萊迪思半導體 (LSCC) 2005 Q2 法說會逐字稿

Good morning and welcome to today's conference call.

Copies of the Lattice Semiconductor second quarter ending July 2, 2005 earnings press release may be obtained from the Company's website, which is www.lscc.com.

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

Alive 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 Chief Financial Officer Jan Johannessen.

Please go ahead, sir.

Thank you and good morning, everyone.

Joining me on the call today is Steve Skaggs, our President and acting CEO.

Before we begin, I would like to read a Safe Harbor statement and then give a financial review of the second quarter, and then Steve will provide a business review followed by our third-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, prior conference and our ability to compete.

Investors are cautioned that actual events and results could differ materially from these statements as a result of the number of factors including the conclusion of the Audit Committee for ongoing examination, the special litigation committee's investigation and the Securities and Exchange Commission's informal inquiry and resulting actions, overall semiconductor market conditions, market acceptance and demand for the Company's new products, the Company's dependencies on its 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 the financial review.

Revenue for the second quarter was $52.4 million, up 2% sequentially from the first quarter.

Gross margin for the quarter was 56.4%, down slightly from the 56.8% posted in the first quarter.

Quarterly R&D expense was $24.5 million, essentially flat from the prior quarter.

Quarterly SG&A expense was 16.4 million and included a $4 million charge for legal expenses related to the Company's ongoing internal investigation and litigation.

Excluding this charge, SG&A expense was $12.4 million, down $1.9 million from the first quarter.

This decrease was primarily due to professional services, employee benefits and other miscellaneous items.

Other income for the second quarter was $7.4 million and included a $5.8 million gain related to the sale of foundry investments and the repurchase of $10 million of our zero coupon convertible notes.

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

Intangible asset amortization was $4.1 million for the quarter, down $300,000 from the first quarter.

The intangible asset amortization for the second quarter will be about $4 million and the total for 2005 about $16.2 million and for 2006 about $10.8 million.

This compares to a total of $124 million for amortization expenses for 2003 and 2004.

The amortization of intangible assets will be substantially eliminated in 2008.

The June quarter net loss was $8.2 million or $0.07 per share, an improvement from the net loss of $10.9 million or $0.10 per share for the prior quarter.

These losses include charges of $4.1 million and $4.4 million respectively for the amortization of intangible assets.

On a non-GAAP basis, which excludes the aforementioned intangible asset amortization, we had a net loss of $4 million or $0.04 per share, an improvement of the net loss of $6.5 million or $0.06 per share posted in the first quarter.

Turning now to the balance sheet, cash and short-term investments at June 2005 were $274 million, up $21 million from March 2005.

During the second quarter, we repurchased $10 million for our zero coupon convertible notes and sold 27.5 million of our foundry investment.

Despite our GAAP loss, as we continue to generate cash from operations, add a total of $3 million positive operating cash flow for the second quarter.

Accounts Receivable increased from $24.9 million to $26 million at June 30th, and days sales outstanding remain healthy at 45 days, a slight increase from 44 days at March 31st.

We spent $2.8 million in capital expenditures during the second quarter, and depreciation expense was $3.4 million.

Inventory declined $2.4 million to $34.1 million and now stands at about 4.5 months on its cost of sales basis, which is in our target range of four to five months.

This concludes the financial review portion of the call.

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

Thanks, John.

Last quarter we again posted sequential revenue growth as we experienced accelerating growth from our new products and continued positive market conditions.

Geographically during the quarter the Americas made up 32% of our revenue, Europe 23%, and Asia the remaining 45%.

Growth last quarter was led by North America and Asia.

On the other hand, Europe showed a sequential decline that was generally broad-based.

Revenue by end market for the quarter was as follows.

Communications 53% of revenue, computing 16% and industrial other 31%.

During the second quarter, FPGA product revenue was $9.8 million or 19% of our revenue and grew 6% sequentially.

This growth was led by our new FPGA products as both our FPSC and first generation XP products posted record quarterly revenues and compensated for declines in our older FPGA products.

PLD product revenue accounted for $42.6 million or 81% of revenue and grew 1% sequentially.

This growth was driven by our newest CPLD products.

We posted our 10th consecutive quarter of sequential revenue growth from our new products as historic customer designs continue to move into volume production.

During the first -- during the second quarter, new products grew 17% sequentially and now make up 32% of total revenue, and this represents an improvement over the 13% sequential growth we achieved from this product classification during the first quarter of the current year.

And on a year-over-year basis, new product revenue grew 70%.

Just to remind you, these new products basically consist of devices that were released to market during kind of the 2003 to first half of 2004 timeframe, and included in the PLD segments are ispMACH 4000, CPLDs and our mix signal products.

And in the FPGA segment, these new products include our FPSC and first generation XP family.

We expect continued revenue growth from these new products in future periods.

Revenue from mainstream products declined 10% sequentially and now account for 32% of total revenue.

This decline was driven primarily by our Legacy FPGA products and our three bolt CPLD products.

As you will recall, mainstream products experienced a significant sequential revenue increase last quarter, the first quarter.

We expect revenue from mainstream products will likely continue to be choppy and depend on the status of specific customer programs.

However, we generally do not expect to continue to experience such large sequential revenue declines from products in this classification.

Finally, mature products grew 3% sequentially and continued to make up 36% of total revenue.

We continue to execute well on our new product development efforts.

These efforts as you know are intended to improve our position in the large and attractive FPGA market.

In this regard, I want to update you now on what we have accomplished in this area since our last quarterly earnings call.

At present our first Next Generation FPGA platform, the LatticeECP family, is fully released, and we are now receiving production qualified wafers on all 12 devices in this product family.

Our second generation Next Generation FPGA family, the nonvolatile Lattice XP family, which we introduced in the first quarter of this year, is moving into the market nicely.

At present we have shipped samples for three of the first five total devices in this family, and I am very pleased with the initial consumer reception and design activity for this individual product line.

Furthermore, last week we introduced another new product family called the MachXO family.

The XO is a nonvolatile programmable logic family built on 130 nanometer embedded Flash technology similar to the technology that is used for our Lattice XP family.

We call the MachXO family our crossover architecture as it combines the best attributes of CPLD technology and the FPGA architecture to provide a new programmable alternative that targets both traditional high-end CPLD and low-end FPGA application.

The device is based on a traditional FPGA 4-input let (ph) or Look-up Table architecture, but also offers the traditional CPLD benefits of nonvolatility, high PIN to PIN performance, low power consumption and a relatively low price point.

We will classify future revenue from this product family as CPLD revenue, and I would like to note that although we only announced this product last week we have already shipped customer samples on two of the four total devices in the family.

Lastly, we made very good progress on the IP core front.

Last quarter we released 13 cores for our LatticeEC/ECP and Lattice XP families.

And early in the week you might have seen we released our own internally developed 8-bit soft microcontroller called the LatticeMico8, and it is now available for download off our website for our customers to use in our EC/ECP, XP and new MachXO families, so the core will fit in all those families.

Last quarter I began to provide you with a quantification of our customer designing activity in order to allow you to better gauge the market reception of our important Next Generation products.

Let me update you now on that activity since the last time we talked.

As of the end of the second quarter, we have secured over 500 cumulative design ends at approximately 300 distinct customers for our Next Generation products.

Our customer design momentum is increasing as the number of Next Generation product design ends achieved last quarter, the second quarter alone exceed the cumulative number recorded during the three prior quarters.

Furthermore, quarterly revenue from our Next Generation products tripled on a sequential basis.

Of course, I caution you that this was from a very low base as the vast majority of customer designs for these Next Generation products are still in the prototyping phase.

Finally, although we remain encouraged about the market potential for our Next Generation products, I will reiterate that at this stage is still premature to make any future revenue forecast.

We will have or continue to keep you updated in this forum on our customer design activities.

I would like now to turn to a discussion of our third-quarter 2005 financial outlook.

We enter the summer quarter with a seasonally backlog, I mean with a sequentially higher backlog and in anticipation of continued growth from our new products.

However, the summer quarter does tend to bring a seasonal slowness to our industry, particularly in Europe, and consequently our current estimate is for sequential quarterly revenue growth to be in the range of 0 to 3% for the third quarter.

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

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

Total operating expenses are expected to be approximately $36 to $37 million.

As Jan mentioned, we expect intangible asset amortization to be approximately $4.0 million.

We expect approximately $1.7 million in other income, and we will continue to report approximately $100,000 of tax expense.

With that, I would like now to open the call for any questions you might have.

Operator, we can begin to take questions at this point.

(OPERATOR INSTRUCTIONS).

Chris Danely, J.P. Morgan.

This is Shawn Webster for Chris.

On the end market breakouts, can you maybe expand a little bit on what drove the strength in your other segment and maybe a little bit on the compute weakness, and then talk about your outlook for Q3 in terms of the end markets?

Sure.

We had a growth quarter in the communications market.

We saw some strength in the access and data networking segments kind of coming off a very strong quarter in the first quarter.

So where we had good strength in wireless, wireless was a little bit more mixed in the second quarter.

But overall the communication market has been a good engine of growth for us for the first half of the year, and we expect that to continue in the second half.

Last quarter as you pointed out the industrial and other market was our fastest-growing end segment.

Really if you will look into it, no subsegment was notably weak, but on the other hand, we saw good gains across the board, and I would kind of focus on the consumer test and automotive subsegment as sort of the strongest subsegments within that 31% of our revenue.

Computing declined due to general weakness in the storage segment and a product transition within a major customer in the server segment.

Server cycles are extremely short, and the business tends to be very competitive.

And our revenue in that arena last quarter was impacted by a particular program that transitioned during the quarter.

So going forward we would see again expectations for kind of growth in the areas that have led to growth for the first half of the year.

Tad La Fountain, Wells Fargo Securities.

Steve, I know it is hard to track this sort of thing, but with all these -- all this design activity and the customers involved, what order of magnitude are we seeing in terms of penetration of new customers or penetration of different socket opportunities compared to previous Lattice relationships?

I think that is a good question, and actually I did some analysis in anticipation of that.

But if you look at those designs and those customers that I talked about, actually about half are in customers where we have not had any appreciable design activity for the last year and a half since the beginning of 2004.

It was actually 49%.

So it really represents kind of about 49% new customers who were accessing with these new FPGA parts, and the remaining 51% at this point are customers who had some experience primarily with our design activity with our CPLD products.

So that hopefully answers your question, and that is something we can continue to track.

With regard to the application arenas that these new products and new designs are targeted, it is actually pretty identical to the application mix that we experience with our other products.

So really they are targeting kind of the similar application areas, and we are seeing a similar mix of business that we would see in our overall business.

Okay and if I could follow up on that, given that sort of penetration potential, there is obviously the opportunity for a very interesting management decision in terms of figuring out the appropriate amount of marketing expense to cede further use of the new products.

And given the fact that the Company is in clearly a financially constrained period right now, what are your thoughts or what thought could you share with us in terms of striking the appropriate balance between seizing the opportunity and protecting current results?

You know we within the constrains of our current budget are engaging in reasonably broad marketing activities both from a sales and exposure standpoint to attack the market.

Even though I mentioned those are new customers, those are new customers from a design standpoint.

I don't have the data with me from a revenue standpoint, but we do have very broad relationships from our CPLD unit.

So we do have access points and relationships to customers from our PLD business that we can leverage from a design standpoint provided we have products that those customers need and want.

Basically our posture is we will -- with the current revenue level, we will live within our current means.

As the revenue grows, hopefully we will look at expanding operating expenses slowly in context with that budget.

We have talked about that before.

We tend to view R&D as something that is reasonably fixed, and SG&A is something that will expand slower than revenue if that does happen.

Larry Borgman, EKN.

The drop-off in expenses that you anticipate for next quarter, is that entirely due to the drop-off in legal expenses from the $4 million level?

Could you just discuss -- 4 million just strikes me as kind of a high number for what you're doing there.

Could you discuss that situation a little bit?

Yes, let's see if I can take this question.

Let me explain the $4 million charge first, which is really expenses invoicing that occurred last quarter and our current best estimate of what we expect to occur to complete the ongoing investigation and related legal work to respond to our existing shareholder litigation as we described in the earnings release.

So that is a it is a big number.

Next quarter also our R&D expenses is projected to be lower than in the second quarter by probably about $1 million.

So --

So the answer to your specific question (multiple speakers) most of the decline is due to the absence of that charge we talked about?

And there may be some additional ability depending on new product takeout and development status to achieve the kind of R&D reduction that Jan just discussed.

Okay.

One other question had to do with, what will be your treatment of stock options this year?

Do you have a policy yet?

We will be following the FASB requirement next year.

(OPERATOR INSTRUCTIONS).

Sumit Dhanda, Bank of America Securities.

This is Jason Jones for Sumit.

I just had a quick question on the other income.

Can you discuss in a little bit more detail about the 5.8 million.

Is that just from the gain of sale on foundry, or does that also include a gain on the repurchase of the coupons?

And if so, what is the breakout there?

We have a $4.3 million gain on the foundry investments, and we have a 1.5 million gain on the buyback.

And then on the foundry investments, is that -- I mean your other income is lower next quarter.

How should we think about that, that gain going forward?

You should not really expect or anticipate any gain from that buyback or foundry investment sales going forward.

I would strip that out, and if we happen to do it, that would be extraordinary.

Robert Toomey, EK Riley Advisors.

I think earlier someone asked a question about the nature of the internal investigation and litigation, and I am wondering if you could elaborate a little bit on that for us, and also where you see the best opportunities for growth for your new products?

Yes, I cannot really elaborate on anything other than what is stated in the press release, so I would refer you back to that.

Our Board Audit Committee and our advisors are working diligently on the matter.

They are balancing the sometimes conflicting obligations to perform an investigation that is fair, thorough and expedient.

The Board has very competent advisors, so I trust that they will perform their duty.

On the other hand, my task and the rest of the Company's task is clear, and that is to ensure our operations continue to run smoothly and that the Company remains focused on executing its product development plans.

So I can say that I and I know the rest of the management team are very committed to doing that for the sake of our employees, customers and investors.

And I think the results will speak for themselves and are speaking for themselves.

So I won't comment on this matter further, but if anyone wishes to ask questions about the business, I will do my best to answer those.

With regard to the opportunities for the new products, really from an application standpoint it is no different than the applications in the end markets that we are addressing today.

We talked a little bit about the customer opportunity.

We have opportunity to sell those products into our existing customer relationships where we have strong PLD business, and having a more fuller product portfolio of differentiated FPGA products allows us to reengage with customers who have a focus on that product category.

We all know it is approximately 80% of the market represents FPGA revenue.

So these products really do provide us an avenue to reinvigorate and add new customer relations.

Steve, one last question.

There has been some indication by some of the Asian semiconductor companies that they have been starting to see what they believe is improving conditions going into the third quarter and the second half of the year.

Do you have any comments about the general end market strength in your markets and what you see in the second-half generally?

You know, I think if we look at the industry outlook, you know unfortunately in general we have little visibility in our future business, but barring what I expect to be normal seasonality, I think 2005 is shaping up to be a good year for the industry.

The market is clearly on a growth trajectory.

There is really no real signs of overheating, and I think it has been a long time since 2000, 2001 but I think we are finally showing signs of kind of returning to a more normal posture in our industry, in the semiconductor industry.

So we do look forward to a reasonably normal year this year.

You know I think I talked about in the first question those end markets performed well for us.

We see kind of a continuation of that in the second half of the year.

Nick Galuscio (ph), PCW.

I think you have answered the question, but let me put it a different way.

About a third of your business is old products, and you have had a roadmap for quite a while.

You have come out of an inventory correction period in your business, so it is hard to figure out where the inflection point dramatically in your business is.

Is it a telecom driven recovery that we need to see to get you growing at a reasonable rate compared to your peer group?

Are those "me, too" products, or do you really have some kind of relative to Altera and Xilinx?

You know, if you look at our business, it is 81% PLD business and 19% FPGA business.

You know, that is really the inflection point that you raised.

If you're looking for sequential growth of our PLD business last quarter, it was in the exact range of our larger competitors posted for their PLD business.

On the other hand, the FPGA business for us grew 6%, which by my math was stronger than two out of the three FPGA players.

You know it is really nothing to write home about at this point because it is a much lower base.

But really the inflection points that we are focused on is driving the growth of that FPGA business.

The market is four times bigger than the programmable logic market that is the PLD segment that is our historic base, and it does have potential we believe to be a strong and vibrant growing market going forward.

So our product roadmap is designed to produce competitive differentiated products that can allow us to improve our position in that segment.

So yes, we do think the products are differentiated products and not any two products that can allow us to attack that segment.

As we look at our XP product line which is just rolling out now, it is a nonvolatile FPGA.

It has significant advantages over the traditional volatile SRAM FPGAs, and those advantages really manifest in sort of three ways.

One, it provides enhanced designed security.

Since the device is nonvolatile, the programming code can be stored within the device, and it is not subject to interception or copying by other people outside the Company who has done the design.

Most people, most customers prefer to put their most proprietary algorithms in FPGA.

That is kind of why they use programmable logic to implement the customization that their system requires to be tested on the marketplace.

So design security is a real concern of many customers, and nonvolatile technology provides substantial enhancement in that regard.

The second aspect of differentiation that a nonvolatile FPGA family provides is really what we call an "instant-on" capability, so the chip is active the logic function immediately upon power up, and that can provide some powerful differentiation versus the traditional FPGAs.

Lastly, the combination of "instant-on" and our programming algorithm that we provide customers really offer a more viable field upgrade path that allows customers to upgrade the logic on the FPGA without cycling or powering down the system.

So we do think that that product provides substantial differentiation to gain the interest of customers looking for value in those arenas.

The question in the past has always been, what is the price premium for a nonvolatile solution?

Historically that premium has been three to five times that of the competitive -- well the overlapping density point for mainstream FPGAs.

With the combination of a low-cost architecture and a state-of-the-art process technology node at 130 nanometer embedded Flash, we have really been able to drive down the cost and price premium associated with a nonvolatile device to really percents instead of multiples of cost.

So that is really the summary of how we think that product is positioned.

And, you know, I do believe it offers meaningful differentiation to the existing solutions in the marketplace.

And, you know, at the end of the day, we have today about a 2% market share in FPGA.

We are striving to increase that, and if we do, it will have a significant impact on our revenue and our business.

Given the telecom concentration of your customer base, do you see this pickup in spending at the early stage?

And you've got a high R&D percentage of rev, there should be some significant operating leverage as you get into the seasonally strong second half of the year.

Do you see that?

Our business is half communications related.

That is not a monolithic market.

Really it's about equal parts what I would call telecom or wireline, wireless and data networking.

So there are multiple application segments that make up that part of our business.

You know, we do see health in that market as do our competitors.

It has been a growth area for the programmable logic industry as a whole this year, and as I alluded to twice before, I see continued health in that market in the second-half.

The other half of our business is the industrial market, the industrial other market which was about 31% today, which makes up the consumer, automotive, medical, industrial and military markets.

That market is a secular growth market for us in our industry.

So we see continued use and essentially share gain of programmable solutions versus alternative in that market, which will augment any just basic economic growth in that sector.

The last market is the computing and storage markets, which for us represents approximately 16% of our business last quarter.

That market will continue to use programmable logic in our solutions, but it's a little bit more concentrated market.

If you look at the people who make mass storage devices and the people who make high-end servers, there is kind of a more limited number of customers and the program volumes tend to be bigger, so the market is a little bit more choppy.

But the first two markets are healthy for us, and I believe we will continue to be healthy through the year.

Bill Dezellem, Titan Capital Management.

We have a couple of questions.

The first one is, I was hoping that you could provide some insight into the applications of the design wins that you did have with the new products.

And if there is anything that is overwriting there or whether it tends to fit your existing mix?

And then the second question is, maybe something that you have already addressed just in terms of a prior question about differentiation of the new products.

But I'm curious if there are any overwriting factors that have brought in the new customers that account for the 49% of the design wins that were mentioned earlier?

Sure.

Looking at the applications, that 500 designs approximately that we have won to date with our new products, again they are really all across the board.

There's a nice mix of those applications, and more importantly it mirrors the application mix of our general business.

So there is really, actually as I look at it, no end segment that really stands out above and beyond kind of our normal design mix.

And that to me is encouraging.

It means there is broad traction on these products and really not narrowed to a particular segment like wireless or communications or, you know, consumer or test and measurement, or military or whatever.

We really have a nice mix of business from those 500 odd designs that is pretty consistent with our historic mix of business.

You know with regard to why are we getting success with new customers?

It is because we have a product they need.

We offer a product that meets their needs or support or attention or something that they are not able to get from our competition.

There is no other reason to select Lattice.

I said many times that the market is a very broad market.

There are literally thousands and thousands of customers who are targets for programmable logic technology, you know, and to think that one or two companies can blanket that market across all needs, across all customers, across all geographies and provide every customer exactly what they need is a big assumption.

So as long as we can provide products that are different, I do believe we have the potential to convert customers to our solutions.

That is our business strategy, and we will continue to pursue that.

Chris Danely, J.P. Morgan.

This is Shawn again.

I was wondering if you could comment on what your turns were in Q2, and what you expect them or what you need them to be in Q3 to hit the midpoint?

And then could you comment on what units and pricing did in Q2?

Most of that I can comment on.

Some of that we don't disclose.

Turns were 61% last quarter.

They need to be the same to achieve our outlook.

Pricing was flat, and we don't comment on units, but you can -- ASAP was flat, and we don't disclose kind of unit trends.

Okay.

Was there anything in particular -- because gross margin seem like they are a little bit on the light side?

Was there anything that drove that down quarter-over-quarter?

You know, gross margin has a lot of moving pieces.

We have said in the past that new products carry slightly lower gross margins than the older products.

Last quarter we had accelerating growth of new products from the quarter before.

So in the margin, that tends to have a suppressing impact on gross margin.

It is really hard to forecast gross margin to the tens of a basis point that you all would like.

But all things considered given the accelerating growth of our new products, we believe that that is consistent with how we want to manage our business.

Robert Toomey, EK Riley Advisors.

Steve, I wondered if you could comment a little bit about the health of the relationships that your major accounts, -- like I think you said earlier that you have maybe you can still retain good contacts and relationships with some of your former PLD customers.

Can you just comment on the status of your relationship with major accounts?

Are they growing, healthy, anything -- any color on that?

They are good.

If you look at our top 20 accounts last quarter, they actually grew faster than the overall revenue of the Company.

You may have misinterpreted when I talked about relations.

We do business revenue with a lot of companies, and then on top of that, we look at design activity.

You know, design activity portends future revenue.

So we may have customers where we have revenue for older design activity than sort of the last six quarters.

So my definition for new customers for design activity was design dependence, not revenue dependence.

So we have I would say our relationships are improving.

Particularly we look at the Lattice XP product line.

That is a product line that is being well-received at the major and large accounts worldwide.

So really it depends on our ability to offer them something different and something that meets their needs in a unique way.

And if we continue to do that, I'm confident our relations and our business will improve with those accounts.

And then the overall health of your design engineering employee staff?

I think it is good.

Engineers are motivated by building and delivering products to the marketplace.

We have clearly done a lot of that in the last few months.

And so I think morale all things considered on that front is great.

People are very motivated and proud to deliver products that can be successful on the marketplace, and we are going to keep doing that.

And then finally, the opportunity and the size of the low-cost FPGA market, can you give us -- are there any updated metrics on that, the size and the growth potential?

Well, you know we have said in the past that we think that the low-cost market is going to be about half the FPGA market, so I will stick to that.

It is not going to change from month to month, quarter to quarter.

That is something that will evolve over kind of years as opposed to more short-term.

We still feel that that is the target for low-cost solutions is sort of the overall percentage of the FPGA pie going forward.

Jack Romaine, SG Cowen.

Your FPSC product has been growing pretty rapidly now for awhile.

Can you give us anytime a sense on how large that is relative to the rest of your FPGA business?

Is it a third?

Is it 10%?

No, we don't break out single product lines, and we won't start doing that.

But our FPGA business is actually pretty small, so it's a meaningful part of that business, and more importantly it's kind of the part that is growing.

That being said, those product lines are reasonably narrow in that they target specific kind of applications.

So we look for those to continue to provide our revenue growth, but really to accelerate the top line revenue of the Company, we are relying on our Next Generation of products.

Okay.

And then just a clarification on what you said about gross margin before.

You mentioned that new products have a slightly lower gross margin.

That is temporary, correct?

They are not permanently (multiple speakers) gross margin.

It is just as you move (multiple speakers) --?

Right.

When they become mainstream and mature, they should have to carry higher margins, and that is because the way that we go to market, we price our products upfront to penetrate, and then we would expect to achieve yield enhancements and other cost reductions as we move into volume production of those products.

That typically takes time.

Our mature products today are products that we introduced into the market 10 or 15 years ago.

Mainstream products tend to be products that are over three-years-old.

New products are by definition the newest products that have not really come down the cost reduction curve.

So our decisions tends to price those products in advance of those cost reductions to stimulate customer adoption of those products and to meet the competitive marketplace.

(OPERATOR INSTRUCTIONS).

Larry Borgman, EKN.

Just to follow-up on the communications sector, this quarter it grew more or less in line with the Company a little over 2%.

Last quarter it really took off and accelerated.

I think it was up like 16% sequentially.

You had alluded to maybe the wireless business being not quite as robust.

Were there some things there that slowed a bit, and could we see a resumption to the (technical difficulty)-- growth in future quarters?

Yes, the line is breaking up a little bit.

We did have a strong first quarter in communication.

We had a more moderate quarter this quarter.

The wireless business for us this quarter was what I would call mixed.

We had some customers grow.

We had some customers shrink.

I believe that is due to normal fluctuations in those businesses going forward, and we look for the wireless market to be a healthy end segment and one that drives growth for us.

Tad La Fountain, Wells Fargo.

Steve, I was wondering if you could give us an update in regard to shifts in the distribution channel and whether that is having any effect on Lattice?

The short answer is no.

We feel we've got good relationships with our major distribution partners, and we are looking for them to use their additional scale to provide additional support for a worldwide customer base.

So we don't see any impact either positive or negative on our business at this point from shifts in the distribution world.

We have no further questions at this time.

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

That is it.

I appreciate everybody getting up early on a Friday morning, and if folks have additional questions, please call Jan or myself at the Company.

Thanks.

Good-bye.

Thank you.

That does conclude today's conference, and you may now disconnect.