萊迪思半導體 (LSCC) 2004 Q4 法說會逐字稿

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor fourth-quarter ending December 31, 2004, earnings press release may be obtained from the Company's website which 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, www.lscc.com.

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

Please go ahead, sir.

Thank you and good morning, everyone.

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

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

Before we begin I would like to read a Safe Harbor statement and then give a financial review of the fourth quarter, and then Steve will provide a business review, followed by our first-quarter outlook.

We will then hold a question-and-answer session.

I will now read the Safe Harbor statement.

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

Investors are cautioned that actual events and results could differ materially from these statements as a result of a number of factors including general economic conditions, overall semiconductor market conditions, market acceptance and demand for our new products, our dependencies on our 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.

Then, the financial review.

Revenue for the fourth quarter was $48.5 million, down 15 percent sequentially from the third quarter.

For the year 2004, revenue was $225.8 million, an increase of 8 percent from the 209.7 million reported in 2003.

Proceeding with the rest of the statement of operations, gross margins for the quarter were 66.6 percent, flat with the third quarter.

Quarterly R&D expense was $22.9 million, down $300,000 from the prior quarter.

Quarterly SG&A expense was $13 million, down 600,000 from last quarter.

Other income for the December quarter was $1.1 million, down 2.9 million from the third quarter.

We had no convertible bond buybacks or sale of EMC shares last quarter.

We added $100,000 to our tax provision for foreign taxes during the fourth quarter.

Intangible asset amortization was $5.8 million for the quarter, about the same as in the prior quarter.

Intangible asset amortization for the first quarter will be about $4.4 million, and the amortization of intangible assets will be substantially eliminated in 2008.

The December quarter net loss was $13.1 million, or 12 cents per share.

On a non-GAAP basis we had a loss of $7.4 million.

Net loss for 2004 was $52 million or 46 cents per share, an improvement from the loss of $91.8 million or 82 cents per share reported in 2003.

These losses include charges of $47.3 million and $77.1 million, respectively, for amortization of intangible assets.

Excluding these charges, the loss for 2004 was $4.7 million, 4 cents per share, as compared to a loss of $14.7 million or 13 cents per share for 2003.

Turning now to the balance sheet.

Cash and short-term investments at December 2004 were $296 million.

During the fourth quarter, we made the first $25 million advance payment on wafer purchases to Fujitsu in our recently announced technology development partnership.

This is the first of 4 payments totaling $125 (ph) million that will be paid based on achievement of specific milestones.

We have made the second $25 million installment to Fujitsu this quarter and recorded this liability on the balance sheet in the fourth quarter.

The business continues to generate cash from operations.

Last quarter we added approximately $5 million in cash from operations before the payment of $25 million to our foundry partner Fujitsu, which brings the total 2004 cash flow from operations to approximately $31 million.

Accounts receivable declined to $20 million from $27 million in the prior quarter; and Days Sales Outstanding decreased to 37 days from 43 days.

Inventory declined $0.5 million to $38.6 million and now stands at about 5.5 months on a cost of sales basis.

We spent $2.3 million on capital expenditures during the quarter and depreciation expense was $3.9 million.

This concludes the financial review portion of the call.

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

Thanks, Jan.

The fourth quarter was a difficult one for Lattice and (inaudible) the industry, as we experienced soft market conditions exacerbated by a short quarter due to the holiday period.

Geographically during the quarter, the Americas made up 33 percent of our revenue, Europe 26 percent, and Asia 41 percent of revenue.

All geographical regions declined sequentially; however non Japan Asia showed by far the largest decline.

The decline in Asia was due to a slowdown in demand coupled with a contraction of inventory.

Revenue by end market for the quarter was as follows.

Communications 48 percent of revenue, computing 20 percent, and industrial other 32 percent.

On the product side, despite the negative market conditions, we did manage to post another quarter of sequential revenue growth from our new products.

During the fourth quarter, new products grew 5 percent sequentially and now make up 26 percent of our total revenue.

On a year-over-year basis, revenue from these new products grew 72 percent.

Last quarter, new product growth was led by our XP and FPSC FPGA products.

Sequentially revenue growth in a down market is a positive sign that these new products have gained traction.

Additionally, overall design-ins of our new products established a new record last quarter, growing at a double-digit level sequentially, and now represent 74 percent of our total design-ins.

Notably, our newest FPGA products, the LatticeEC/ECP families made a meaningful impact to the design-in growth.

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

Revenue from mainstream products on the other hand declined 30 percent sequentially and now account for 35 percent of total revenue.

Mature products declined 10 percent sequentially and now make up 39 percent of total revenue.

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

During the fourth quarter, FPGA product revenue was 8.9 million or 18 percent of revenue, declining 21 percent sequentially and 14 percent on a year-over-year basis.

This decline was driven by our older ORCA 2 and 3 product families, which shrank from about $6 million to under $3 million.

As I mentioned earlier, our newer FPSC and XP FPGA products did post sequential revenue growth, but unfortunately this growth only partially offset this ORCA decline.

You may recall that we advised you two quarters ago that the secular decline of these older ORCA products would cause a short-term plateau of our FPGA revenue.

Unfortunately, poor market conditions and a more abrupt end-product transition within our major customer for ORCA products caused an acceleration in the rate of the decline and resulted in a larger than expected decline in our overall FPGA revenues.

On the other side of the coin, there is not much room for further fall-off in ORCA product revenue.

Consequently, we believe the potential for a future drag on our FPGA revenue as a result of the secular decline in ORCA product revenue is now substantially reduced.

PLD product revenue accounted for $39.6 million or 82 percent of revenue and declined 14 percent sequentially.

This decline was primarily driven by our mainstream PLD products, as customers reduced orders to accommodate reduced demand and generally tightened inventory.

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

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

In this regard, I would like to give you an update now on what we have accomplished in this area over the last quarter.

At present, (technical difficulty) our low-cost FPGAs, the LatticeEC and LatticeEC-DSP product families.

We have shipped customer samples in 10 of the 12 unique silicon devices that make up these families.

However, last quarter we also saw significant progress regarding the software and intellectual property core support for these new families.

Critical requirements to support the growing customer design activity.

On the software front, we released versions 4.2 of our ispLEVER development, which allows full access to all 12 EC/ECP devices to our worldwide customer base.

This release, which also incorporates upgrades of our third-party OEM synthesis tools to Mentor's Precision package and Synplicity's simplified 7.7 tool, also dramatically improves device performance, utilization, and software runtime.

Based on our own internal benchmarks, device performance was increased by 24 percent; device logic utilization improved by up to 15 percent; while software runtime was reduced by 24 percent -- all when compared to version 4.1 of the software.

With ispLEVER 4.2 our device performance and utilization results put us on a strong footing in comparison to alternative low-cost FPGA architectures.

LEVER 4.2 also includes library support for the MathWorks popular Simulink DSP design tool package, and thus allows customers to take full advantage of our robust DSP blocks that are built into the LatticeEC/P family.

Turning to the IP front, we now have over 20 internally developed cores available for the EC/ECP devices, with 16 additional cores available from our third-party partners, a substantial improvement from the 6 that were available the quarter before.

We also sold our first IP cores to support our EC/ECP products last quarter.

Of particular note our DDR, double data rate, memory interface solution, which includes an IP core and an evaluation board, offers customers a proven 400 megabit per second memory interface solution, the only viable high-performance DDR support within a low-cost FPGA offering.

So as of last quarter we were fully engaged in EC/ECP design activity across our full direct and indirect sales force.

Our sales activity to date validates our belief that these products offer differentiation when compared to competitive low-cost FPGA offerings.

To this point, EDN, a respected electronics trade journal, recently named these products as among their Hot 100 products of 2004; and then subsequently named our EC DSP family an Ultimate Product, as their readers ranked these FPGAs first in technical significance and second in the likelihood of use among all programmable logic products introduced during 2004.

Although we are encouraged about the market potential of these new products, I caution you that at this stage it is still premature to make any forecasts regarding the ultimate market success of the products.

Next quarter we will plan to provide you a quantification of our design activities.

Our R&D efforts are now focused on the introduction of subsequent FPGA product families.

Our next family which we plan to introduce during the current quarter will be a nonvolatile FPGA based on the industry's most advanced embedded flash process technology, jointly developed with our foundry partner Fujitsu.

In the second half of the year we plan to introduce the high-end FPGA with embedded SERDES transceivers.

Finally, early next year we anticipate the introduction of a follow-on low-cost FPGA family building on the EC/ECP foundation.

We will discuss the details of these future products when we make public announcements regarding their availability.

I would like to turn now to a discussion of our fourth-quarter financial outlook.

It is clear that last quarter there was a major dislocation in the PLD market driven by a slowdown in demand and a contraction of inventory.

Although the first quarter has historically tended to be a seasonally strong quarter for our industry, we have adopted a cautious outlook.

Consequently, our current estimate is for the first-quarter revenue to be between 46 and $49 million.

For the rest of the P&L statement, we currently have the following expectations for the March 2005 quarter.

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

Operating expenses continue to be dependent on new product development activities and are expected to increase by approximately 1 to $2 million.

We expect intangible asset amortization as Jan mentioned to decline to approximately $4.4 million.

We expect approximately $1 million on other income.

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

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

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

Operator, we can begin to take Q&A.

(OPERATOR INSTRUCTIONS) Chris Danely, J.P. Morgan.

Just a few quickies.

Steve, what is the turns percentage needed for the guidance in Q1?

Turns to make our guidance need to increase from what we experienced last quarter.

Last quarter turns were close to 60; we need them to be in the mid to high 60s to achieve the guidance.

And based upon the history we expect Q1 to be a higher turns quarter than Q4, primarily due to a, you know, lack of a kind of a holiday period.

Can you give us a little color on your expectations by end market for Q1?

Where you expect strength, in particular?

Our end markets last quarter were relatively stable on a relative standpoint.

The communications segment did shrink from 50 to 48 percent of our total revenue.

However, that was primarily due to the major customer of the legacy ORCA devices that I talked about significantly reducing their consumption.

That customer happens to be in the communications segment.

If you take out that, the end markets were relatively stable.

So really going forward, we look for just a continuation of kind of the end market trends we experienced through 2004.

Communications, we see -- it is a major market for us, and we see continued relative performance of that market.

On the margin, we believe consumer automotive, medical industrial markets will be stronger markets for us, and the other markets should be relatively in balance.

On the OpEx, how should we be looking at that trending throughout '05?

And is most of the increase going to be on the R&D line?

It will be.

Most of the increase is driven by the fact that the Company actually shut its operations during Q4 for the holiday period.

We don't plan to have an operational shut-down during Q1.

So that drives an increase in expense simply from that.

The separate and additional factor really is on the payroll tax basis.

As I think most of us who work for a living know, that FICA taxes in the U.S. for people who make above a certain wage are front-end loaded.

So we have that phenomena, really, that impacts our benefits in the first quarter.

Those really collectively combine to increase the operational expenses.

Looking forward, as we have mentioned, R&D expenses will be driven primarily by product development activity, particularly mask orders to support our new product ramps.

So we see that kind of fluctuating 0.5 to $1 million per quarter throughout the year.

Other than that, we look for R&D to be relatively stable through the year.

Okay, thanks guys.

Mark Edelstone, Morgan Stanley.

I wonder if you could talk about, if I heard you right, Steve, it sounds like the mainstream products were down 30 percent sequentially.

Can you talk about that?

Was that largely due to inventory corrections?

Or was there something more going on, on top of that?

Sure.

The ORCA products are in the mainstream arena, so that decline impacted the mainstream.

Additionally if you look at the mainstream, really the low voltage CPLDs declined.

These are products that typically have been designed in systems several years ago.

Our belief is that that downturn really is driven by inventory compression within the customers of those products, as opposed to those products being designed out of systems midcycle.

So we do believe it is an impact due to a slowing of demand at our customers, which then really cascades into inventory compression of those products.

If you look at the mainstream productline, they do tend to fluctuate with respect to their revenue performance depending on kind of industry conditions.

When industry is more robust, those products grow; and the opposite is true when the industry is not.

That is primarily due to inventory pressures on those products, in my opinion.

So if you were to back out the secular decline going on in ORCA, and look at the less, the mainstream business, where do you think the Q4 demand was -- the Q4 sales, rather, were for you in those products, versus the actual consumption of the end markets?

The sales were below the consumption level, because I think there was inventory compression.

Do you have a sense as to how far below we are?

I have not done that detailed calculation, Mark, no.

I guess just the last question there then.

You suggested that you would expect mainstream and mature products to continue to decline; yet if we are below consumption and we have got a decent economic environment here, wouldn't the mainstream products begin to find some solid footing here fairly quickly?

The mature products will continue to decline.

Mainstream products again will be dependent on conditions.

Our current outlook really doesn't anticipate a dramatic improvement in conditions in this quarter, primarily in the Asian markets.

You know, therefore, our outlook for mainstream products is it would be improved from what we experienced the quarter before, because we're not forecasting a large change in revenue like we experienced in the fourth quarter.

But we don't expect substantial growth in those products to kick in until the industry conditions and inventory balances improve.

Okay, thanks a lot.

Sumit Dhanda, Banc of America.

Question on the inventory.

Could you talk a little bit about the mix of inventory you currently have and whether there is any risk of obsolescence going forward?

Sure.

We think we did a very good job with inventory during the quarter.

Inventory actually went down on an absolute dollar basis, and at current we have about 5.5 months of inventory, which is pretty close to our target of 4 to 5 months.

Inventory balances we believe have been well controlled since the point of the bubble bursting in 2000.

Today, inventory mix is predominantly oriented towards die bank (ph) and we (technical difficulty) inventory reflects pretty well the mix of our revenue components.

So we don't expect any major obsolescence risk with regard to our inventory going forward.

But it is not dominated by new product?

You're saying it is relatively in line with your revenue (inaudible)?

It is more weighted towards new products, Sumit, than the revenue proportion.

But the inventory is not the majority of our newest products.

New products last quarter were 26 percent of revenue; they make up a greater portion of that than our inventory.

Okay, great.

Thank you.

Bill Dezellem, Davidson Investment Advisers.

We had a couple of questions.

First of all, are we reading the balance sheet correctly, that with deferred income going down approximately $5 million sequentially, that that implies there was a $5 million reduction in sales and into distribution, and valued at the cost of goods sold level?

Is that a correct way to read that?

Deferred income represents the profit that is just yet to be earned and the credits yet to be given on inventory on distributors' shelf.

So the decline, Bill, would reflect both the decline in inventory with those two things.

So, yes, there was a compression of inventory on the distributors' shelves last quarter.

Inventory is by our account at about a 5 to 6-week level in the distribution channel, which is obviously a very low level, both on a turns basis and an absolute dollars basis.

What is your view relative to inventory reduction or stabilization from Q1's perspective?

Well, inventory tends to follow the demand picture.

When demand is down, inventory backs up in the channel and orders are compressed, which tends to cause orders to overshoot consumption.

Clearly that phenomenon is going on.

The key to going forward is, to what level will that balance out at?

I guess where we are going is, are you feeling like distribution is now holding inventory at the current level or are they still continuing to reduce further, since demand conditions are still a little soft?

Distribution has very powerful financial incentives to control their inventory; and they tend to do so in a pretty abrupt fashion.

So from a distribution standpoint, inventories are lean and I do think reflect the current expectations for revenue through the channel this quarter.

The distributors do a very good job in adjusting their inventory quickly.

We have seen a resumption of orders from the distribution channel in the first part of the quarter, as is typical both in the new year and the first part of the quarter.

So I don't really anticipate a significant contraction of inventory in the distribution channel.

On the OEM customer side, that is a different story.

Because inventory tends to react a little bit more slowly when you look at it on contract manufacturers' and customers' shelves.

Are you of the belief that there is reduction continuing to take place at the contract manufacturer level?

Or have they now also stabilized?

If not, when would you expect that they would stabilize?

I think inventory was squeezed last quarter, as I mentioned.

Really, the extent of any continued squeezes depends on the state of end demand and consumption in the various customers and end markets.

It is kind of a complex moving picture.

We've seen a resumption of order patterns in the current quarter that are clearly higher than December, but currently on the pace to produce the kind of revenue outlook we described.

So we don't anticipate a substantial reduction in revenue this quarter.

On the other hand, we don't anticipate substantial growth.

So putting all that together, we see kind of the major inventory move behind us, but we don't really see a strong impetus for growth in inventory expansion at least in the very short term.

Changing topics completely here, relative to your double-digit design-in growth here in the quarter, do you believe that is more a function of customer issues, or is Lattice product specific issues?

Really design-in activity, it's a Lattice specific phenomena.

We're not a big enough player in the industry to really drive overall designs.

The function of the designs that we get on a relative basis, which is what that indicator is, is really a measure of how our products are doing in the marketplaces and the customers that we reach.

We did see a nice growth in the designs of our new products, which we expect to and need to see to demonstrate revenue growth in those products.

As I mentioned, with the continued flow of new products, we continue to expect design-in growth and revenue growth from those new products.

Amrit Tewary, Standard & Poor's.

Can you give us some color on the weakness seen in Asia and Japan?

Which product areas was this weakness concentrated in?

Or was it just broad based?

The weakness for us was primarily concentrated in Asia.

Japan performance was relatively consistent with North America and Europe.

So Asia was the big deterioration in our revenue.

The business in Asia is both contract manufacturing for Europe and to a greater extent North American OEMs, and also kind of indigenous domestic design oriented business.

So the weakness was basically across the board.

There is no particular (technical difficulty) or productline that drove the substantial part of that decline in Asia.

We attribute that to a general slowdown in demand of those economies in China and a backup of inventory that results from the slowdown in demand.

Obviously, over the long run, we do expect the Asian region to continue to experience a 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 Asia continue to grow at its historic economic rate, we believe the inventory effect will be transitory; and should the rate of the economic growth slow for an extended period for macroeconomic factors, the extent, the effect could potentially (inaudible) beyond the first quarter.

Thank you.

I have one other question.

You said that FPGA declined 21 percent sequentially and that was driven by older ORCA products.

Right.

Can you estimate or give us a quantitative, some more detail on how that would have declined excluding these older product families?

Sure.

You think you can calculate that from my comments, but I know they were buried in kind of other comments.

I did mention that the older products declined from about 6 million to about under 3 million.

So there was more than a $3 million decline in the ORCA products.

With that and our FPGA numbers, it is pretty easy to calculate the performance of the other part of the FPGA business.

Great.

I guess one more last question.

The accounting rules for stock options have changed; and going into the second half of this year, there is going to be an impact on the dilutive impact of these options.

Do you plan to do anything different going forward on your compensation philosophy?

We are a smaller Company, and compensation in the industry needs to be competitive.

So our viewpoints on stock option expensing will be kind of to be abreast of competitive trends with regard to compensation and to attempt to quickly follow and adopt those trends.

If you look at the impact of stock option expensing, simply from our 123 footnote in our financials, it is about 2.3 or $2.4 million per quarter based upon that calculation methodology.

So the Company will need to take steps to ensure our compensation is competitive; and that will depend mainly on kind of larger employers' actions.

We will be keeping abreast of those and attempt to follow those trends quickly.

Excellent.

Thank you very much.

Tad La Fountain, Wells Fargo.

Two balance sheet questions.

In light of the tail-off in some of the older products, will there be a full-scale impairment review now that it is year-end?

We do that every year-end.

We are obliged to do an impairment review, and we conduct that with our accountant every year-end.

Okay.

How much of the goodwill balance would be related to the FPGA product stream?

This is Rodney.

Goodwill, we explained this in our footnote actually in a little bit of detail.

I am happy to cover it with you in more detail off-line.

But basically the goodwill calculation is not dependent upon particular products.

It relates to the stock price.

To the extent that the stock price falls below book value for a sustained period, then we're obliged to take a look at a goodwill impairment.

That hasn't happened.

So mechanically, just applying the FASB, we don't take any goodwill write-down.

The foundry advances, could you walk us through the mechanics of that?

If I understand correctly, 25 million was recognized in the fourth quarter, but then a current liability appears to have been established for the second tranche that would be due this quarter.

Since there are other no apparent liabilities being recognized, is that because it is a function of the milestones being met?

And do those milestones trigger the recognition of the next round?

Exactly.

Meeting the milestone triggers the liability.

So we met the milestone in last quarter and recorded a liability; and we made the $25 million second payment so far this quarter.

Great, okay.

Thanks.

David Duley, Merriman.

Most of my questions have already been asked.

But I was wondering if you might give us a comment on what you think your served markets are going to grow in '05?

Maybe what you think the PLD businesses are going to do and what the FPGA business is going to do, as far as an industry?

If you look at the growth outlook for '05, David, the trouble is that we are starting off the lowest quarter of the year in Q4.

The '04 really declined through the year.

So we see growth of that base, but when you pull together the numbers I think it is unlikely that the PLD market is going to achieve its historic level of growth on a full-year over full-year basis, simply because of the trajectory of each quarter during 2004.

You kind of have a strong first half a weak second half punctuated by a substantial decline in the market in the fourth quarter.

Consequently, we don't see growth in the PLD segment of the market in '05.

We have an outlook down 10 or 15 percent for the market on a kind of full-year basis.

On the other hand, we do think that the FPGA market historically has grown faster than the PLD market by 10 or 15 percentage points.

So our best estimate for the FPGA market is for it to grow probably flat to up 5 percent on an annual basis.

Again, that is simply a function of the trajectory of 2004 and the fact that you are ending the year of kind of the lowest dollar figure for the market in that quarter.

As it relates to your first-quarter guidance, and I'm sorry if I missed this, but could you just give us a little idea of what you expect in the FPGA and PLD businesses in the first quarter, to kind of foot (ph) to your flat to down guidance?

We would expect both businesses to perform relatively consistently.

It is difficult to kind of parse the data at that level in the short term.

The margin, given that the ORCA secular declined I talked about is behind us from a major movement standpoint, we would expect a slightly better relative performance in the FPGA part of our business.

Okay.

Finally, if you could talk a little bit more about the trends in the consumer PLD space and how you're addressing that space?

I guess there is a segment of business there that Xilinx has been taking advantage of.

I am not sure if that is a part of the market that you want to address or not want to address.

But help us understand what is going on in that space, and if there is an opportunity for you.

Sure.

I think there has been an explosion of kind of handheld digital products, multifunction cell phones, MP3, and digital video personal players.

There is a host of electronic products that have the ASP points that can utilize a low-cost PLD to add some functions and features to those devices.

I think Xilinx has a full family of low-power CPLDs, which they had at a time when neither Lattice nor Altera offered those types of CPLDs.

To their credit, they have used those parts to garner some high-volume design-ins in the consumer market space and have gained share from both Altera and Lattice.

But really the revenue and market share that you see today is a result of designs kind of won 2 years ago.

In 2003, in the middle part, we introduced our first family of low-power CPLD parts and are now able to participate in that segment that I spoke about.

So we expect to garner kind of our fair share of revenue out of those product lines, and do feel that we can participate and have been participating in that business from a design standpoint for the last 12 to 18 months.

We have a family of products called the MACH 4000Z CPLD products.

It is listed in our new products and is part of the growth of that new products revenue stream that we talk about.

Thank you.

Robert Toomey, RBC Dain Rauscher.

Steve, I wonder, you talked a minute ago answering Dave's question about market growth in '05.

The inventory correction has been sort of with us now for the better part of three quarters were so.

Do you see an end to the inventory correction?

It sounds like from your comments that that might be the case.

I wonder if you can make any comment on that.

Inventory correction by their very nature can't go on forever.

Really part of the process of correcting inventory is to ship less semiconductors and end (ph) consumption.

When an inventory correction goes on, that clearly happens and has happened in our opinion over the last two quarters in our marketplace.

I think if you look at the historic timing of inventory corrections, they tend to last a couple quarters and no more.

Really the wildcard is in demand, because that is both difficult to forecast and is dependent upon things outside the industry.

So I expect the inventory correction to end in the short term.

I think if you look at our outlook and the industry's outlook for the first quarter, which traditionally is a strong quarter for the business, you are seeing some flat or modest growth forecast, which really I think signals to me that we still expect to have some inventory correction going on in the first quarter.

So that would make 2, 2.5, to 3 quarters of inventory correction which I believe is basically consistent with these types of phenomenons in the past.

So I would expect later in 2005 to see a return to a growth posture in our industry.

One of the things that I focus on is the fact that really PLD and FPGA technology is becoming much more relevant to our customers as a replacement for ASIC and ASSP type functions.

Really the cost points and the density points that are achieved in the newer FPGAs really allow us to capture a much broader segment of the marketplace.

So I am confident about the long-term market outlook for programmable logic and returning to a growth posture as an industry in short order.

As a follow-on to that, can you give us a little bit more color on the outlook for communications markets?

You did touch on that earlier in your comments.

But I wondered if you could just give us a feel for what you think is going on there; and do you see a better strength in that in the second half?

Really the communications market is made up of kind of 3 key submarkets, the wireless market, the wireline access market, as well as the data communication networking market.

Longer term, we see additional growth in functions from an equipment standpoint in each of those markets.

I think those are going to be growing industries over the long run that have ample opportunity for increased innovations, as new platforms roll out in each of those market spaces.

So we do think that the communication market, which represents about 50 percent of the programmable logic market today, will continue to provide the bulk of the revenue for the programmable logic market, particularly as new platforms are introduced which require innovation and adoption of new standards; really an ideal market for Programmable Logic Devices.

We see continued contribution from the communication market as a healthy end market for programmable logic.

Just one quick last question.

Where do you see your strongest growth for new products in '05?

What is the base -- by market, by product?

I would say by market in general.

Where do you see in general your new FPGA products doing the best in '05?

Our new products a really targeted towards a wide application reach, so really they are not focused on any particular market.

I would expect those products to really have a similar end-market profile as a recurrent revenue stream, with the caveat that the consumer industrial medical space I would expect, just given the growing part of that market as a portion of our revenue and the industry's revenues, to make up slightly more of the growth of the new products.

Thank you.

Jack Romaine, SG Cowen.

Could you give us some idea of the split between CPLD and FPLD revenue?

We combined our product as programmable logic, so we're not breaking that out anymore.

The simple PLD business is a very small business; that is a mature business.

So it doesn't contribute meaningful to the total programmable logic number.

Like the ORCA business, that seems to be in secular decline.

So I was hoping you give us some idea on where this is, so we could subtract that out.

Is it around $5 million in the quarter?

It is a small part of the business.

I am not breaking it out.

We don't break out specific product lines.

The bigger point is that the decline in that business really isn't drastic and doesn't impact the rates of movement of the overall PLD number.

Okay.

Looking forward, gross margin now, kind of 56, 57 percent; that is a bit lower than your previous long-term average of about 60 to 62.

Can you talk about the trends there that we should expect over the next several quarters and several years, I guess?

Sure.

Our gross margin -- we have talked in the past about our newer products carrying lower gross margins than our older products.

We have I think done a good job in managing yield enhancements of our new products, because we have priced them for market penetrations from the get-go.

Given that our revenue has declined and our margins have held stable, with our new products growing, that is a positive sign for our performance on new product revenue margin enhancement.

So we are comfortable with the margins where they are, because that allows us the leeway to price our new products for market penetration.

We will continue to do that.

Our current target for our gross margins are 55 to 60 percent.

Really, where we are in that range will be dependent upon where we are in new product cycles.

So as our new products enter the market and go down the yield curve, we see a potential for some slight expansion within that range.

As we are more focused on driving design wins of our products, we will see some moderation of gross margin.

But our target is in the mid 50s to 60 percent in terms of gross margin for our business.

Okay.

Finally your R&D spending, as you look ahead over the next several quarters, is there any chance that we start to see that fall off as you get these rollouts done?

Or should we expect further increase in spending in R&D?

I think we have consistently said that R&D spending will be stable and dependent upon new product introductions, so potentially fluctuating by 0.5 to $1 million a quarter, so that is the current viewpoint with regard to quarterly R&D spending.

We don't see significant movement upwards or downwards in R&D spending outside of that range that I articulated.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Bill Dezellem, Davidson Investment Advisors.

As a follow-up to the design-in growth that you had in the fourth quarter, what would be a reasonable time frame to anticipate that those design-ins would turn into revenue?

12 to 18 months depending on which application segment and where we are in the cycle. 18 months is going to be for a more complicated design, and in the less robust business conditions.

Did we understand correctly, with your answer to a previous question, at the end markets that the design-ins that you had in the fourth quarter would roughly mirror the revenue, with a bit of skewing toward the consumer medical arena?

And automotive, correct.

Great, thank you.

Richard Shannon, Piper Jaffray.

A quick question on design wins trends.

You mentioned some pretty nice growth in design wins here in the last few quarters.

Can you parse those design wins out by geographies?

Also can you address how your profile with larger OEMs has been trending with these design wins?

We don't provide the breakout of design wins to any granularity, except to break out for you what percent of the design wins are our new products.

I mentioned that in new products, which are about 26 percent of our revenue, make up about 74 percent of our design-ins.

Other than that, we're not providing any more detailed breakouts about the design-ins.

I guess I wasn't asking for a detailed breakout.

But one of your larger competitors is talking about larger OEMs reducing, perhaps, their number of FPGA suppliers from 3 down to 2.

I am just wondering if your design wins with some of these new products is helping you to not lose the opportunity in a larger OEM, or regain entry into such a larger OEM.

First, I am not personally aware of any OEM who has kicked Lattice out of their account over the last year.

I think I'm aware of two who have actually improved our FPGA status from nonpreferred to preferred.

So really, those kind of comments taken out of context really mislead people.

I think the more important thing to view is kind relative status within an account.

Of course, given that we are a smaller player in the marketplace, we are not in as preferred a position at as many accounts as our larger competitors.

I think that is just an obvious fact.

Really what we endeavor to do is to use our new products, which we believe our targeted towards emerging segments and have a number of differentiation features to offer, is to use those products to improve our position and improve our penetration into accounts.

We believe that those products can and are doing that.

Okay, great.

One last quick follow-up maybe for Jan.

Jan, what is your expectation of cash flow from operations, and also overall cash usage or generation in the first quarter?

We should have a slight positive cash flow from operations in the first quarter.

Otherwise, we have made a $25 million payment, the second payment to Fujitsu this quarter.

You have to look at that.

Otherwise, it will be as usual.

Okay, great.

Thank you guys.

Having no further questions, I would like to turn the conference back over to our presenters for any additional or closing comments.

This is Steve Skaggs.

Thanks, everyone, for getting you up early in the morning.

If you have further questions, please feel free to call anyone at the Company at the normal number.

Thanks very much.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.