萊迪思半導體 (LSCC) 2004 Q3 法說會逐字稿

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor third quarter ending September 30th, 2004 earnings press release may be obtained from the Company's website which is www.lscc.com.

This call is being recorded and 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, www.lscc.com.

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

Please go ahead, sir.

Thank you, and good morning, everyone.

Joining me on the call today are Cyrus Tsui, our Chairman and Chief Executive Officer;

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

Before we begin I'd like to read a Safe Harbor statement and give a financial review of the third quarter.

Then Steve will provide a business review followed by the fourth quarter outlook.

We will then hold a question and answer session.

I will now read the Safe Harbor statements.

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 the possibility that further accounting adjustments may be required, effectiveness of changes to our internal control, as well as general economic conditions, overall semiconductor market conditions, market acceptance and demand for our new products, our dependencies on our silicon wafer suppliers, the impact of competitive products and pricing, technological and product development risks.

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

Now turning to the financial review.

The revenue for the third quarter was $57.3 million, down 6% sequentially from the second quarter.

Proceeding with the rest of the statement of operations.

Gross margin for the quarter was 56.6%, slightly lower than in Q2.

Quarterly R&D expense was $23.2 million, up $600,000 from the prior quarter.

The increase was primarily due to higher mass set expenditures for our new FPGA products.

Quarterly SG&A expense was $13.6 million, down $0.5 million from last quarter.

Other income for the September quarter was $4 million, up $900,000 from the second quarter and includes a $2.8 million gain from buying back $15 million of our convertible bonds and $0.5 million gain from the sale of UMC shares for $10.8 million.

We added $108,000 to our tax provision for foreign tax.

Intangible asset amortization was $5.8 million for the quarter, down $11.3 million from the second quarter.

The significant reduction for the quarter was because the amortization of the assets acquired in the Vantis acquisition was completed during the previous quarter.

The amortization of intangible assets will be approximately $5.8 million for the fourth quarter and be substantially eliminated in the year 2008.

September quarter net loss was $6.3 million, or $0.06 per share.

On a non-GAAP basis we had a loss of $0.5 million.

Turning now to the balance sheet.

Cash and short term investments as of this September 2004 quarter increased by $8.6 million to $319 million.

During the quarter we used $12 million in cash to extinguish $15 million of convertible bonds, and we generated cash proceeds of $10.8 million from the sale of UMC shares.

We would like to point out despite the GAAP losses, the business continues to generate cash from operations.

And last quarter we added approximately $7 million in cash from operations, which makes the year-to-date total operating cash flow approximately $26 million.

During the third quarter we recorded a $25 million current liability to recognize the initial payment due Fujitsu under our recently announced technology development partnership.

The $25 million payment, which is an advance payment on wafer purchase from the new 300mm Fujitsu fab, was made earlier this month and is the first of four payments totaling $125 million that will be paid based on the achievement of specific milestones.

We anticipate that the final payment will be paid by the second quarter of 2006.

If Lattice has not used all the wafer credits by December 31st, 2007, we can request repayment of the unused portion of the $125 million wafer advance.

Our inventory declined $1.7 million to $39.1 million.

Inventory now stands at about 4.8 months on a cost of sales basis, within our target of four to five months.

We spent $1.4 million in capital expenditures in the quarter and depreciation for the quarter was $4.2 million.

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

Thanks, Jan.

The third quarter unfolded close to our revised outlook, as we experienced what I would term a traditional summer quarter.

Geographically during the quarter, the Americas made up 31% of revenue, Europe 22%, and Asia 47%.

All geographic regions, with the exception of Japan, reported sequential declines in revenue, with Europe and Asia showing the largest decline.

Europe's decline was due to seasonal factors, while in Asia, the decline was due to a slow-down in demand.

Revenue by end market for the quarter was as follows.

Communications, 50% of revenue; computing, 20%; and industrial other 30% of revenue.

On the product side, we've posted another quarter of strong growth from our new products.

However, this growth was more than offset by declines in our mainstream and mature products.

During the third quarter, new products grew 22% sequentially and now make up 21% of total revenue.

On a year-over-year basis, revenue from new products nearly doubled.

Last quarter our new product growth was led by our new CPLD families, as well as our FPGA products.

Overall, design ends of our new products established a new record last quarter, growing at a double-digit level sequentially and now represent 69% of our total design ends.

This continued growth in designing activity gives us confidence about prospects for future revenue growth from these new products.

Revenue from mainstream products declined 7% sequentially and now make up 43% of total revenue.

Mature products declined 16% sequentially and now make up 36% of total revenue.

Going forward, we anticipate continued declines in these product categories.

During the third quarter, FPGA product revenue was $11.3 million, or 20% of total revenue, growing 1% sequentially and 22% on a year-over-year basis.

In a quarter in which the FPGA market declined, we're pleased to have eeked out some modest growth in the FPGA segment.

Generally, revenue declines in our mature FPGA products last quarter were offset by growth in our newer FPSC and XT products.

Looking forward, we expect to see a continuation of that trend.

On the other hand, PLD product revenue accounted for $46 million, or 80% of our total revenue and declined 8% sequentially.

This decline was driven by our mature PLD products and, in particular, our simple PLD products, which, as a group, simple PLD declined 17% on a sequential basis.

Revenue from 3-volt and lower CPLD products was essentially flat and our new CPLD products grew over 20% sequentially.

As Jan mentioned, the Company continues to generate positive cash from operations.

Accordingly, we remain strongly focused on our new product development efforts, which are intended to improve our position in the large and attractive FPGA market.

So, in this regard, I would like to give you now a brief update of what we have accomplished in this area over the last quarter.

As you're aware, at the end of June we publicly announced our first low-cost FPGAs, the so-called LatticeEC and LatticeEC-DSP families.

Openly [ph] within these two families, we plan to offer 12 unique silicon devices.

At present we have released two devices to mass production, are sampling two additional devices and are well on track to sample the remaining eight devices within those two families in the current quarter.

This puts us ahead of our original schedule on product releases, and full release of an entire product family of this magnitude in such a short time is unprecedented at our Company, and is a reflection on the superb execution of our product development organization and the strong support of our foundry partner.

We continue to believe that the EC and EC-DSP families are the right products at the right time for the FPGA market.

Those products were designed from the ground up to optimally balance architectural features, performance, as well as low costs.

In addition, they're differentiated from competitive low-cost FPGA offerings by providing more performance and functionality at equivalent price points in the marketplace.

Ours are the only low-cost FPGA to offer a 400-megabit-per-second DDR memory interface.

The only low-cost FPGA family to provide a high performance yet flexible DFC block, as well as the only low-cost FPGA family to support standard SPI boot prongs to lower the total system cost of a FPGA solution.

This message is resonating with the customer base, either for additional low-cost FPGA offerings, and as of last quarter, we have already won our first handful of designs and booked our first revenue shipments for these families.

And although we are encouraged about the market potential, I will caution you that at this early stage, it is premature to make any predictions on the ultimate markets of the products.

Additionally, we continue to be pleased about the steady progress we've made with our software tool support.

Earlier in the month we announced a renewal and expansion of our OEM software agreement with Mentor Graphics.

This week we completed development of our ISP Lever 4.2 software, which is the third release supporting our new FPG families and we'll soon make this tool available to our worldwide customers. 4.2 offers a significant performance improvement and substantial future enhancements for our FPGA customers, including a major upgrade to the bundled third party synthesis and simulation tools, which are enabled by our new agreement with Mentor.

I'd like to turn now to a discussion of our fourth quarter outlook.

It's clear that industry conditions have changed from the first half of the year.

Exiting this soft summer quarter, we'd normally expect to see a pick-up in orders beginning in October.

At present, we have not yet experienced this phenomena.

Consequently, we currently expect to report a revenue decline in the fourth calendar quarter, and at present, our best estimate for fourth quarter revenue is between $51 and $53 million.

For the rest of the year P&L statement, we currently have the following expectations for the December 2004 quarter.

We expect gross margin as a percentage of revenue to be approximately flat, plus or minus 50 to 100 basis points.

Operating expense will continue to be dependent on new product development activities, however, should be flat to slightly down for the fourth quarter.

We expect intangible asset amortization to be approximately $5.8 million.

We expect approximately $1 million in other income.

We should continue to report approximately $100,000 of tax expense.

And, finally, we expect the shared count to be relatively flat.

With that I would like now to open the call for questions.

Operator, please start the Q&A session.

Thank you, Mr. Skaggs.

This question and answer session will be conducted electronically.

If you would like to ask a question you may do so by pressing the star key followed by the digit 1 on your touch tone telephone.

If you're using a speakerphone we do ask that you make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, that is star 1 for questions.

We'll pause just a moment to assemble our roster.

And our first question comes from Ruben Roy, Pacific Crest Securities.

Thanks.

Steve, you just mentioned that your operating expenses you're expecting to stay flat.

How do you see that trending out into '05 as your new products roll out?

Do you expect the out-backs to trend up, especially on the sales and marketing side, more aggressively?

The -- we expect operating expenses to be, you know, dependent upon new product development activities.

Generally, there's potential for that to fluctuate on the R&D side 0.5 to $1 million per quarter, perhaps slightly more, dependent upon tapeouts and so forth as we roll out new products.

With regard to SG&A, we should see that be fairly related to the revenue of the Company.

If revenue grows a certain proportion of those expenses are variable, yet we should see those grow a little bit slower than revenue.

And if revenue declines, there'll be some decline, although it won't be as fast as the revenue decline in certain aspects of SG&A, like commissions that are -- that are variable.

So, really if you look at the operating expenses, we've had a -- a ramp-up of expenses as we've made the major investment in -- in our new products.

For the most part, that ramp-up is behind us but, as I mentioned, the expenses will be variable in-- in the manner that I described.

Okay.

Quick follow-up on the product side.

You mentioned a handful of designs for the new products.

Can you specify the types of end-market applications that you're seeing the most traction in?

Well, really, low-cost FPGAs are going to be useful for a real wide variety of FPGA customers.

Last quarter we expressed the viewpoint that, you know, over time, really, one-third of the market in FPGAs from a design-start standpoint would be addressable by low-cost FPGAs.

Additionally, we feel another one-third of the market is still using kind of mainstream FPGAs, older technologies, and therefore, really, these products address a large part of the FPGA market space.

So, in our early engagements with customers, we're seeing a quick ability for these products, really across the whole gamut, the whole range of application spaces for -- for FPGA devices.

So it's really the same applications that -- that are traditionally available to FPGAs.

In addition, there's obviously newer applications and the more cost-sensitive market application spaces, like consumer automotive, where these price points allow use of FPGA technology, perhaps for the first time, as well as other areas, where traditionally there's been more of a preference to use chip sets or ASIC technology straight out of the box.

So really we believe that the low-cost FPGA market is a good one and one that is going to show strong growth and design starts.

And, as I mentioned this time and last time on the conference call, we do believe we have the right products at the right time to address that market space.

Okay.

Sorry.

Just one quick follow-up.

So, thus far, with these design wins, so it's mostly traditional FPGA sockets that you're going into versus ASIC replacement thus far?

Right.

It's the normal applications, normal customers, that we would expect to see.

Thank you.

Our next question comes from Mark Edelstone of Morgan Stanley.

Good morning guys.

Just, first off, one point of clarification.

On the gains that you had in the quarter, was that a total of 3.3 million?

Say that again?

The gains that you had in the quarter, the $2.8 million.

You gave us two numbers, 2.8 and 0.5.

Was that a subset of one or was that a total of $3.3 million?

We had a gain both on the -- on the sale of the -- of the UMC shares and on the debt buyback.

The debt buyback was $2.8 million and the -- the UMC gain was $0.5 million.

Great.

Okay.

Thank you.

That's what I thought.

Total other income was $3.4 million, actually.

Right.

Okay.

Thanks for clearing that up.

Steve, just a question on the gross margin trend as you go forward.

You clearly now have your inventories back down to a much more normal level vis-a-vis where it had been over the last couple of years.

So, that would seemingly be a positive for gross margins going forward.

And then, secondly, as you ramp up these new products over the next couple of years and also get production out of Fujitsu, how do you expect gross margins to trend when you look out over the next couple of years?

As we -- as I talked about last time, really, we had priced our new products such that they would penetrate the marketplace.

So really, at current time our new products are carrying lower gross margins than our mainstream and mature products.

And we expect to -- to drive those margins up to our normal historic levels through yield enhancements.

If you look at our gross margin performance last quarter, it's really pretty consistent with the margin of the quarter before, and that's in the context of some major mix changes in our business.

And new products really grew nicely, as I mentioned.

So, we did achieve our expectations on that dimension, and we're pleased in being able to hold the gross margin pretty much in line with where it had been the quarter before.

Now, moving forward, we're going to continue to -- that same process.

We want to price our products for the point on the cost curve which we think we can achieve as we reach volume production and yield enhancements, because we don't want to retard the traction of those products in the marketplace.

And we'll endeavor to do the operational work to -- to drive those margins up to our kind of corporate targets, which have and have always been kind of in the upper 50% to 60% range.

So, looking out over the long-term, really, we don't see any structural change in our business that can prevent that from occurring.

And our next question comes from Chris Danely, JP Morgan.

Thanks, guys.

One question, a quick follow-up.

For Steve or Cyrus, what's your sense on the cause of the current slow-down?

Do you think it's mostly inventory or there's some end demand or a little of both or one or the other?

I'd just like your sense on that.

Sure.

Really, if you look geographically last quarter, our actual end markets were reasonably stable from a percent-of-revenue standpoint.

Geographically, we saw Europe have a decline in revenue last quarter.

We believe that's normal and consistent with traditional summer period.

But in addition, we saw Asia, particularly non-Japan Asia, show a revenue decline, which really was a result of kind of a demand slowdown in Asia.

A demand slowdown has two impacts.

One is there's obviously a slowing of the purchasing of devices.

But additionally, there tends to be an inventory backup as a result of that.

So our best viewpoint is that that, you know, occurred due to a change in the rate of the growth of the Asian economies.

So, in the short term, we see really going forward Asia being affected by a demand slowdown that's resulted in a slight build-up of inventory in Asia.

Over the long-term, we still expect the Asian region to continue to experience strong economic growth.

The real key to how long it will take to deplete the excess inventory will be the exact rate of that growth.

Should, you know, Asia continue to grow at historic rates, we believe the effect will be transitory.

Should the rate of the economic growth slow for an extended period of time, then the effect will obviously last longer and potentially into 2005.

So, really we -- we see the -- the issue being economic and demand related, with a second order effect of an inventory build-up, which is normal.

Going forward, the long-term health and growth of the region is more dependent on the overall macroeconomic picture, as we look into 2005.

And the second question centers on Opex.

Clearly, the FPGA solution for you guys is starting to gain traction out there.

The issue is that Opex is creeping up pretty high.

If the Opex stays in the sort of 60 to 70% range for, say, another two, three, or four quarters, will you guys start to rationalize some of that?

Well, I think it's premature to discuss that in this forum.

It's obviously something that the Company looks at and will continue to look at.

We have an obligation to do that.

You know, I would point out, last quarter the company was solidly cash flow positive.

We had significant cash reserves.

Next quarter, even at the lower revenue outlook, we believe we can again be cash flow positive.

So, given that situation, we believe the best course for the long-term success of the Company is to continue our aggressive investment and development of next generation differentiated FPGA products segments that can allow us to grow our market share in that large segment.

Really, fundamentally, the FPGA market is a very attractive market.

It's large.

Anybody who observes it believes it has strong long-term growth prospects.

It's a very difficult market to crack into with substantial barriers to entry.

Lattice is really, if you analyze it, probably the only semiconductor company who has a -- a potential to -- to build a market share and break down those barriers in that marketplace.

We've made most of the investments in terms of channels of distribution, software tools, technology, product definition, to be able to -- to build our market share.

Most of the operating expense ramp-up investment has occurred, and thus, you know, we think that the best course for the Company is to, you know, continue to roll out these products and to -- to work to -- to build our market share with these products in that segment.

Okay.

Just one -- one last question.

Can you give us a sense of how much of your R&D is dedicated to the FPGA products?

A substantial majority.

Okay.

Thanks, guys.

We'll take our next question from Bill Brizome (ph), Davidson Investment Advisors.

Thank you.

We had a couple of questions.

First of all, following up on the Asian slowdown, does that -- would you characterize the three market segments, communications, computing and other, in which or all of them that you saw the slowdown in?

And then secondarily, relative to your guidance for the December quarter, would you break down the difference in your growth expectations between the PLD and the FPGA business, please?

Sure.

Asia is actually -- business in Asia is transfer business for -- for U.S. and European companies as well as indigenous (ph) business, and across a number of market segments.

You know, I guess the best way to characterize the slowdown was that it was, you know, across the board, across all the various segments.

So, we -- we see it as a -- a broad market-related issue, as opposed to an issue that's, you know, reflective of a specific segment.

And I think that's consistent with the viewpoint that -- that articulated.

You know, moving forward we actually have a -- we don't have a growth outlook.

We have a -- a decline outlook.

And, you know, I would say at this point in time, we haven't really parsed it by -- by FPGA and CPLD.

So we'd expect, you know, at this early stage, similar performance out of both businesses in that time frame.

I would give you a -- a large caveat in that we do expect to see continued growth out of our new products, and that's probably a better way to look at how we segment our business from a growth outlook.

So, last quarter we saw double digit growth from our new products.

We expect to continue to see growth from new products.

We saw a -- a decline in our mainstream and mature products.

Mature products, you know, we expect to decline.

Mainstream products are more of a reflection of the overall industry and inventory situation of the industry.

So, really that depends on how fast, kind of, inventory moves through, and the overall economic and environments that, really, the prospects for the mainstream products.

But you know, I would suggest that our growth, or lack thereof, in those two product areas -- mainstream and mature -- are really consistent with what you'll see if you look at the numbers from every other PLD company in the industry, with respect to sequential growth performance out of those product categories.

And the new products, the growth that you're referencing there, to what degree is that replacement of existing Lattice parts versus really new growth for the Company?

I don't really understand the question as you phrased it, Bill.

But you know, customers rarely take PLD out of one socket on a board and replace it with another one.

They're always looking at redesigning either for cost or performance reasons boards so I really wouldn't know how to classify as new growth or replacement situation where a customer might be using an older technology.

They do a redesign or an enhancement of a product and in that they use one of our newer products.

That -- that is an ongoing phenomenon we deal with all the time.

So you know, we look at new products as -- you know, new growth for the Company.

The new board designs typically where we participate in but that being said, if we don't continue to provide a strong flow of new products you know, obviously over time our revenue will decline.

So it's part and parcel to I think this being a successful industry we have to have a strong flow of new products.

The Company has been reasonably prolific in new product introductions over the last couple of years.

I think, you know, we're seeing -- there were fruits of that labor in our CPLD growth in the new products and we obviously hope to see that in the FPGA arena as we roll out our new products for us in that segment.

Thank you.

And our next question comes from Robert Toomey, RBC Dean Rauscher.

Good morning.

A couple of questions, kind of simple questions, but I'd like to hear your response.

Steve, why do you think your customers are responding well to the new FPGA products and what have you seen as a competitive response?

Or have you seen any yet?

I'll take the first -- the first question first.

You know, as I mentioned, we design these products from the ground up as we enter the market.

We have the luxury of really not having a large legacy mainstream FPGA business, so in kind of defining our low cost FPGAs, we were really interested in, you know, providing the customers the most bang for the buck with that technology and we were unencumbered by our, you know, legacy FPGA lines.

We really don't have much of a business there to -- to think about.

So really we architected these products to take the maximum advantage of the technology available to us so we have really three things that I specified in my opening remarks that we believe are really differentiated futures of the product.

The first of which is we built in DDR interface so that's double data rates memory interface.

Most designs require some form of memory interface to the FPGAs and really an emerging trend in memory is really to -- to -- is the DDR memory.

It's a very complicated difficult interface to -- to build, and having a -- a built-in memory interface that can perform at, you know, a high level is of interest to many FPGA designers.

Traditionally, if that interface needs to be accomplished they need to rely on, you know, different types of FPGAs and low cost families.

So our device, our family, our EC family can perform that memory interface at 200 megahertz or 400 megabits per second which really enables us to capture the entire DDR market as defined today and that's something that we don't believe that the competitive low cost FPGA devices can provide.

And so really customers who need to implement that interface we can provide a working solution and we can provide that working solution in a FPGA at a reasonable price point.

And that's something we can demo to customers.

In fact, we're in the midst of a seminar series across 15 major markets in North America which we're doing in conjunction with Micron who is a key provider of DDR memories and really when customers see the demonstration of that DDR interface at speed it's a pretty powerful selling tool for our low cost FPGAs.

Second thing is true with respect to the DSP block we built in our EC-DFP technology.

A very high performance chip flexible DSP block that allows customers to do kind of some basic digital processing functions in the device for filtering and -- and the like.

And some multiply, add functions.

And that's, again, something that allows a little bit more performance out of the device and potentially allows our device to be differentiated from the competition or address the sockets of the competition would address with some of their more powerful parts.

The last thing that we did that is different is to define the product with a memory interface to standard SPI flat chips for boot memories.

SRAM devices need to have an external component or circuitry or path in the circuit board that allows the programming code to be fed into the device.

Traditionally, that's been done with a proprietary interface and the customer is required to provide -- to buy a proprietary boot prompt from an FPGA vendor typically at a substantial price premium over commercially available flash chips.

So our technology is designed to use very low cost, very small package commercial high volume boot prompts which can save customers up to 2 to $3 per implementation which, you know, when you're talking about an FPGA chip that might cost anywhere between 5 and $25, that's a reasonable portion of the overall solution cost.

So those three areas are where really Lattice has done something different.

They're all in the element of either lowering the total solution cost or, more importantly, providing more bang for the buck for -- for a low cost FPGA and they're providing kind of a -- a unique aspect that someone looking for a low cost FPGA might -- might be amenable to.

And so really we're trying to drive those aspects of differentiation.

That, of course, coupled with, is a primary requirement for success in this marketplace is that the technology has to be economical so of course we did all that while making sure that we used a production proven high yield 130 nanometer process and managing our dye sizes to be what we believe are the smallest in the -- in the industry for -- for these type of devices.

So that's -- you know, the strategy.

That's how we're going to market and those are the things that we're really trying to emphasize with the customer base through our, you know, direct and indirect sales force.

We started doing that in earnest really in the July, August time frame and are going to really ramp up the activity this quarter as I alluded to in my prepared remarks as all the devices in the product will be sampling this quarter so we'll really be selling in -- at full steam this quarter.

Thank you.

The other question I have, Steve, has to do with, you know, we talk about this slowdown we've seen in your industry, semiconductor industry overall.

Do you feel the Company overall is well positioned to participate when we see an acceleration in demand?

Do you feel that you should participate in that as well?

Absolutely.

We -- you know, I talked about the FPGA market being a large and attractive opportunity from a growth standpoint.

We firmly believe that trend sends cycles or even blips in cycles in the semiconductor space.

FPGA technology really is to the point now from a density performance and cost standpoint where we as an industry can take on, you know, large parts of the ASIC industry.

What the Company's done is, I think in a thoughtful way, trying to invest in FPGA technology that's different and will meet that trend, so we do believe that we're actually very well positioned, better positioned than we have been in any time in the past to address the widest capture radius of the PLD market.

And then one last question has to do with what was operating cash flow year-to-date again and can you say what you expect CapEx and depreciation and amortization to be for the full year?

Yeah.

The operating cash flow for the first three quarters was $26 million.

We expect to have a positive cash flow this quarter as well.

Exact amount, I can't say at the moment.

Capital expenditure for the year, I don't have that number.

Depreciation will be roughly the same as this quarter.

Last quarter.

Do you have CapEx for year-to-date?

CapEx year-to-date?

Hold on a second.

Yeah. $8.3 million.

Thank you.

We'll take our next question from Sumit Dhanda, Banc of America Securities.

Good morning.

A couple of questions.

First the mass cost for the new FPGAs, you know, in the event that your revenue remains at depressed levels, how long do we expect these positional R&D costs to persist and how do you expect to I guess right size that part of the operating expense structure if revenues do stay down?

Well, the -- the mass cost will persist while we're continuing to roll out FPGA families, so we've -- we've got most of the mass expense behind us for the EC family and we've -- we've alluded to two additional families and I've also talked about how we expect R&D to -- to be consistent with kind of the current quarterly run rate plus or minus 0.5 million to $1 million depending on where we are with specific tapeouts.

I don't have a specific forecast or schedule to do that, you know, that I want to share with you.

We of course have a -- an internal schedule, but we really haven't announced publicly the availability of our follow on FPGA families and I don't want to do that at this point.

You know, really the mass set cost is the final -- final dollar expense to -- to get a device out, you know, that comes after, in many cases, multi years of development.

We believe that the products that we're rolling out are differentiated and attack a large and growing market.

I think not to tape out a product to save a half a million bucks is a pretty poor financial decision if one is of the opinion that -- that that product has a -- has addressable market that's large and a reasonable chance for success.

Okay.

That's fair.

The other question I had was the current expectations for this quarter and what were they --

I didn't hear you.

If you could speak a little louder.

The current expectations for this quarter and what were they last quarter?

Last quarter our turns was a bit under 50.

And the -- the requirements to reach our -- our guidance is about 60%.

So we're expecting an acceleration of turns in this quarter, which at least if we look back historically, is -- is something that -- that happens as we come out of the summer quarter.

Okay.

Thank you.

Once again, that is star one for questions.

We'll go next to Richard Shannon, Piper Jaffray.

Hi, there.

A quick question on your EC and EC-DSP lines.

In terms of how you see it improving your customer profile, do you see yourselves as mostly penetrating within your existing customer accounts or are you seeing a lot of success or at least a lot of interest in accounts where either you're not in or you don't have a lot of penetration currently?

It's actually both.

You know, we have accounts where we're doing business with on the PLD side who also use FPGAs.

Obviously those people we know.

They've used FPGAs and PLDs for long periods of time so we're able to -- to get visibility into and traction with -- with our story and the low cost FPGA line with those accounts.

Additionally, we're finding more of these, there are accounts who are really solely users of FPGA technology and those accounts -- primarily those accounts who have a need for the differentiation that we offer that I talked about.

You know, we're actually probably seeing more of those than I would have expected initially, but, you know, really have opportunities in both areas.

Okay.

I'm not sure if you're going to answer this one or at least not directly.

But, you know, with the guidance you've given for the fourth quarter, revenues for 2004 should be up about 9% or so for the year.

When you look out into 2005, can you -- can you definitively state where you think you definitely think you can grow faster than that in 2005, or you're not sure or be below that?

Any sense on how we should be thinking about that?

I think, unfortunately in general, we have very little business on our future business and that's just the world we live in.

And at present, we have less visibility than is typical.

You know, I mentioned in the short term we see Asia affected by demand slowdown which has resulted in a slight buildup in inventory, but really the key to that I talked about is the really the macroeconomic environment in Asia.

And if it rebounds to historic rates, I think we'll see that as a short-term transitory effect.

If it goes the other way, you know, we'll see a little bit longer effect from that.

So really the long-term visibility in our business is not something we have.

What we -- what we do believe is that, you know, -- I'll point out (ph) that last quarter FPGA grew faster, business grew faster than the market.

In addition, from what I can ascertain, our CPLD business also gained market share last quarter.

In general we're more heavily weighted to the CPLD market than any other PLD company and the CPLD market is growing slower than the FPGA market so we have that.

Our challenge is really not market share erosion in the the two businesses we're in.

It's the overall mix of our revenue, to grow our FPGA revenue.

And we're actively addressing this issue, you know, each and every day at this Company and really the key to that is the -- the develop -- the successful market introduction of the EC family and, you know, the market release of the next generation of FPGA products.

Okay.

A quick clarification for Jan.

Jan, you mentioned you're expecting a positive cash flow this quarter.

I'm assuming you're referring to operating cash flow?

That's correct.

Would you still be positive on a free cash flow basis or subtracting CapEx?

Excuse me?

Would you be positive still on a free cash flow basis or subtracting Capex?

Yes.

I just want to point out that this quarter also we have this first $25 million payment to Fujitsu that we made a couple weeks ago.

Great.

I remember that.

Thank you.

Once again, ladies and gentlemen, that is star one for questions.

We'll go next to David Duley, Merriman, Curhan, Ford and Company.

A couple questions.

Within the FPGA revenue line could you help us understand what is new, mainstream and mature?

That's in the press release.

Yeah.

It's in the press release but let me just highlight it for you.

So new FPGAs are our FPSC devices, our XP devices are GDX devices and mainstream FPGAs are ORCA 3 devices.

I was wondering as far as the revenue in -- No, we don't break that out.

Okay.

Well, maybe you could help us -- another way to ask the question overall then is when would you think you would see the crossover, ie, your new product revenue would be greater than your mature product revenue?

How many quarters out is that?

You know, I'm sure you're looking at all this and I think that's kind of key to not only introducing new products but can I get any of the old mature products that are declining out of the way.

So when do we see the crossover between those two categories?

I don't have a forecast to share.

Okay.

And just on the R&D dollars, you know, you've been spending between 20 and $23 million a quarter for about three years now.

What sort of return on investment do you look for for that investment?

Can you share with us, you know, how you look at that line item and how you're planning for it or is it just no, we need to spend the money to get into this marketplace and we're going to continue to do that until we're successful?

We obviously look at the return on that investment and do so in context with -- with our product planning.

Fundamentally we believe the FPGA market's exceedingly attractive.

In fact, one of the most single most attractive segments of the semiconductor market.

In 2003 that market was 25 -- that was $2 billion market.

This year's not done yet so it's premature to give a forecast for -- for that market.

If you look at the historic growth rate of the FPGA market, it's grown 20-25% across cycles.

You know, we think over the next three or four years the market's clearly capable of doubling with a reasonable growth rate that's not outlandish given the history of the market.

You know, today the market is dominated by two players.

We're uniquely positioned to build a position in that marketplace.

We have about a 2% market share today in the FPGA arena.

If we can increase that share even by a small increment we believe we'll provide a powerful return on the R&D investment we've made to enter that market.

So you know, that's how we look at it.

And when you look at your new FPGA product, clearly the one you're talking about most is this low cost family at this point.

Is that because you believe that will provide the biggest bang for your buck versus your R&D investment or that's just the first one out the door?

It's solely, David, a function of timing.

The first one has been released as I mentioned.

If successful in getting all the products out this quarter and we have them all in house so I'm pretty confident that we'll be sampling those, that will be the fastest rollout of a family in our history, particularly a family of this magnitude and complexity.

So it's the first one out.

It's the one we're selling.

It's therefore the one we're talking about the most.

Really we don't think it does a lot of good to -- to talk about products that are not released yet.

So, you know, when we release the follow-on families we'll have a number of details about those families and be happy to share those with -- with the investment community.

One final one from me on the low cost FPGAs, you know, clearly you have some feature differentiation which is more historically your strategy.

But it -- it kind of appears that this is kind of a two-fold strategy in which you have some additional features.

But clearly you're attacking mature slots with a much lower price point.

How does that -- strategic-wise, that's kind of a different strategy than I think you've pursued in the past, and how does that change your thinking and what you do in the marketplace?

Your perception is incorrect.

We're -- we've got a number of differentiated features.

We're attacking the marketplace to the equivalent price points with better features.

Maybe there's the confusion around the -- the boot prompt cost.

That's a separate component.

We don't sell boot prompt.

It comes from standard third parties like Atmail [ph], ST Micro, Next Flash and the like.

That provides the customer with a lower total cost.

But with regard to pricing our product line, we are not trying to establish new price points in the marketplace for low cost FPGAs.

So these products with the same number of gates and speed are priced very similar to what Altera and Xilinx have?

Obviously pricing is cutting across thousands of customers, but, you know, we aim to provide the customers with better functioning higher performance, more bang for the buck at the same price point.

Great.

Thank you.

And Mr. Skaggs we have no other questions standing by at this time.

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

That's it.

Thanks everybody for attending the conference early in the morning.

If there's any follow-on questions, please give the Company a call and we'll be available.

Thank you.

Thank you.

That does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.