萊迪思半導體 (LSCC) 2004 Q2 法說會逐字稿

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor's second quarter ending June 30, 2004 earnings press release may be obtained from the company's website which is www.lscc.com.

Again, that is www.lscc.com.

This call is being recorded, and is being broadcast live over the internet by CCBN.

A live broadcast and replay of the call will be available on the Lattice Investor Relations website at www.lscc.com.

At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Jan Johannessen.

Mr. Johannessen, please go ahead sir.

Thank you, and good morning everyone.

Joining me on the call today are Cyrus Tsui, CEO;

Steve Skaggs, our President; and Rodney Sloss, our Vice President of Finance.

Before I begin I would like to read the Safe Harbor statements and give a financial review of the second quarter.

Then Steve will provide a business review followed by our third quarter outlook.

We will then hold a question and answer session.

This conference call may contain forward-looking statements within the meaning of the federal securities law 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 the possibility that further accounting adjustments may be required, the effectiveness or changes to our internal controls, as well as general economic conditions, overall semi-conductor market conditions, market acceptance and demand for our new products; our dependencies on our [inaudible] suppliers, the impact of competitive products and pricing, ecological and product development risks.

We do not intend to update or revise any forward-looking statements.

Turning to the financial review.

Revenue for the second quarter as 60.9 million up 3% sequentially from the first quarter, proceeding with the rest of the statements of operation.

Gross margin for the quarter was 57%.

Slightly lower than in Q1.

The 1.2% decline in gross margin was primarily caused by a strong growth in new products, which currently carry a lower margin, and a decline in revenue of mature products, which typically have a higher margin.

Quarterly R&D expense was $22.6 million.

Essentially flat from last quarter.

Quarterly SG&A expense was $14.1 million, $1 million higher than last quarter.

This increase was primarily due to increased sales commissions on higher revenue, and increased expenses to support the new FPGA launch.

Other income for the June quarter was $3.1 million, essentially flat from the first quarter, and includes the $3 million gain from the sale of UMC shares for $9.6 million.

We add a $100,000 to our tax provision for foreign taxes.

Intangible assets - amortization was $17.1 million for the quarter, and we'll just say some intangible assets acquired in the Vantis acquisition was completed during the past quarter; as a result, the intangible assets amortization for Q3 will be reduced by approximately $11.1 million from Q2.

The June quarter net loss was $16 million or 14 cents per share.

On a non-GAAP basis we had $1.1 million in income, or one penny per share.

Turning now to the balance sheet.

Cash and short term investments as of June 2004 quarter increased by $12.3 million to approximately $311 million.

Due to previously mentioned sale of $9.6 million worth of UMC shares, and $2.7 million of cash flow from operations.

Inventory declined $3.5 million to $40.8 million and inventory now stands at about 4.6 months on a cost of sales basis, which is within our target of 4 to 5 months.

We spent $4.8 million on Capital Expenditures, and depreciation for the quarter was $4.4 million.

I would now like to turn the call over to Steve Skaggs.

Thanks, Jan, and good morning everyone.

The second quarter unfolded pretty much as we predicted.

We saw a resumption of strong growth from our new products, which was off set partially by a return to a more normal business trajectory for our mature products.

Geographically, during the quarter, the Americas made up 30% of the revenue.

Europe 23%, and Asia the remaining 47%.

Revenue by end market for the quarter was as follows: communication, 51% of revenue,computing 17%, and industrial other 32% of revenue.

During the second quarter, new products grew 28% sequentially, and now make up 16% of total revenue.

Year-to-date on six month basis, revenue from our new products has nearly tripled over the same period in 2003.

Last quarter new product revenue growth was led by our new CPLD, specifically, the ISP mach 4000, our low-power ISP mach 4000Z, and our new power management products.

We believe the strength of our CPLD products portfolio, reestablished with the introduction of these products families, is now resulting in this revenue growth as customer design-ins begin to move into volume production.

Overall design-ins of our new products established another record last quarter, growing at double digits levels sequentially, and now represent 61% of total design-ins.

This continued growth in design-in activity gives us confidence about future revenue growth for our new products.

Revenue from main stream products make up 43% of total revenue and grew 5% sequentially.

However, as I mentioned, mature products--which still account for 41% of total revenue--declined 6% sequentially.

During the second quarter, PLD product revenue accounted for $49.8 million or 82% of the revenue, and grew 4 1/2% sequentially.

CPLD product revenue, which is the sub-category of PLD revenue, grew in excess of 7% sequentially.

FPGA product revenue was $11.1 million or 18% of revenue, and declined 2% sequentially.

This slight decline in the FPGA revenue last quarter was driven by lower revenue levels of our more mature FPGA products.

I think it's - important to put our FPGA business in perspective, so let me provide you with some historical data.

Immediately following our [inaudible] FPG acquisition roughly two years ago, our quarterly FPGA revenue level was approximately $7 million.

Now the substantial majority of that revenue base--over $6.5 million was Legacy Orca II, and Orca III products.

At present, our FPGA business is slightly over $11 million per quarter as I mentioned, which over two years equates to about 60% growth--which exceeds the FPGA market over the same time frame.

And today, we still generate about the same revenue from Orca II and Orca III products that we did - at the time of acquisition, but have added almost $5 million in quarterly from our new FPGA products introduced since our acquisition.

Despite the success in growing our FPGA revenue base, we currently face a short term challenge.

The Orca II and Orca III products are now exhibiting signs of secular decline, as all mature products do.

And although we believe our new FPGA products will continue to grow, they are more or less positioned in niches of the market place and therefore will not provide the explosive growth necessary to fully overcome the revenue lag of the Legacy Orca products.

Consequently, we currently anticipate quarterly levels in the 10 - $12 million range for the near future from our current FPGA product portfolio as we undergo this product transition.

The key to achieving higher levels of FPGA revenue is - we believe new products.

On that note, I want to take time now to provide you with some perspective on the progress we have made in the FPGA market since our entrance two years ago, and then discuss our future product direction in the FPGA arena.

Now we entered the FPGA market two years ago with the acquisition of the Agere FPGA products and the product development team.

At that time our primary interest was in a small family of field programmable system chips or FPSC products, which combined [inaudible] transceivers and other hard IP cores with a programmable FPGA fabric, and are targeted mainly towards the communications end market.

During the 12 to 18 months after the acquisition we successfully developed and brought to market a total of eight additional FPSC devices.

Unfortunately, to date the revenue level of these products has been less than our initial expectations as we have come to understand that products of this nature, one, generally have a much longer gestation period than CPLD products; two, require very early engagement with customers' system architects; and three demand heavy technical support, particularly for customized soft IP cores which tend to be required in conjunction with sales of these types of products.

However, our initial efforts into this segment have not been without substantial benefit for the Company.

These products have allowed us to engage system architects for the first time, to develop a strong communication centric IP portfolio, and as an organization learn a great deal about this market segment and the necessary requirements for success going forward.

Our second effort in the FPGA market was the introduction of our internally developed non-volatile, infinitely reconfigurable XP product line in late 2002 through early 2003.

These products upon launch generate a tremendous interest within the customer base.

However they were launched at a time when the FPGA market was just beginning a major transition.

Customers who once were solely focused on density and performance in their FPGA purchases and technology evaluation were becoming increasingly concerned with device costs.

Our XPGA product which sells roughly for $10 per 1,000 look up table was priced out of most main stream customers' reach.

So despite the tremendous interest in demand for a non-volatile FPGA, our XP products have been relegated to the remaining nonprice sensitive niches of the market where nonvolatility is an absolute requirement.

And in this arena, we are very successful in winning designs, even at these high points I mentioned.

But again, despite the current revenue of that product, there have been substantial benefits that have accrued from the introduction of the product family over the last year and a half.

We've - believe we've validated the market for a main stream non-volatile FPGA, and through our initial customer engagement, we have a clear understanding of product requirements and cost targets necessary to be met in order to expand the market for a non-volatile FPGA solution.

So based on those initial experiences in the FPGA market, during the second half of 2003 we completely reset and revamped our FPGA road map and development strategy.

And we did so utilizing our experience in the market to define a full family of next generation products which we believe we can build up for engineering efforts to bring these product families to market much faster than the first generation of internally developed FPGA products.

On that note, I'm pleased to report that we recently, only a month ago in June, introduced our first two next generation FPGA product families--the Lattice EC, and the Lattice ECDSP product families.

Both products have been designed from the ground up to optimally balance architectural features, performance, and importantly low cost--with emphasis on the low cost.

Externally EC stands for economy, however, internally we nicknamed it the El Cheapo, to represent the market we are going after with these product families.

Due to the hard work of our product development team, superb execution and service from our new family partner--Fujitsu--and most importantly, the experience garnered that I mentioned over the last two years of active participation in the FPGA market, I'm pleased to report that these products are being released, and now ahead of our original schedule.

And I believe our timing in releasing these low cost FPGA products is excellent, as now the bulk of the FPGA market is in the midst of a major transition from high priced low price volume solutions to low priced high volume solutions.

And to date, Lattice has not had an FPGA family to compete in this rapidly growing sector.

But with the introduction of the EC and the ECDSP family, this whole - product portfolio has been closed.

Not having a low cost FPGA family currently in the market is really a - truly a double edged sword.

The major shift and emphasis by FPGA customers towards lower cost devices that the market is clearly experiencing now dampens the growth of our older FPGA products.

However, the good news is that we really have no high-priced legacy sockets to protect, so in essence we have full and complete freedom to capitalize on the market's transition towards lower-cost FPGA solutions.

And this time we believe we have the right product at the right moment in the market place.

Software for these two new EC/FPGA families has already been released, and we are currently sampling the first device from both product families, and are actively engaged in the sales process with the worldwide customer base.

These families obviously have additional devices in them, and we plan to release all 10 devices in these two families before year end.

Secondly, we plan to complete the revamp of our FPGA product portfolio by year-end, with the introduction of two additional brand new FPGA product families.

One of these families will extend our efforts in the nonvolatile area while addressing the cost of our current solution, and the other will leverage our FPSC experience and focus on the high end of the market.

Detail of these families will be forthcoming upon their formal introduction announcement.

So with that I'd like to turn to a discussion of our third quarter outlook.

We expect a strong continued growth from our new products.

However, we also expect continued declines in our mature products, and a normal summer seasonal softness in Europe due to summer vacations scheduled.

Consequently, at present, our best estimate is for flat third quarter revenue plus or minus two percentage points.

For the rest of the P&L we currently have the following expectations for the June - for the September 2004 quarter.

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

Our operating expenses, although dependent on new product development activities, we expect to be relatively flat.

We expect intangible asset amortization to be approximately $6 million, as Jan mentioned, for the quarter, a significant decline from the 17.1 million reported last quarter, due to the elimination of the quarterly amortization charges from our 1999 Venice acquisition, which is now been concluded.

We expect approximately $3 million in other income will continue to report about $100,000 of foreign tax expense, and finally, we expect the share count to be relatively flat.

So with that, I'd like to now open the call for questions.

Operator, if you could - start that portion of the session.

Thank you, gentlemen.

Our question-and-answer session will be conducted electronically.

If you would like to ask a question, please firmly press the star key followed by the digit one on your touch-tone phone.

We will call on you in the order that you signal, and when called upon, please repeat your name and company name before posing your question.

Please ask one question at a time.

Time permitting, we will come back for additional questions.

And for our first question we go to Chris Danely with J.P. Morgan.

Thanks guys, what's the terms percentage needed to make the guidance?

The terms percentage last quarter was about 50%, it's going to be about - need to be about the same to meet the guidance.

Okay.

Can I ask a follow up?

Sure.

Great.

You know some of your competitors said that they saw some softness in bookings toward the end of the quarter.

Did you guys see any of that?

You know, [inaudible] said that July has started to pick up a little bit.

Just wondering on - some of the linearity of orders trends last quarter, and then going into this quarter?

For us last quarter was actually reasonably linear.

Going into the summer quarter, as I mentioned, we expect the normal seasonal softness which typically occurs in kind of the August time frame.

So, we would expect to see that order of pattern in the third quarter.

So nothing abnormal.

No.

Great.

Thanks.

We will go next to David Duley with Merriman.

Yes, good morning.

I was wondering if you might be able to break up the addressable market for your new EC product line, the lower cost FPGA product line, and then give us a commentary about the decline in growth margins this quarter, and what was behind that.

Sure.

I'll take the second one first.

You know, as Jan mentioned, we did see substantial growth in our new products, last quarter 28% sequentially, and a decline in our mature products of about 6% sequentially.

Given the posture we've taken in the market place with the our products, currently newer products carry a low gross margin than the corporate average, and mature products tend to carry a higher gross margin than the corporate average.

So what - you're seeing is kind of a reflection of the change of mix in our business on the gross margin line.

And that causes a slight decline.

Obviously, there's a lot of other things that flow through margin.

ASP, cost movements, as well as our ongoing yield enhancement and cost reduction efforts in our new product, but mixing that all together, really the impact on the gross margin is what you saw.

Going forward, we see gross margin being relatively flat as I indicated in our guidance, as we continue to improve the cost position of our new products as they ramp in the market place.

With respect to the addressable market for the EC products--we - are going after the low cost segment of the markets, you know, we see that as one of the most rapidly growing arenas within the FPGA market.

We think it has potential to grow to - over time kind of a third to potentially even about half of the FPGA market.

We really think low cost is the key to expanding usage of FPGAs across a number of end applications as well as providing really viable replacement alternatives for [inaudible] having FPGA that meet cost targets in that regard are critical to doing that.

I mentioned, for Lattice, we really haven't had a product line that addresses that market space before to really the EC families have been architected from the ground up to - target that market place, and we've made a number of architectural decisions in order to make those products both attractive from a cost standpoint, yet fairly fully featured.

So, we're reasonably excited about the reception and potential for those products in the marketplace moving forward.

Thank you.

We go next to Sumit Dhanda with Banc of America Securities.

A followup on the gross margin question, is it fair to just model it going forward - I know you've given flat guidance for the next quarter.

But just looking out a few more quarters, given your expectation of continued advance in new products, is that how we should think about it?

That's the best view we can give you at this time, Sumit, yes.

Okay, thank you.

Sure.

We go next to [Bill Dezellem] with Davidson.

And thank you.

It's [Bill Dezellem] at Davidson Investment Advisors.

A couple of questions.

First of all, relative to margins on the new products, as they mature will they also move into that higher margin category, or is there something fundamentally different about this set of new products versus those in the past?

And then secondarily, given the fact that the Company is trading at less than two times cash on the balance sheet, are you at all considering, and at what point do you consider a repurchase of the convert - or share buyback?

As I think most of you know, we have entertained convertible buybacks in the past.

You know, something the Company evaluates on an ongoing basis.

I would note that our cast position is - solid.

The Company has generated cash from operations last quarter.

In fact, has done so each and every quarter for the last several years.

So, we will continue to make those evaluations and act accordingly.

Obviously, we're not going to telecast our intentions, but that's something that we've done in the past, and continue to evaluate.

Yeah, with respect to gross margin, we don't believe there is anything fundamentally changed in our business.

As I mentioned in the last call, which I'll reiterate here, we have priced our new products in order to drive their market penetration.

I think we're seeing that in the growth of new products, and so therefore, it's really incumbent upon us to do the normal work in driving yields and cost down over time.

We plan to do so.

We have made progress in those regards and we'll make additional products.

So we do expect the margins of new products, as they move into the main stream categories, to move up to the corporate average.

And Steve, if we look back historically, the Company's margins would have been closer to 60% on the gross margin line.

As the products mature, would you anticipate that - and again, this is over several quarters - that margins would move back up to that level, or again, coming back to the same question, are these newer products fundamentally different, either in terms of the products themselves, or the Company strategy?

No they're not fundamentally different.

The think that the only thing that's fundamentally different is that we - we have chosen to price our new products for market penetration in anticipation of cost reductions - primarily yield enhancements - instead of pricing them at consistent margins.

And therefore the onus is on the Company to drive the cost down over time, and we expect to do that.

But in terms of the margin targets of the Company, they really haven't changed over the long run.

Thank you.

We go next to Bob Toomey with RBC Dominion Rauscher.

Hi, good morning, Bob Toomey at RBC Dane Rauscher.

Steve, could you talk - go over again, you gave some numbers relating to sequential growth of new products, and their percent of total revenue.

Can you go over that again please?

Sure Bob.

New products, in the second quarter represented about 16% of total revenue, and they grew 28% sequentially from the - prior quarter.

Mainstream products represent about 43% of total revenue and grew 5% percent sequentially.

Mature products make up the remaining 41% of total revenue and those declined 6 percent sequentially.

Both movements in mainstream and mature we think are - representative of current market conditions, and not abnormal.

The Company is very focused on driving the growth of our new products, and as I mentioned, developing next generation FPGA products and getting those into the market and in - as timely a manner as possible to drive the growth of what we believe will be the most strategic important opportunity for the Company, and that's to increase our FPGA market share and penetration.

And can you say - with the key end markets that you're going to be going into with these new products, and the sizes of those markets?

Well, really our new products today address, you know, the normal applications for programmable object devices.

Really, you can divide our current new products into CPOB products which attack the entire market space, and the newer FPGA products that I talked about, which at present really are FPSC products which target the communication sector, and the XP products, which really offer as a differentiating factor nonvolatility.

We talked about the price premium on those products in their current generation, which really relegates them to areas where nonvolatility is critical.

That tends to be more in markets like the military, high reliability, and other areas where security is of utmost importance.

Going forward, I also talked about our current development of successes in the FPGA market manifested by our early announcement introduction of our EC families.

These are mainstream FPGAs targeted towards the low cost portion of the FPGA market, which we believe is a market that's in the midst of kind of a transition and a move into very substantial growth.

We believe that low cost FPGAs really can service a broad swath of end applications--much like the FPGA market itself.

So, our products really are targeting those broad applications, our ECGSP family has built in DFP blocks that make it more useful to implement kind of digital single processing functions, so that we will have some particular addressable applications in that market space.

But in - essence, Bob, our new products really, from an application standpoint, address the main stream applications in the POB market place.

And you're confident with your engineering that you're going to be able to make this transition you know, smoothly?

Well, I mentioned that, you know, we've been in the market two years.

We've - learned a lot.

We've garnered a lot of experience.

We believe we're applying that experience successfully, to - both to the definition of our new products, but also the execution of the development of those new products, so the answer to the question would be yes.

Thank you.

Steve.

Yes?

This is Cyrus.

If I may, add a few points.

Please.

The overall market, if you look at the current design activity point of view, roughly about 8 or 9% of the current designs is really what we call in the low cost segment.

Which is devices comprised of the cyclone and the [inaudible] III type of devices.

And that, as compared to the sort of an overall mainstream full feature FPGA products are products like vertexes or apexes and so on, which accounts for about roughly two thirds of the overall market.

Then the rest of the stuff is a various embedded stuff like embedded 30s and embedded DSPs, and embedded processes, and so on and so forth.

What we see as we engage the customers is the next design, however.

You are going to see roughly 30% of the designs are going to go into what we call you know, EC type of devices.

On the other hand, the main stream devices is really - are reasonably going to shrink, so we three years from now, instead of two thirds of the market in the main stream type of full feature FPGA devices into roughly 1/3 - into low cost of products like EC, like the Cyclones and so on.

1/3 into the main stream products, and the rest of those are various kind of specialty embedded functions. o, what we are looking at, you know, in the past with all this major transition from full featured FPGA devices, that's almost impossible to touch the market place, because, the established position of [inaudible] is so strong in the market place.

So two years ago as we entered the market we chose not to compete in the market segment.

However, as we see the turn and shift around the price and cost driven sort of an area, we look at it as a major opportunity, given that, as Steve mentioned, we have nothing to protect in this area.

We have all the freedom to move around.

And so first, for us it does not mean we need to get 50% of the market.

So first, for us, if we can get 10% of the market it would be - fine.

And so, from that point of view, we believe that EC and ECP type of product is very timely, and we also believe from - internal cost point of view, potentially these products can cost lower than the current competitors' products in the market place.

On the other hand, in the non-volatile area, what we - there is a major shift, a major progress made in the market place with the advent of the sort of a reprogrammable nonvolatile technology.

And that's, you know, although relatively small today, about 8 or 9% or so, we believe it's going to double in the next two to three years.

So, our products are XP, the first generation, while it has priced itself out of the range, the second generation devices are going to be fundamentally remedied up, and allow us to compete in the mark place of basically, without the brand X and brand A. So, as well, you know, on the high end we learned a lot of things as we engage the FPSC area.

So we look at it - the product that we are going to be coming out, fundamentally is going to stake out the portion over the market which is going to be growing, and that the establishments quote unquote is not as well established in those areas as they would like to be.

So it will give us room to compete.

That's basically the market assessment.

Bob?

And ladies and gentlemen, as reminder if you would like to ask a question.

Please firmly press the star key followed by the digit one.

We go next to Mark Edelstone with Morgan Stanley.

Good morning, guys.

A couple of questions for you if I could.

First one, Steve or Cyrus, you talked about the things learned and the difficulties of the FTSE market.

Going forward, is that a market opportunity that you feel like you either want to or can afford to fund going forward?

And then I've got a follow up question.

What was the question?

Question on [inaudible] FPSC, Steve talked the kind of the kind of the learning experience that you've had.

FPSC?

Exactly.

Hold on, what was the question?

The question is, is that a market place that you want to continue to pursue, or is it just not going to be cost effective enough of a market for you to be in?

We will continue to pursue the market, but however, with a very different approach in the ways of the products, so make it relatively much less expensive for developing these products.

And what - what's the time, you think involved in Cyrus, to be able to have an impact there with the new strategy?

You're talking about FPSC?

Yes.

Oh, I think once we introduce the approach in products, probably two years.

Okay, great.

And then, just a question going back to the margin structure on the new products.

Steve, you mentioned that there is really nothing fundamentally different with what's happening there other than that you guys are pricing this to get a foot hold into the market.

When we look at the ramp of those products going forward, the ability to get margins up to your corporate average, is that going to be done through shrinks, or can it be done just simply through yield improvements as you come down the learning curve?

It can be done, with a couple of things.

One is migration of this to the 12-inch fab line, which will end up bringing additional cost reduction, because the fundamental of this device is, from a [inaudible] point of view, is exceedingly competitive vis a vie what we know of the products in the market place.

The portion that we have taken or we plan to take being a lot more aggressive from price end, is the - reflection that fundamental issue for Lattice is not the gross margin.

Fundamental issue for Lattice is the top line growth, and that is going to come up with even with the current gross margin, okay, if we can resume getting to the past growth on the top line, I think most of the issues we are talking about, will go away.

So Cyrus, when will you start to have 300 mm transitions really taking place in earnest?

2005.

Great.

Thanks a lot.

For our next question we go to [Richard Shannon] with Piper Jaffreys.

Hi there.

Couple of questions, first of all, you mentioned on - the R&D line that we should see some increase there in mass cost temporarily, and obviously, your guidance here would suggest that that's not necessarily the case happening this quarter.

Can you give us a sense of when - some increase cost from [inaudible] might hit the income statement?

We're actually spending a substantial amount on mass every quarter, and we have this year--and that accounts for the increase that you've seen in that line versus last year because the headcount is relatively flat.

Really, it depends Richard, on the specific tape out schedule each and every quarter.

So - going forward, we could have fluctuations of $.5 million to $1 million per quarter in that line depending on the specific product development, activities, and schedule.

So there is mask, and the development expense is in that number, we expect the next quarter R&D to be slightly up.

But we expect overall operating expenses to be relatively flat as our guidance indicated.

Okay.

The second question is in terms of your guidance which - on revenues which is roughly flat here.

How do you expect the end market segments to shift within that?

You know, we roll those up at the end of the quarter with a flat outlook.

We'd - expect kind of more of the same.

If you look at the communication market, we had a really strong ramp in the first quarter that was moderated somewhat in the second quarter, but overall this year the comm market is up nicely.

You know, last quarter many of our larger communication customers took a more conservative posture on orders.

My own sense is that was a more function of their desire to be cautious on their inventory position rather than a reflection of a change in their in demand.

We believe in-demand the communcation end market is healthier than it has been in several years.

However, you know, many of the management teams at the major communication OEMs really have a vivid memory of being caught with a mountain of inventory in 2001, and they're really not interested in repeating that experience.

We've, you know, on our part done a very good job in keeping our general lead times in control, and responding to our customer's needs to keep their inventory at desired levels.

And kind of unfortunately sometimes that retards short-term orders.

So, kind of net-net is looked at, or across two quarters, the comm market has grown nicely.

Additionally this year, the industrial and other market has shown nice growth, kind of going forward throughout the extent of 2004, you know, we don't expect major changes in kind of the end-market posture from kind of our vantage point.

Okay.

Last quick question here, Steve, you talked a little bit about your EC and ECDSC products.

I was wondering if you'd kind of summarize all the points of differentiation between it, and what you expect the competitive products to be from your larger competitors.

Sure.

As I mentioned in June, we announced both of those families.

The products offer a density range between about 1,000 look up table to approximately 33,000 look up tables, with up to about 750 megabits of user accessible memory.

Kind of in [inaudible] terms we translate that as up to about 3 million gates.

So, really for us, it's a significant expansion of market capture as part of that family or largest FPGA was about a half to a third the density.

But perhaps more important, the products are really designed to be extremely cost competitive from an architecture standpoint.

They've been architected from ground up with cost in mind.

And we believe our die sizes are smaller than our competitors' and have made certain architectural decisions to make the devices even more cost friendly for our customers.

For example, the products are architected to utilize standard boot flash chips for holding the programming code as opposed to proprietary memories which can save our customers as much as up to $2 to $3 dollars per socket.

And, kind of in this cost sensitive sector, $2 to $3 per - socket is actually a reasonable percentage of the total solution cost.

Additionally, kind of unique to Lattice, we offer a built-in DDR memory interface that's actually coated - hard coated in the device.

That, for the high percentage of customers who need the interface of FPGA to external memory really lets them avoid the overhead of having to build that interface out of programmable logic.

So again, that plays to the cost angle, that the customer can use the programmable logic to implement a design instead of implementing a complicated DDR interface.

So really, they can use a smaller fabric to get their logic needs accomplished.

The EC/DSP family really offers a similar benefit, by the way of kind of built in DSP blocks such that the customer is doing digital processing application, can utilize the architected cores and blocks in the chip to do that functionality instead of building around [inaudible.]

So this device has kind of been architected from the ground up with cost in mind.

We believe that we can offer kind of a chips that's more fully featured than our competition, yet meet - the desired price points that our customers required, and save additional money for customers by allowing them to use kind of standard flash for booting the FPGA as opposed proprietary flash.

Okay.

Great.

Thanks, Steve, for that expansion.

Sure.

And Ladies and gentlemen, as a final reminder--that is star 1 to ask a question.

We go next to David Duley with Merriman.

Yes, just a couple of follow ups.

With your EC product family, are - you currently targeting kind of a discount competitors market place, and just help us understand what sort of strategy you're pursuing there in order to win the sockets, and what - I'm assuming it's on [inaudible] now - what technology note are you going to migrate that down first before you go to 12-inch wafers?

And after you take out all these new products will the R&D expenses moderate?

You asked a lot of questions, so let me, you know, try to answer those in order.

The EC products, as we mentioned in our announcements, are on 130 nanometer technology.

I think Cyrus gave you some viewpoint on our migration plans to 300 mm wafers.

We'll assess the technology and interoperation mode and disclose that at the time of any announcements.

The product is going to be sold, kind of with two things in mind.

As a more fully featured low-cost FPGA that's price competitive with our - the alternatives in the market place.

You know, we believe we can position the products successfully in that regard.

As we've mentioned, both Cyrus and myself, the market's in the midst of a very major transition towards low cost solutions.

You know, there's many customers who use Legacy mainstream FPGAs, you know, that carry 65 to 70% gross margin who are, you know,quite interested in moving down to a more economic solution for their own board of economic reasons.

And we - you know - so there's going to be a lot of moving in the market place, and a lot of interest in low cost solutions.

Particularly ones that are architecturally featured to be robust, as opposed to just stripped down, you know, architectures.

So, you know, we're going to sell on that basis.

You know, we think the market's going to go through a very turbulent, dynamic period, and you know, we believe we've got a good solution at the right time.

Yes, Steve.

If I may add - I think the low cost segment, you know, beyond the features and performance levels, obviously the cost of the sort of a total solution Steve mentioned, our devices--especially architectured to interface with very low cost of boot prompts, and those consumer FGI boot prompts.

And if you look at the 50% of the designs will require boot prompts in the FPGA arena, so given our inherent low cost in the in our die, and plus the lower cost SPI boot flash, we will give customer in sort of a totality, a much more economical choice than otherwise.

Beyond that, you know, Steve, talk a lot about the feature comparisons and named a couple of the key feature differences, but fundamentally if you look at it, the balance is really achieved in the EC chip.

That is, if you look at a number of IOs, compared to Cyclone, our stuff is anywhere from 20 to 50% more IOs on the different density point.

We've got more embedded memories than Cyclone, we supply more differential IO standards than Cyclone, yet our die size is smaller than Cyclone.

So, we give people a lot of value and we - are going to certainly going to be very competitive in the market place relative to the price, and we aim to give our customers the lowest solution for - among FGPA options.

Cyrus, what do you think that your competitors' reaction will be to you kind of pushing the envelope, so to speak, with more fully featured product at a lower cost - right, basically it sounds like right at the center of their larger segment where - that which is also the most profitable segments?

Yeah that - the thing to remember though, and the target for our product, are not necessarily Spartan III's or Cyclones.

After all, there's few, relatively few sockets of it.

The target is really in the new designs with the Legacy full featured FPGA products which is selling on the average of $4 to $5 per [inaudible], versus $1 to $2 for [inaudible] on the low cost product options.

So that being the target - that being said, you know, as we start to trying to convert the customer design inevitably we are going to be competing with the low cost solutions from [inaudible] and that fundamentally, it requires the sales skills to emphasize or accentuate the sort of a differential features that our products have that the competition do not have.

Therefore allow us to secure the socket and still be able to offer the customers with the very competitive and economical price.

I mean, you know, what can I say?

The competition is going to come back.

I don't need to win every battle, I just need to win a few.

Great, thanks, Cyrus.

We go next to [Bill Dezellem] with Davidson Investment Advisors.

Thank you.

I did have a couple of follow up questions relative to EC.

First, coming back to you at your point Cyrus, at the $4 to $5 price for the main stream products, how--if we were to do a comparison of - the $1 to $2 per thousand lot, compared to say Cyclone or Spartan III--pricing out in the same way?

It's a - it's basically in the same price range, right, so - in a high end, low end of this price range depends on the falling of the customer requirements and depends on the time of the delivery.

So, from pricing point of view whether you hit the $1 versus $2 all depends on a lot of things.

And all I'm saying is, our product is amply designed to meet the competition on those price points.

That's helpful.

And given that it was roughly a month ago that you did officially introduce EC, where are you all hearing from customers relative to that introduction?

Our sales people tell us they're very excited.

And more detail in terms of what they're most excited about?

No.

No.

It's too early.

All right.

Thank you.

We go next to Bob Toomey with RBC Dane Rauscher.

Hi, it's Bob Toomey again.

Just a couple of follow-ups.

Cyrus, I think you gave earlier a time frame for - in response to Mark's question - about the time frame on FPSC.

Can you comment on what you think might be a time frame for success of the new EC strategy, and then also, can you comment on the potential growth of the main stream products over the next several quarters?

Thanks.

Steve, you want to take a crack at it?

Sure.

The - you know, I think, Bob, we'll be in a position 12 months from now to get a sense on the success of the EC strategy.

So that would be my answer to that question.

With respect - can you repeat your question on the main stream, I don't -

What's the growth prospect for the main stream.

Our main stream FPGA products?

Yeah, mainstream business, I believe.

Yeah, mainstream core business, including CPLDs as well.

Well, you know, we've had two quarters of solid growth out of the mainstream business, as you've seen.

We're somewhat cautious on the summer quarter for seasonal reasons, but, you know, I think, you know, going forward in the current economic cycle and also the current semiconductor cycle, you know, we'd expect to see, you know, reasonable growth out of the mainstream business in conjunction with that cycle.

You know, bearing in mind that, you know, the PLD part of the market is not going to have as high growth of prospect of the FPGA part of the market.

But nonetheless, you know, we do believe that business can - turn in a steady growth for us in this economic and semiconductor climate.

Do you feel the semiconductor cycle is still intact, there's a lot of controversy on wall street about that?

Can you comment on that?

Only wall street would know.

Okay.

Thank you.

And ladies and gentlemen, we have no further questions on our roster at this time; therefore, Mr. Skaggs, I'll turn the conference back over to you for any closing remarks.

Great.

Thanks everyone for attending this early in the morning.

To the extent we can be helpful, please give the Company a call, thanks a bunch, bye.

And ladies and gentlemen, this does conclude the Lattice Semiconductor second quarter ending June 30, 2004 conference call.

We do appreciate your participation and you may disconnect at this time.