarter.

What we need to do this quarter to hit the number.

Can you repeat, Mark, the question on the FPGAs?

Yes, just now that you guys have at least enough view of the market with your products out there, just wanted to get a sense, based on the design wins that you've seen to date and the momentum that you're building out there if you've got a sense as to what the revenue ramp of the FPGA and FPSC market or business looks like for you as you look at it over the next several years, and, you know, maybe you can kind of compare it to your guys' entry into the CPLD market in years past or something like that, just to give us a sense as to what kind of potential you see out there, based on the foundation you've laid so far?

With respect to FPGA revenue ramp, you know, I think in this environment it's pretty hard to come up with a definitive number because I think everybody is even hesitant to come out with revenue numbers for companies that are beyond the quarter that they've just begun.

I know that some of our competitors have made some comments on the revenue ramps on new products which have, I think, turned out to be much more bullish than reality, so I'd hate to - to put out numbers that later turned out to not be accurate.

With, you know, the best measure for us, Mark, has been, you know, the activity we're seeing on design activity.

And as I commented, our design-ins on the FPGA products, specifically the FPSC products which are the ones that we've really been emphasizing where we have a leadership position in SERDES technology, we have - we're at a rate where we've doubled that that we were doing just six to nine months ago and we, you know, hit a record high for that this past quarter.

We're seeing a lot of activity and design-ins on the XP products which we recently released.

So we're quite - we're quite positive and quite bullish with respect to the FPGA revenues.

I think one thing that perhaps - you know, because of two things, because one we're talking about products which are much more complex and higher capacity than we've sold in the past, and because of the relatively soft economic environment, I think the time to revenue is a little longer than perhaps we had anticipated, and certainly it's longer than what you see from CPLDs.

And so I think in that respect, we do expect that the FPGA revenues, as I said before, they're going to be growing this year, as compared to last year.

It's just that it's not going to necessarily happen on a sequential basis every quarter, especially when you have big quarters like we had in Q4.

Thanks a lot.

And our next question comes from David Wu with Wedbush Morgan securities.

Hi.

This is Sidney Ho for David.

Can you comment on - for the first quarter, can you comment on the end-markets?

You mentioned the communications versus computing versus others.

Within those segments, would you be able to give us color as to what particular area is strong or what direction they're going in, and probably - and if you can comment on going forward in the second quarter what you expect in that - these segments as well, that would be great, thanks.

Well, with respect to the end-markets, you know, in the - in the communications markets, I think what we've seen has been pretty much consistent with what we've seen over the last - not just last three months but probably last six to nine months which is that the wireless part of the marketplaces have been stronger.

We did see some activity, although we don't know how long or how strong it will follow through, of some pilot production runs in the 3G area, as well.

But, you know, in the communications marketplace, it's still relatively subdued and a softer growth marketplace and we think that's going to continue for the remainder - probably certainly for the remainder of this year is really the expectation.

With respect to the other marketplaces, we are seeing, you know, growth in the sort of industrial and other, which includes instrumentation, includes medical marketplaces, it includes automotive marketplaces.

Those marketplaces, and consumer, we are seeing a higher growth rate than in the traditional PLD marketplaces, and we do expect that those marketplaces, while they may not have the strong growth they had on a quarterly basis as we experienced this past quarter, we do extend - expect, excuse me, that during this year, they're going to grow faster than the overall PLD market would.

They'll be the primary supporters for that marketplace.

Historically, server continues to be, I think, a reasonably solid, not spectacular, but steady kind of marketplace.

Certainly for the next - it has been and we expect it will be at least for the - for the quarter that we're in.

Okay Sidney?

Thanks.

And we'll go now to Sumit Dhanda with Bank of America Securities.

Hi.

A couple of quick questions.

First off, I wanted to get your sense as Xi links (ph) is ramping pretty aggressively on smaller geometries whether you feel that your products will remain cost competitive with the ones they're offering, and then a second question, sort of a housekeeping question.

How should we think about the interest and other income line going forward?

Thanks.

On the question about ramping more geometries and cost competitive, I mean Lattice has always been competitive.

I think with respect to competing in our marketplaces against both of our sort of traditional competitors in the marketplace with respect to cost competitiveness and cost-effectiveness.

With respect to smaller geometries and the activities of Xi links (ph) with respect to that and so forth, I think you guys - let's make sure we're connecting both the facts with the comments.

The fact is that Lattice has demonstrated a higher gross margin over the last - certainly the last couple of years, I believe, than Xi links (ph) has.

Much more consistent gross margin.

And at the same time, done so without writing off any of our inventory, or write-downs on inventory like they have demonstrated.

So when it comes to demonstrating cost competitiveness, I think the best way to judge that is through the financials, and I think that we've demonstrated that.

So I wouldn't get caught up in the discussions about smaller geometries and what it does for you.

There's no doubt that there's values to that in certain ways, but a lot of people had a lot of problems with getting good yields and getting cost-effective yields today on the most advanced geometries, and we think that as we've demonstrated in our financials, our cost competitiveness and the way we've gone - gone forward with our strategy there has probably been, if not the most effective, it would be hard to argue it hasn't been more effective in that area.

On your other question, Steve ...

With respect to other income, I mentioned for the June quarter about our outlook is for about a $1 million in other income, primarily driven by our outlook of being a little bit less active in the repurchase of our convertible notes.

As of last quarter, we had about $175 million in notes safe (ph) value (ph) outstanding, which is down from the $216 million we originally had outstanding, so we have been quite active in repurchasing of those notes over the past couple of quarters.

We plan to be active, but less so.

With respect to the remainder of the year, I - you know, $1 million is - it's really too early to tell at this point.

We'll assess conditions as they emerge prior to each quarter, and we can update you on the outlook for that prior to the advance of each quarter.

Okay.

Thank you so much.

And our next question will come from Eric Rothdeutsche with FBR.

Hi.

Thank you.

A question on your computing revenues.

It looked like they dipped from the fourth quarter into the first quarter, just looking for a little color there.

And also curious internationally speaking, looks like Europe came in relatively strong and Asia came in less - you know, I mean relatively weaker.

I'm curious as to what the dynamic is going on there, geographically speaking.

Okay.

With respect to computing revenues, we did have a dip this quarter, this past quarter.

The sense is some of the storage server businesses were actually reasonably steady for us.

We did see some dips in some of the sort of specifically data processing area, some of the stuff in there in the sort of graphics area was down for us.

But overall, what we also noted was some projects actually were sort of end of lifing, sort of ending for the customers, and so some other ones were coming on and we expect that to really recover in this quarter.

We know we're designing for the new projects, so we think it's just more of a just change with respect to product transitions.

With respect to what's happening in - I think you mentioned about geographical revenues?

Yes.

Just Asia had dropped as a percentage of total revenues versus Europe that showed some nice growth.

Is there any dynamic there?

What we've experienced in Asia over this past quarter, our sense is that there was - as you guys may know, there's a fair amount of business that's now done by contract manufacturing.

This business is done throughout the world, and a lot of times a lot of projects are manufactured in one region or in two regions or even in three regions and it's mixed up among those regions for the same type of products.

We did see some - some code (ph) manufacturing that actually got transferred from Asia to other parts of the world and we think that was the major part that influenced the number in Asia this past quarter.

We don't expect - we don't expect to see long-term trend necessarily in that direction, however.

With respect to Europe, we think there was - there was some growth in the CPLD area there, specifically in some pilot runs of 3-G platforms, and also some growth in some of the industrial marketplaces in Europe that really drove the number for Europe this past quarter.

Great.

Thank you, Steve.

Our next question comes from Robert Toomey with RCB Dain Rauscher.

Hello?

Yes, go ahead.

Hi.

Good afternoon.

Can you comment first on where - a little bit more on the design wins, where you're seeing those design wins and what kinds much products?

And then also, Steve Laub, you mentioned that your - you mentioned, relating to - you said revenue growth in the second half in '04.

I just wanted to make sure I heard that correctly, and does that - are you saying that you think revenue can grow at a faster pace in the - in the second half and in 2004?

Okay.

With respect to the first question on design wins, the type of products that we're getting design wins into, you know, those are occurring - if I sort of break it down by end-market, you know, we're seeing it across all the end-markets, whether it be communications, computational, industrial, medical, imaging, and other.

We're seeing a more dynamic sort of growth in some of the more nontraditional marketplaces, whether it be automotive, as well.

Some of the telematics projects and automotive are getting some nice design wins for us.

We're seeing some of the wireless area in the communications, some of the GPRS and edge type of projects.

Enterprise networking continues to be an area of active design.

And a lot more of the sort of portable hand-held type of consumer, we're seeing a lot of interest for our PLCD solutions there than we have in the past.

So those are the primary sort of types of products or end-markets we're seeing some of the design activity into.

With respect to growth, the second half of 2004 to 2005 - excuse me, second half of 2003 and for 2004, my comment earlier was just that we believe with a lot of new products we've introduced now over the last, I'd say, 12 to 18 months, that these really should give us a lot of support for growth in the second half of this year, and for 2004.

We, however, have not put out any forecasts with respect to those particular time periods, but our expectation is that we will be growing and those will be supported by a lot of our new products in that growth.

Thank you.

We'd like to remind everyone if you do have a question, simply press the star key followed by the digit one on your touch-tone telephone.

We'll go next to Bill Patser (ph) with Merrill Lynch Investment Managers.

Hi.

How are you guys doing?

Good.

I wanted to ask two short questions, or I hope short questions.

The first one is just to ask you about how you see the acceptance of the software tools for your FPGA and FPSC products?

How are, you know, people taking those on board and are they happy with them?

And then the second question is a different area but it's regarding your other category of sales, the industrial and other.

I just wondered about the revenues in that segment.

Are they more or less volatile than your traditional segments?

Are they longer-term, longer - higher volumes?

Just give some color as to how they differ from your communications and computing revenues.

Okay.

With respect to the software tool acceptance in the FPGA area, actually that has been a - for us, sort of a - I wouldn't, a pleasant experience so far.

There's always issues and so forth with respect to software, but overall, the feedback we've had from customers and the design activity from customers has been that the software tools are intuitive, that the look and feel of the software is very consistent with the type of what their expectations are for FPGA software tools.

We also have integrated those tools with respect to all of our products so you can - and a customer can design with not just our FPGAs but our CPLDs and so forth with the same software platform.

And so given that we've had tens of thousands of customers or design engineers who use our tools in the CPLD area, their ability to access a common user interface and a common look and feel as they move to FPGA has been a real advantage and - for us in minimizing sort of that barrier of getting customers to accept the tools.

So overall, that actually has gone quite well, and we're quite pleased with that.

On your second question with respect to what's happening in sort of the industrial and other marketplaces, you know, how steady versus volatile those customers are with respect to their ramps as compared to the traditional communications, it depends on the customer.

In the industrial area, in the medical area, those particular customers, the - our expectation and belief is that the revenues of both will be more stable and probably a longer product cycle, which is that the customer, if they design it in, instead of, say, it lasting for one, one-and-a-half to two years, that product might be in the marketplace for three, four, or more years, and is more likely to have a very good sort of consistent, stable product - or revenue or manufacturing build cycle than would be something more in the traditional communications marketplace.

However, a consumer or hand-held type of product is likely to be very different.

It's going to be much more of a quicker design cycle, faster ramp, and more volatile.

So it really depends on which parts of those marketplaces you're getting the designs.

For us, we're getting, actually, I think a lot more in the instrumentation, a lot more in sort of the automotive, medical, and so, yes, we do expect that those will be more stable in that respect.

Great.

Thank you.

We'll go next to Dave Duley with Wells Fargo.

This is Dave Duley again.

One quick question from me regarding R&D.

Seems like you've been spending somewhere between $21 and $22 million on R&D in the last five quarters.

I'm wondering how you measure the performance of this expenditure?

Do you do an ROI model or - and I guess what can we expect going forward?

Is this a level that you feel comfortable with to be able to grow your business, or will you be increasing or decreasing this kind of on a long-term basis?

The R&D spending for us - clearly, everyone does an evaluation of the market opportunity and the return you expect from a product, so that is done by us, as well.

I mean, the R&D spending is supporting both a leadership CPLD product platforms that we've introduced, as well as the FPGA investments that we've been making over the last few years.

Our sense is that these marketplaces are, you know, very attractive marketplaces, marketplaces that we intend to succeed in and that requires that we continue to make the kind of investments we're doing.

With respect to going forward, I think you can expect that our R&D spending at a sort of dollar level will be reasonably, you know, around the range you described, $21, $22 million.

I would say sort of going forward at least for the next year or so would be, I think, our expectation.

We don't expect major changes - major changes in that, so if revenue grows as our expectations of the business will be growing, you should not expect a big ramp-up in R&D consistent with that.

We expect to hold it pretty much at the level that it's at.

Great.

Thank you.

Next up is Jack Romaine with SG Cowen.

Just to follow up on that R&D question.

So you're not anticipating ramping down your R&D spending at any time in the future?

Is that correct?

This is Steve Skaggs.

Jack, most of the R&D expense is related to headcounts, and no, we're not anticipating a layoff in the near future.

And can I make the same assumption, then, about your SG&A spending?

SG&A spending has a variable component in it due to commissions and other variable aspects that fluctuate with revenue.

So there is some potential to fluctuate SG&A down with revenue, although there's not a great degree of flexibility on the way down.

But with respect to both, you can and should expect that as revenue grows, operating expense should grow slower than revenue.

Okay.

Then just one final question here.

With operating expenses a little bit higher than they've been in the past, is there any chance that you could see higher gross margin in the future to offset, so that you see a more consistent operating profit?

Our target with respect to gross margin is, and has typically - has always been, 60 percent to 62 percent, and I think we've done a reasonably successful job in kind of managing gross margin across business cycles to those levels.

Okay.

Thank you.

And we'd like to remind everyone once again if you would like to ask a question, press star one on your touch-tone phone.

We have a follow-up question from David Wu with Wedbush Morgan securities.

Hi.

This is Sidney Ho again.

Just following up the last question, in terms of the operating margins, what would you be - be your long-term target and at what kind of revenue level would you expect that to happen?

We think long-term that the business can support operating margins consistent with what it has if you look over the past cycles of the business of 20 percent to 25 percent levels.

So the revenue levels to achieve those is higher than what it is today.

And we don't have a specific forecast as to what point we would reach those levels of operating margin.

Sidney Ho Okay.

Great.

Thanks.

And we'll go now to Bill Patser (ph) with Merrill Lynch.

Hi.

Just wanted to hopefully short follow-ups here.

One regarding the question someone had on the smaller geometries, and it's a different tack on that question.

To the extent that those type of geometries allow you to lower the price of the chip and maintain gross margins, and when we're in a slow or no-growth environment, is that going to put pressure on your ability to grow the top line until we get real unit growth and volumes?

I mean, you're saying to the extent it gives you a lower price ...

Yes.

You got to keep in mind that whenever you move to smaller geometries you're paying a substantially higher price for your wafers.

Right.

And so to the extent that wafer price is constant, absolutely what you say is true.

However, in this environment where people are having a difficult time being able to drive the real high volumes, wafer prices are substantially higher at the advanced geometries.

Yes

And so I think - and also the yields are not nearly as good at the very advanced geometries.

Don't get us wrong, though.

We - you know, we're going to be moving to the advanced geometries, as well.

But being on the sort of bleeding edge of that tends to put you in the position that I think achieving lower cost has not been demonstrated by anybody, that being on the very leading edge of the most advanced geometries gives you a lower cost.

Okay.

So ...

It clearly has not been demonstrated by anybody's financials in any part of this business.

Okay.

So what you're saying is that to the extent that that becomes a much - a cheaper alternative, it's probably going to be coincident with a much higher demand environment?

I think that's right.

Okay.

Then the second question ...

Hold on, Bill.

What does that mean?

Well, I was - the way that it was - we were just explaining it, I thought I understood that right now people have not been able to put the sufficient volumes through these new lower geometries in order to gain the efficiencies in yields they need to, so that, in fact, the expenses - they're - slightly - the dies and wafers are more expensive at this point.

No.

I just made the conclusion that probably the learning curve effect happens when demand comes back and we get more volumes going through those wafers.

Learning curve, Bill, will eventually happen.

Sure.

So the yield will eventually reach its sort of targeted yield.

So you - and with any new technology, you will - you will have to go through this phase.

Where there's the small geometry really gains you is in the large die size.

In the extremely large die size, moving down to a smaller geometry, you effectively shrink the die size quite a bit.

Now, the yield, the inherent yield, even after you reach maturity, is an exponential function to the defect density.

With smaller die size, your defect density in the overall die size will be much smaller, therefore increase your yield.

Now, let's just pick - take a point here.

If your die size already very small, OK, suppose I achieve a .13-micron mature technology and with a certain die size.

In order to migrate to 90 nanometers, that die size must be cut down to half.

Otherwise, you don't achieve any economic value whatsoever.

The reason is very simple.

That goes to moving to a 300-millimeter versus 200-millimeter argument, as well.

All depends on the die size.

And in the smaller die size, it really doesn't make any difference unless the technology is such, by moving from one generation to another generation you're going to cut your die size down to half.

Yes.

Now, there's a practical problem with that.

In the FPGA, OK, it's almost all metal limited.

If you look the migration from .13 to 90 nanometers, it doesn't really give you the 50 percent die size reduction.

So the economics in the smaller die size is just not there.

So if you want to move there, just - just want to - because you want to go to the learning curve, therefore in the future your bigger dies can benefit from that.

That's another argument.

Right?

On the other hand, just on the cost basis, with the smaller die size, if we talk about, you know, cyclones and Spartan 3's, I don't really see the economic value in that.

Okay.

Well, that's very helpful, actually.

Thank you.

Yes.

Because the overall cost is more than double.

OK.

So ...

Good.

And we have another follow-up from Robert Toomey with RCB Dain Rauscher.

Hi.

I wondered if you could just talk again - address for my benefit the key areas where you see growth coming from for your FPGA and FPSC business, and then also can you give us some guidance on capex and depreciation and amortization expense for the full year?

With respect to the (ph) growth for FPGA and FPSC business, the primary areas for us that we're sort of - sort of our products are best suited for, the FPGA products are primarily for Hi-Speed I/O or SERDES based FPGAs.

Those go into high-speed sort of networking type of applications.

So it's going to be where high-speed networking is best suited, so that's going to be in the communications area, which by the way, even though many people talk about the communications area as being a software area within the overall PLD end-market space, it is, nevertheless, the largest end-market space in the entire PLD market.

It's, you know, over 40 percent of the marketplace.

And for us, it's a huge opportunity because Lattice does not participate much in the FPGA portion of the communication space.

So - but it will be the communications area.

Other places in the high-speed networking will be in the medical area.

There is applications in industrial area.

Wherever, again, high-speed networking is used, or high-speed communications is used, it's going to be utilized.

With more of our traditional or our other FPGA products, you'll see those also in the - sort of say, industrial instrumentation, medical marketplaces, as well.

So those are your primarily the sort of end-market sort of applications you will see us in.

You will not see these FPGAs in portable or typically or in hand-held type of applications.

Capex, depreciation, I'll turn that over to Mr. Skaggs.

As I mentioned, depreciation for the quarter was $4.7 million, and the December quarter was $4.9, so that should come down a little bit and that's because we've been spending less in capital than our depreciation, so really for the full year $4.7 or slightly less per quarter is probably a good number to use from a forecast basis.

Capital last quarter was $3.2 million, and the quarter before is $3.8, so really, again, looking forward, annualizing those - the average of those numbers is probably a good assumption, so to use between $12 and $15 million for the full year is a good number.

Thank you.

There appear to be no further questions in the queue at this time.

Gentlemen, I'll turn the call back to you for any closing remarks you may have.

Okay.

Well, thank you, everyone.

Appreciate - appreciate your time this afternoon, and if you have any questions, please feel free to give us a call at our corporate headquarters at 503-268-8000.

And thank you for your participation.

You may disconnect at this time.