萊迪思半導體 (LSCC) 2003 Q2 法說會逐字稿

Please stand by.

We're about to begin.

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor second quarter ending June 30, 2003 earnings press release may be obtained from the company's web site, which is www.latticesemi.com.

This call is being reported and broadcast live over the Internet by CCBN.

A live replay of the call will be available on the Lattice investor relations web site at www.latticesemi.com until July29 2003.

At this time I'd like to turn the call over to SVP and CFO, Steve Skaggs.

Thank you and good morning everyone.

Joining me are Cyrus Tsui, the CEO, Steve Laub, our President and Rodney Sloss, VP of Finance.

Before we begin I'd like to read the Safe Harbor statement, then I'll provide a financial review and our outlook.

Steve Laub will then provide a business review, after which we 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, revenue, customer, product offers and the ability to compete.

Investors are cautioned that cautioned that actual events and results could differ materially from the 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 the silicon wafer suppliers, the impact of competitive products and pricing technological and product development risk.

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

I will now review our statement of operations for the second calendar quarter of 2003.

Revenue for the quarter was $58.2 million, flat with last quarter.

During the second quarter, CPLD product revenue accounted for $40.3 million or 69% of revenue and declined 1% sequentially.

FPGA products contributed $9.0 million or 16% of revenue and grew 7% sequentially.

Low-density SPLD products accounted for $8.9 million or 15% of revenue and declined 3% sequentially.

For the quarter, the Americas made up 45% of revenue, Europe 24%, and Asia 31%.

Revenue by end market for the quarter was as follows - communications, 52% of revenue, computing 21%, and industrial/other 27%.

Revenue mix by channel for the quarter was direct 52% of revenue and distribution 48%. [Turns] business for the quarter was nearly 70%.

Proceeding with the rest of the statements of operations, gross margins for the quarter was 60.0%, down slightly from the 60.2% reported last quarter.

Quarterly R&D expense was $21.7 million, and SG&A expense of $12.6 million, both were essentially flat when compared to last quarter.

Other expense for the March quarter was $1.4 million.

During last quarter, we issued $200 million of new zero-coupon, zero-yield convertible notes and also announced the call of the remaining $172 million of our outstanding 4.75% notes.

That call was completed yesterday.

Later, I will discuss the impact of these financing actions on our financial statements for the current the financial statements for the current quarter, the third quarter and subsequent periods moving forward.

The tax provision for the second quarter was a credit of $2.6 million due to the fact that during the quarter, we received a larger than anticipated federal income tax refund during the June quarter.

Intangible asset amortization was $18.7 million, and the June quarter GAAP net loss was $16.9 million or 15 cents per share.

On a non-GAAP basis, earnings were $1.8 million, or 2 cents per share.

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

Turning now to the balance sheet cash and short term investments at the end of June increased by $217 million to $470 million.

As I mentioned during the quarter -- well, during the quarter, we use $3.0 million in cash to repurchase certain outstanding 4.75% convertible notes while raising approximately $194.5 million in net proceeds from the issuance of the new zero coupon notes that I discussed earlier.

We also made a semi annual interest payment of $4.2 million on the older notes and spent $2.5 million on capital expenditures.

Additionally we received a $28.3 million federal income tax fund.

Netting together the aforementioned items, cash flow from operating activities was a positive $4.2 million.

Depreciation for the quarter was $4.6 million.

Also on the balance sheet of note, inventory declined to $48 million from the $52 million reported in the March quarter and the present levels inventory represents 6.2 months of current cost of sales.

Turning now to a discussion of our financial outlook, we ended the third quarter with a lower backlog and continued limited visibility, due to seasonality and general industry conditions.

As you know, summer is a traditionally a slower quarter for our industry.

We expect a lower level of turns business during the quarter, and consequently, our best estimate at present is for September quarter revenue to be between $52 million and $55 million

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

For rest of the [inaudible], we currently have the expectations for the following expectations for the September quarter.

We expect gross margin as a percentage of revenue to be flat.

We expect operating expenses to decline between $1 million and $2 million on a sequential basis.

We expect intangible asset amortization to be approximately $18.6 million.

As I mentioned yesterday, we completed the call of the remaining outstanding balance of our old 4.75% convertible notes.

Consequently, due to the payment of the call premium associated with the notes and an accelerated write off of the remaining unamortized issuance costs on these notes, we expect to report other expense of approximately $5.6 million during the third quarter.

However, all of that expense is non-recurring in nature, and on a steady state basis, beginning in the fourth calendar quarter, we expect to report other income of approximately $400,000 per quarter from that point forward.

Obviously, with 0% interest rates, our new convertible notes are accretive.

We also plan to report a tax benefit or a negative tax provision of approximately $3 million to $4 million in the September quarter due to the release of certain tax -- income tax reserves.

These reserves will no longer be necessary due to the expiration of certain statutes of limitation and the anticipated satisfactory completion of the currently in process income tax audit.

Finally, the total shares outstanding should be relatively flat for the next quarter.

With that, I would like to turn the call over now to Steven Laub, our President, for his comments.

Steve?

Thank you, Steve.

Good morning, everyone.

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

As already stated, our overall revenues were essentially flat sequentially at $58.2 million, by 7% sequential growth in FPGA revenues and 1% decline in CPLD revenues.

FPGA revenues were driven by growth in both new FPSC product revenues, which grew by 22% sequentially, so just under $1 million, and also by traditional FPGA products, which grew by approximately 5%.

On a year-over-year basis, FPGA revenues are up by approximately 27%.

Going forward, we continue to be encouraged in the growth outlook for this business, design-ins for new FPGA and FPSC products, so a record high this past quarter.

CPLD revenues were essentially flat with the prior quarter and this tends to mask important changes that are taking place within the product line.

During this past quarter, low-voltage BFW products grew by 19% sequentially while the ispMACH 4,000/Z product family, based on .18 micron technology, grew by over 200%.

The reason that the overall CPLD business was flat was that the older fiber products revenues declined.

Going forward, we continue to expect our low voltage PFW/CPLD products will show meaningful growth as we are experiencing double digit increases in design wins of these products.

Sales by end market in the first quarter showed increase in communication sales from 44% in the first quarter to 52% this past quarter.

The increase was broad-based across multiple customers and was primarily due to growth in wireless, primarily 2.5 G equipment and in telecom equipment.

We're also experiencing growth in ADSL and consumer based access equipment.

Computational based revenues primarily made up of servers and mass storage applications held steady at approximately 21%.

The other significant change in the sales by the end market was the reduction of the apportionment to industrial/other customers.

Basically this is industrial, automotive, consumer and many other applications of this area.

This decline is from 35% in the first quarter of 2003 to 27% this past quarter.

I think it's important to put the decline this context.

If you compare sales to industrial/other customers with the second quarter of last year, it increases from 22% to 27% of total revenues.

So, therefore, as a percent of total revenues sales to industrial/other customers are up strongly year over year, relatively flat with six months ago and down significantly versus last quarter.

The drop from last quarter is due in large part to two large European customers in the -- who make products for the industrial/other marketplaces that reduced their purchases due to product transitions they are undergoing.

From a geographic standpoint we're encouraged that North America grew this past quarter to be relatively flat for the past year.

European sales declined both overall and as a percent of sales due primarily to the product transitions of the two large industrial/other customers that I talked about earlier.

Asia grew due to growth in Asia based OEM's growth as well as business transfer from North America and Europe to contract manufacturer's operations located in Asia.

In the new product area, during the past quarter, we released a new high speed IO product family named the XPIO 110 GXS, which is a product family focused on the CIRTES marketplace.

The product offers the industry's lowest power 10 gigabyte per second CMOS transceiver and extends our strong position in CIRTES based technology.

We intend to incorporate this technology into future generations of FPGA and FPSC products.

Since the beginning of 2002, Lattice has delivered to production six new product families, including the XPIO family.

The other five families are our advanced FPSC products, our innovative ispXP products, our third generation VXWCPOV products, the ispMACH 4,000/Z product family, the industry’s lowest power CPLD family and our revolutionary ispPAC Power products.

Since it takes approximately 18 months before the onset of production revenues, the best way to evaluate the success of these products is the design activity that they're generating.

As a glimmer into what's occurring in the design area, first, it's important to note that overall design and activity for Lattice increased by nearly 20% sequentially.

This is our biggest sequential increase since the semiconductor downturn began in 2001.

Our overall designing levels that climbed back to the high levels we were experiencing before the downturn began.

Perhaps more importantly, the mix of products being designed in has shifted significantly from established products to new products.

The designing of new products as a percentage of total design wins and I have new products defined as products introduced in prior two years, have increased from 7% of total design wins a year ago, so the second quarter of 2002, the design win of new products was approximately 70% of total design wins.

In the past quarter, they were at 38% of total design wins.

So, on a sequential basis, you can tell, on the annual basis, the enormous ramp-up in the designs for new products.

Let me share with you specifically the increase on the sequential basis we are experiencing for our new product families.

For our new FPGA products and FPSC products, are designed-ins were up 45% between Q1 and Q2.

For our third generation BFW products, they were up nearly 30%.

The other new product families, the ispMACH 4,000/Z family and the PAC Power Manager were up over 300%.

That's due in fact to the fact that the small base of these products were very recently released.

Clearly, our new products are generating lots of enthusiasm from the customer base, as they are setting records for new design wins.

Based on the design-in success we are experiencing, we expect that in the FPGA marketplace, our FPGA revenues will continue to increase on the annual basis.

As we have stated in the past, since the business is a mix of production and prototyping orders, it is non-linear.

Therefore, while we expect those to grow annually, it will not necessarily do so each and every quarter.

In the CPLD area, we expect to continue to grow our business in the low voltage CPLD part of the marketplace.

We are specially encouraged by the positive reception of customers to the recently released ispMACH 4,000/Z ultra-low power product family.

Furthermore, we're encouraged by the strong design activity of our other new product families and are confident of the revenue ramp of the products.

Now, our outlook for Q3 for sequential decline in revenues for this quarter is due primarily to the combination of three factors I think Steve echoed on this.

I'll just comment a little bit further.

As stated, the backlog entering Q3 is down from the same time entering Q2.

Because of the summer seasonality and general softness which is typical in the summer quarter, we are assuming that turns will be lower than we experienced in Q2, and thirdly, the full impact of the two European customers' product transitions will actually be felt this quarter, and this will mainly impact CPLD and SPLD revenues.

While the business environment for our industry and our sales continues to be subdued, we're excited the products we have released and our customers’ active design-in of these products.

As we successfully repositioned the company during the past two years, Lattice has today the largest market opportunities available to it in its history, is a more competitive supplier, and is well positioned for eventually industry upturn.

I will now open the session to questions.

Operator, do you want to lead us into questions.

Thank you.

The question and answer session will be conducted electronically.

If you do have a question, press the star key followed by the digit one on your touch tone telephone.

We'll call on you in the order signaled.

When called upon please repeat your name and your company name before posing your question.

Please ask one question at a time.

Time permitting, we will come back to you for additional questions.

We'll go to Mark Edelstone, Morgan Stanley.

Good morning, guys.

I guess the question really relates to the five bolt CPLD business now.

How big is that, and when do you think we'll have the low voltage BFW parts be a large enough piece of the CPLD business to allow for secular growth once again?

Mark, we don't break out how big five volt and three volt are.

The 5 Volt business still is a substantial portion of the total CPLD business.

Obviously not at the new designs or the growth of that business, which is driven by the3.3Volt and lower voltages within the marketplace.

As I commented, the growth in the 3.3 Volt area continues to be strong especially with the BFW products.

The 5 Volt products are --have slowed down and last quarter they did decline.

And also, the -- some of the customers that are going through as I mentioned we had those two customers going through product transitions, primarily based their products -- earlier products were based on earlier products of ours as well.

So, some of the 5 Volt influence is being impacted there.

As far as when you are going to see the cut over, clearly, when 3.3Volt overtakes 5Volt or when 3.3 volt overtakes the decline in 5 volt, the past quarter we did see 5 volt influence the number downward from where we otherwise would have been, but I don't see that this is going to be a constant drag, but I cannot predict what's going to happen in the next few quarters.

Just a follow on there, Steve.

On the two European customers that you talked about, can you give us just a rough cut as to how large they are?

I'm assuming that collectively, these are just three or four percent of sales at the most, and when you look at their new products, can you give us a sense of what the Lattice content is in those versus the products that are end of life now?

From the standpoint of their size, roughly a few percentage as a total of the two, where total sales would be correct.

With respect to our content in their new products, we are in their new products.

One thing that's happened is that the new products are not ramping as well as the ones that basically that we're in before that, that we have now come down.

So we're being impacted two ways.

One is that the old products are being sort of transitioned to new products.

The new products are not doing as well.

So, we didn't have the new products make up for the old products.

The content in the boxes, the content is not much different.

Thanks a lot.

Our next question is from Dave Duley with Wells Fargo Securities.

Good morning.

You mentioned, I think, inventory on your balance sheet came down a little bit.

Did total inventory come down and are you at your targets for inventory at this point?

Steve, do you want to take that?

Yeah.

I mentioned that inventory on the balance sheet came down from $52 million to $58 million.

Inventory on the distributor shelf is also lower.

In fact, inventory from the distributors in the channel is well below two months.

With regard to our targets, inventory and distribution channel, our target is approximately two months, so we're below the target there.

With regard to the target on our own balance sheet, our target is and has always been four to five months of inventory.

So, at the current levels of six months, we're a little bit over that target still at this point.

Steve, just as a clarification, I think inventory declined to $48 million from $52 million last quarter.

Correct.

OK.

And going forward, you know, your guidance is down a little bit.

Could you talk about maybe the pieces of the business, I think you kind of touched on it briefly.

I'm just wondering if you expect FPGA to grow sequentially over that being more flattish or down.

Our growth outlook for the business is that the FPGA business will be probably slightly up this quarter.

So, we continue to be encouraged by what we're seeing with respect to that business.

The decline that we're experiencing or we are anticipating for this quarter is really CPLD and SPLD business, the CPLD being again the sort of older 5 volt products is where we are seeing most of that decline.

I'm not sure if you answered the previous guy's question regarding when do you think the crossover between 3 and 5 volt would take place?

You don't want to tell us how big each one is, but when would you think that the 3 volt was larger than 5 volt.

It will happen probably within six months.

The two are actually quite close as a percent of our sales within that business.

So, we shouldn't -- I guess going forward, we shouldn't see this be a big major impact, then?

That's correct.

Great.

Thank you.

The next question comes from Danny Cole with JP Morgan.

This is Danny Cole [inaudible] for Chris.

Can you give us a sense of how July has been so far in terms of ordering?

July so far has been pretty much consistent with what we just gave with you respect to our guidance.

I mean, what we saw was that June began to soften, as the approach of summer began, and July has been pretty consistent with June.

So, we are expecting to see the general sort of seasonal slowness and softness for summer as we have commented earlier.

That's what we're seeing so far.

I guess another way to look at this is do you expect the European customers to come back, I guess, the two that you specifically mentioned, do you expect them to come back in terms of ordering for the September quarter?

In the September quarter or December quarter?

In the September quarter, actually.

In the September quarter, we do not anticipate much comeback from those two European customers I commented on.

The actual full impact of product transitions we're probably going to feel this quarter, which is part of the reason we have got the number down.

With respect to overall, typically the softness that you see in the summer quarter is primarily independent of what we're seeing with those customers, but is primarily more of a European phenomenon than other places.

And I apologize if I missed this, what was the new product revenues as the percentage of total sales?

We didn't disclose new product revenues as a percentage of total sales.

That wasn't disclosed.

You didn't miss it.

OK.

Are you guys going to tell us?

What we have been disclosing is the design activity with respect to new products.

In the future, we may begin to break out some of our new products versus more of mainstream products and so forth.

But that's something we'll probably begin perhaps next quarter.

We haven't done that in the past.

We're not prepared to do that in this call, but it is something that we have made a decision we are going to move forward and do that in the future.

Great.

Looking forward to that.

Thanks.

Yes.

Next question comes from Tristan Gerra with SoundView Technology.

Thanks.

I was wondering if you could comment on the product condition that you mentioned.

You're going to have to speak louder, please.

Can you hear me now?

That's better.

I was wondering if you could elaborate on the product condition that you referred to regarding the two European customers.

Are those really push halves?

Is the product condition at the customer level?

Could you give us a bit more color on that?

What's happened is that the customer themselves are going from, you know, one time of system to another.

As they do that, they reduce their purchases of the systems that being retired in favor of the one that's ramping up.

So what's happened is that they cut down the purchases.

They don't want build up inventory of the products.

They want to burn off the inventory that they do have of those products.

At the same time that you would begin the purchases of the new products, that are in the new boxes they're putting out, or new equipment, what we're seeing is the impact or feeling the impact of the systems that are in a sense being retired in favor of new systems that cut back the purchases of those products, the primary impact of which we're going to be feeling this quarter.

We have not felt much -- we have felt some, but not much favorable impact of ramp up of new products.

When we checked in to it with them, what we’re also finding is that they're not seeing the success yet with those new products that were designed in that are replacing the old.

We're getting a double whammy.

We're getting one system going down or one set of equipment going down and for example in the business levels and the new stuff not catching on.

Would you -- what would you expect the business of those customers to come back and be on the September quarter?

Well, you know, we are actually hoping that we're not going to have this impact this quarter.

We're hoping that the business does resume in a more normal way in the December quarter, but when I see customers having issues with product not hitting their forecast, it tends to have a concern for us that perhaps it's not going to return to the levels they may have had before.

OK.

And last question.

Yeah.

If you could talk about the pricing environment.

I'm sorry.

Speak a little louder.

I was wondering if you could talk about the pricing environment in the quarter, whether there was any change versus what you have seen earlier this year?

Or late last year?

The pricing environment hasn't really changed, I'd say, in the last few years.

Certainly, since the downturn began, the pricing environment we have been competing in this downturn has been the same throughout the downturn.

It's competitive.

Nevertheless, overall, our [ISP's] as a company rose this past quarter primarily due to a retromix.

But the rising environment this quarter hasn't changed versus last quarter or this quarter versus six months ago.

Thank you.

The next question comes from Sumit Dhanda with Banc of America Securities.

Morning.

Couple of questions.

Actually, I comment a little bit on the prior question on pricing.

The only time you see a little bit of unusual pricing is when our competitors use written down inventory to go after a piece of business.

So, we have seen a little bit of that.

To the extent of inventory gets burnt off, I think it's obviously not a sustainable thing for them, but there has been a little bit of that kind of activity occurring.

Sorry.

Go ahead.

Sumit Dhanda here, Bank of America Securities.

First question, you guys indicated that some of the softness that you are going to see in September is seasonal.

Your competitors have talked about the same.

Could you perhaps quantify roughly how much of the -- you know, the downtick that you are going to see in September is attributable to seasonal softness versus the product transition issue that you talked about in the European customers?

From the standpoint of what we're seeing, again, we argue there are three factors influencing our business.

One was that backlog was down as we entered the quarter which to some extent was seasonal.

The other thing we had going on was we anticipated the returns because of the general environment.

From the standpoint of the decline, I'd say probably the majority of it is due to the general softness or seasonal softness and the remainder, therefore, being due to the specific customer product transitions.

So, if the decline turns out to be, closer to a 5% decline, you know, roughly, 3% of that or some area around that would be based on seasonal softness.

The rest of it is based on customer.

If it's a bigger decline, again, it would be roughly the same.

The slight majority being based on seasonality.

OK.

Couple of follow-ups here.

In terms of your XPGA product, could you give us some time frame in terms of when you might start to see an actual material ramp in production revenues for that product line?

The -- for FPGA products, typically, it takes at least18 months.

In fact, what we're finding is that in this environment, sometimes the FPGA products take longer, certainly longer than CPLD products do to experience revenues.

The products were released this past year, and my anticipation probably sometime really in the second half.

Middle to the second half of next we're year, we should be experiencing production revenues contributing meaningfully to the overall revenue level.

OK.

On the final question, could you actually quantify the turns that you had in Q2 and then what your expectations are for Q3?

Q2 turns were just about 70%.

Our expectation for this quarter to be down about 10%.

Thank you.

We're planning from -- that's again due to seasonality.

Thank you.

We’ll take the next question from David Wu with Wedbush Morgan Securities.

Steve, can you go down a little bit on the communications side?

You said both the [D-Slam] and the (inaudible) the wireless space station business were good.

How has the trend been and to the extent that you can tell us the next quarter, how does it look?

You want me to say I was going to look at next quarter, especially going into the summer quarter.

Well --and how has it been, clearly how it's been is those are the areas we're seeing the growth, the 2.5 G and equipment in wireless and some of the traditional telecom business actually did better this past quarter.

With respect to, you know, what we're seeing 3G continue to be soft.

And it has not demonstrated much ramp-up. 2.5 G, we think will continue to be reasonable for us, being that I think some slight growth anticipated there.

I think from the carrier standpoint, I'm not sure that there's been a big uptick.

I think these guys are experiencing a difficult time, and so long as they're having difficult times, they will translate down that -- it's hard for us to have a strong growth.

With respect to what's going on, obviously wireless and a lot of the access points for a lot of the wireless applications, Wi-Fi and so forth are experiencing growth in Asia.

We're participating in that.

Then there's generally a broadband now has taken off in a much more significant way and I think people anticipated a year or two ago.

We're participating in that.

We expect those will continue to grow.

Steve, is there a difference between Europe and -- Asia, and the United States on the telecom -- in the telecom business or the com group for you?

In our growth in com between Europe and the United States, is that your question?

Yeah.

Europe and the United States and Asia-PAC.

Asia PAC is growing.

It's growing for two reasons.

You are having the indigenous customers there grow, but you're also seeing a lot of business transferred from both North America and Europe to Asia PAC.

It's growing just because it's picking up the contract manufacturing business that's going on.

The other thing that's happening is that with respect to what's happening between America and what's happening in Europe, I don't want to start picking winners and losers among the different carriers there.

What we see with respect to our programs is that our com business actually was pretty broad-based in the growth.

Most of the customers grew.

A few didn't but generally growth and generally growth in -- it occurred worldwide.

OK.

Thank you.

Our next question comes from Bill Dizella (ph) with Davidson Investment Advisers.

Thank you.

I was interested in learning more about the com business also.

Relative to the products that your customers are offering, does it tend to be existing products that they are selling, and as a result is this simply demand, some pent-up demand from their customer base or have your customers been introducing new products that in fact are driving the sales from their customer levels?

It's both.

I mean, some of the existing stuff is selling, and some of the new stuff is selling, so, it's hard to discern exactly a significant trend from that.

Clearly, the most exotic new stuff has not been selling.

You know, the latest generation stuff, 3G, for example, is not selling significantly that we see.

We're seeing that some of the new programs that we have been designed into are ramping up and that's very encouraging for us and the more established ones are also doing well.

It's really a mix of both.

And can I interpret now just thinking about the communications area from a very big picture base level that there does seem to be some broad-based pickup taking place, and also seems to be some adoption of new technology, and but maybe leaning more towards a broad-based pickup and not any one customer, just in general?

Yeah.

I mean, I would say that's reasonably accurate.

All right.

Thank you.

Just a reminder, if do you have a question, please press star, one on your telephone keypad.

We go next to Robert Toomey with RBC Dain Rauscher.

A follow-up on that question.

I wondered if you could talk about the nature of the design wins, particularly, the new design wins that you talked about earlier that were strong.

Can you talk a little bit about generally what types of areas that you're getting those design wins in?

The types of areas being end market application and so forth?

Yeah.

Design wins that we're seeing is not, you know, entirely different from the standpoint of the past.

I would say design wins are in the communications area.

They're in the traditional markets that we serve, but we are seeing more design wins in areas that have been outside, for example, automotive.

We're seeing more in consumer.

We do expect the areas to be growing for us relative to where they are today.

We're seeing more in the industrial.

So, I would say the design wins are some applications where people haven't used PLD's before.

They're migrating to it because complexity of the products more sophisticated.

They would apply to automotive and consumer.

Consumer is picking up because they're not only getting more sophisticated but because of the low power now that we're being able to offer, we're seeing a more greater interest in the use of PLD and those applications.

We're seeing actually what we believe is that the marketplace for PLD is continuing to expand from an application standpoint.

That we're very encouraged by.

But also I would say the majority of the designs are still in the traditional areas that we have approximately been using in the past.

If I would say what percent of designs are occurring where, would say we're seeing more new designs occurring in new markets as a percent than we have in the past and probably the highest level in that area, so that's very encouraging.

Great.

Thank you.

We’ll go next to William Patzer with Merrill Lynch Investment Managers.

Hi.

I just had a simple question on your guidance with respect to the operating expenses being down between $1 million and $2 million on a sequential basis.

By that, do you mean SG&A plus R&D or is there a larger group of expenses that you are talking about?

Steve, do you want to touch on it?

The overall total bill of R&D and SG&A.

OK.

Thank you very much

Once again for questions press star one.

We'll go next to Bill Dizella with Davidson Investment Advisers.

I wanted to follow up one more time on the communications area.

You are seeing where the customers out there are increasing capacity because some of the various routes have become full, or does it tend to be offering new product and services to their customer bases?

That's -- you know, specifically how they're addressing their markets with respect to their customers, it's difficult for us to discern.

We know the systems that we're going into.

We know how well those systems are doing.

We have a sense of what systems they're developing and so forth.

I can share with you the fact that we're going into new systems, I can share how well they're doing, but I can tell you specifically.

They don't know.

The engineers that are using our products don't know the answer for example to the question that you just asked.

It’s people -- people buying them because of capacity needs or new configurations and so forth.

So, that's hard for me to give you an accurate answer on that, Bill.

Thank you. and then relative to one of your recent answers, taking the automotive segment as an example, if I heard you correctly, the -- as an example, if I heard you correctly, the products being used, the electronics in automotive have heretofore for have not been sophisticated enough to require a lot of PLD's, but now as the electronics become more sophisticated in automotive and other products, consumer, for example, they almost just on a given basis, on a curve, are moving into your type of product.

Is that -- did I understand that correctly?

Yes, you did understand it correctly.

If you think about automotive.

For example, all of the telematics that are now in automotive and the ability to have the mapping and so forth, navigation control.

The new technologies that are going into that, the fact that the power systems, the drive systems are now electronically controlled instead of being mechanical, this does driving a much greater sense of complexity with respect to electronics.

That has now opened the door for using our types of products.

So, that's exactly what's going on there.

It's also happening in consumer as well.

So, in automotive as we move to the 48 Volt vehicle, that's a positive for you?

Well, what's positive for me is the increase in electronics.

To the extent, you're right, you're moving toward thinking about what battery systems they're going to be using because of the fact they're having so much electronics in the system.

I don't think of it from the size of the battery or the power that way, but the fact they're continuing to increase the amount of complex electronics, which is planned and continuing to happen, that's good for us.

One final question, when we talk about consumer products, and the standard household products like washing machines, refrigerators, air conditioners -

No, no.

We're not talking about those yet.

Those products I think haven't moved up to the complexity level where our products yet are going to be appropriate for them.

It isn't to say that won't happen, because they clearly have more electronics today than they did, say five or ten years ago.

The consumer products we're talking about are going to be the digital sort of iPods for listening to music, your PDA's, your cameras, those kind of things are -- Wi-Fi access points.

Those are the products that I'm talking about.

Very helpful, thank you.

We'll go next to Tristan Gerra with SoundView Technologies.

You talked about design wins in consumer -

I'm sorry.

I can't hear you.

You talked about design wins in consumer and automotive and I was wondering if those design wins are primarily CPLD's or SPGA's, if you could give us an idea of the ratio and I would have the same question for the entire business as well in terms of new design win activity.

If the question is design wins in automotive and consumer, are they primarily SPG or CPLD, they’re primarily CPLD.

Is that the same for the entire business beyond consumer, but across all end-markets as far as design win activity today?

No.

I commented that FPGA design wins actually were up 45% on a sequential basis, so for our new FPGA products.

No, it isn't.

But what you find is that our FPGA and FPSU price today are more territory of traditional marketplaces of communications and industrials and so forth.

But specifically some of the stuff in the automotive and consumer for us is primarily CPLD.

Great.

Thank you.

Yeah.

Our next question comes from David Wu with Wedbush Morgan Securities.

On the subject of consumer and industrials.

Is that your 2 major customers are competitors out there, have been approaching that market with I guess limited function FPGA's, and they have scored very big successes there.

Do you think that your product line overlaps with them between your CPLD line as well as your current newer generation of FPGA or do you think you need another family of lower end, lower price FPGA to compete in that segment?

With our current product that line we have today, our FPGA product line is more of a full featured, full functionality product line, lots of capabilities, for example, the 3D technology incorporated into it that, the FPFC products have a technology incorporated into that.

Those are not necessarily well suited for sort of the automotive consumer those kind of low-end, I would say low-cost minimal featured applications.

To compete in that area, we probably -- we anticipate that coming out with a product line that is focused as a sort of very low end, very low cost minimal feature set is the appropriate product line for that, which we do not have today.

But as you can see, with what we do have, we're competing effectively in the traditional FPGA marketplaces.

When do you think we might see something like that from you?

We don't typically give out information with respect to the introduction of new product families.

But obviously, we very much acknowledge that that's a part of the marketplace we're currently not serving.

OK.

Thank you.

We'll go to Robert Toomey, RBC Dain Rauscher.

Just to follow up on the FPGA's you mentioned that the design wins were strong-very strong in the area sequentially.

Do you feel that the design win growth you have seen there over the last couple of quarters implies more substantial growth by 2004 in that area?

One thing we have been consistently saying is that we expect that our FPGA business will continue to grow on an annual basis and it has been doing so for us.

We have also said that while we expect it to grow annually, it may not grow each and every quarter.

It doesn't necessarily go in a straight line.

That's the expectation.

The expectation this year will be well over last year.

The expectation in 2004 will be up over 2003.

It's difficult to say exactly what number designs leads to exactly what revenue levels.

People don't have that sense of granularity.

But the fact that we're seeing a strong increase in the new FPGA product in the design-win area is encouraging us that that will lead to eventual revenue growth.

Great.

Thank you.

At this time, it appears we have no further questions.

I'd like to turn the conference back over to you gentlemen for any additional or closing comments.

Steve Skaggs OK.

Well, thank you very much, and if there's -- Steve, you may want to indicate to the people where to call if they have questions.

We're at the headquarters.

I think people have that number.

Thanks.

OK.

Thank you.

This does conclude today's conference.

We appreciate your participation.

You may now disconnect.