萊迪思半導體 (LSCC) 2005 Q3 法說會逐字稿

Good morning, and welcome to today's conference call.

Copies of the Lattice Semiconductor, third quarter, ending October October 1, 2005, earnings press release may be obtained from the Company's website, which is www.lscc.com.

This call is being recorded and 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 Chief Financial Officer, Jan Johannessen.

Please go ahead, sir.

Good morning, everyone.

Joining me is Steve Skaggs, our President and CEO.

Before we begin I'd like to read a Safe Harbor statement and then give a financial review of the third quarter and provide an overview of the financial implications of the corporate restructuring we just announced.

Then Steve will provide a business review and an overview of the restructuring followed by our fourth quarter out look.

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 the expected impact and timing of the restructuring of our business and financial results, future quarterly financial results, revenues, [customers], product offerings and the Company's ability to compete.

Investors are cautioned that actual events and results could different materially from these statements as a result of a number of factors, including the the ability of the Company to successfully complete its restructuring without disrupting its business, any delays in the timing of the restructuring and related charge, the possibility that the Company incorrectly estimated the restructuring charge, the ability of the Company to realize the anticipated benefits from the restructuring and the timing of those benefits, the impact of ongoing Special Litigation Committee's investigation and the Securities and Exchange Commission's informal inquiry and any resulting actions, overall semiconductor market conditions, market acceptance and demand for the Company's new products, the Company's dependencies on its [inaudible] silicon wafers suppliers, the impact of competitive pricing, technological and product development risks.

The Company does not intend to update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

I will now turn to the financial review.

Revenue for the third quarter was $53.4 million, up 2% sequentially from the second quarter.

Gross margin for the quarter was 56.2%, down slightly from the 56.4% posted in the second quarter.

Quarterly R&D expense was $22.7 million, down $1.8 million from the prior quarter.

The decrease in R&D expense was primarily a result of lower [MASK] costs for the third quarter.

Quarterly SG&A expense was $13.6 million, down $2.9 million from the second quarter.

This decrease was primarily due to lower professional services offset by severance payments and other miscellaneous items.

Other income for the third quarter was $3.4 million,and included an $1.4 million gain related to the repurchase of $10 million of our [inaudible] coupon convertible notes.

We added $237,000 to our tax provision for foreign taxes during the third quarter.

During the next quarter we expect the provision for taxes to be approximately [inaudible].

Intangible asset amortization was $4 million for the quarter, down $145,000 from the second quarter.

Intangible asset amortization for the fourth quarter will be about $3.7 million, and the total for 2005 about $16.2 million.

And for 2006, the total will be about $10.8 million.

This compares to a total of $125 million of amortization expenses for the 2003 and 2004 time period.

Amortization of intangible assets will be substantially eliminated in 2008.

September quarter net loss was $7.1 million, or $0.06 per share, an improvement from a net loss of $8.2 million or $0.07 per share for the prior quarter.

These losses include charges of $4 million and $4.1 million, respectively, for the amortization of intangible assets. n a non-GAAP basis, which excludes the aforementioned intangible assets amortization, we had a net loss of $3.1 million, or $0.03 per share, and improvement over the net loss of $4 million, or $0.04 per share, posted in the second quarter.

Turning now to the balance sheets.

Cash and short-terms investments at September 2005 was -- were $264 million, down $10.6 million from June 2005.

During the quarter we repurchased $10 million of our zero coupon convertible notes for approximately $8.5 million.

Despite our GAAP losses we continue to generate cash from operations.

Accounts receivable increased from $26 million to $26.4 million at September 30, and days sales outstanding remain healthy at 45 days, consistent with the prior quarter.

We spent $3.3 million on capital expenditures during the third quarter and depreciation expense was $3.2 million.

Inventory declined to 1 -- declined $1.9 million to $32.3 million, and now stands at about 4.1 month [inaudible] sales basis which is within our target range of four to five months.

Turning now to the restructuring we announced yesterday.

Steve will provide details and commentary on the restructuring shortly, I'd like to first provide you with what we currently believe are the financial implications of these actions, which we believe are positive for the Company.

We expect to record an one-time restructuring charge in the fourth quarter of 2005, currently estimated to be in the range of $8 to $10 million.

These charges consist primarily of the separation costs related to the affected employees, expenses related to lease terminations and facility closures, as well as miscellaneous expenses related to the restructuring.

Furthermore and more importantly, we expect that the restructuring will result in a significant reduction in operating expenses effective in the first quarter of 2006.

The expense reductions, mostly from R&D, are currently estimated at approximately $3.5 to $4.5 million per quarter.

Assuming continued new product revenue growth and positive industry conditions, we believe this restructuring and resulting reductions in operating expenses will lead to a return to quarterly operating profit, excluding non-cash charges, during 2006.

This concludes the financial review portion of the call.

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

Thanks, Jan.

Last quarter we, once again, posted sequential revenue growth as we experienced accelerating growth from our new products.

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

North America was sequentially flat while both Europe and Asia produced a modest growth for us.

Revenue by end market for the quarter was as follows: communications, 51% of revenue; computing, 18%; and industrial other the remaining 31% of revenue.

During the third quarter FPGA product revenue was $10.2 million, or 19% of our total revenue, and grew 4%, sequentially.

This growth was led by our FPSC products, which again posted record quarterly revenues and grew at a double-digit sequential rate.

PLD product revenue accounted for $43.2 million, or 81% of our total revenue, and grew 1.5%, sequentially.

This growth was driven by our MACH 4000 and MACH 4000Z CPLD products introduced about two or three years ago, which both grew at double-digit sequential rates.

We posted another quarter of strong sequential revenue growth from our new products as [historic] customer designs continue to move into product and into volume production during the first quarter new products collectively grew 16% sequentially and 61% on a year-over-year basis, and now make up 36% of our total revenue.

Moving forward, we expect continued revenue growth from our new products.

On the other hand, revenue from mainstream products declined 8% sequentially, and now accounts for 29% of total revenue.

This decline was primarily driven by our three [volt] CPLD products.

Finally, mature products declined [2]% sequentially, and now make up 35% of total revenue.

From my vantage point, we continue to execute well on our new product development efforts.

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

Let me take some time now to update you on what we have accomplished in this area since our last quarterly conference call.

At present, our second next generation platform, the non-volatile Lattice XP product line is fully released and we are now running production wafers in all side devices within this family.

This non-volatile FPGA family is highly differentiated from the mainstream competitive FPGA offerings, and we are seeing strong customer reception and design activity for this innovative product line.

Turning to our newest product family, the four device Mach XO family.

Two devices are now in production release, and the final two devices are sampling to multiple customers, and expect to move into volume production for the entire family during the current calendar quarter.

To remind you , the XO is a non-volatile programmable logic family built on 130 nanometer embedded flash technology. ll this family our -- XO our crossover architecture as it combines and offers customers the best attributes of CPLD technology and FPGA architecture combining a traditional FPGA [four] input lookup table architecture with the traditional CPLD benefits of non-volatility, high pin to pin performance, low power consumption and a relatively low price point.

These two complimentary families, the Lattice XP and the MACH XO product families, we now have a comprehensive non-volatile product portfolio on the state of the art [process] technology, offering customers a cost-effective and differentiated solution up to the mid-range of F PGA densities.

Also in this forum we've been providing a quantification of our design activities in order to allow the investment community an market reception of our important next generation of products.

We feel this is useful as customer design-ins is really a selection of our device.

That milestone tends to lead volume production orders for a given board by up to 18 months.

Let me give you update on last quarter's customer design-in results.

During the third quarter we secured over 500 design-ins at approximately 350 distinct customers.

Once again, our customer design activity during the last quarter surpassed the cumulative total recorded since the initial release of our next generation product families.

The quarterly revenue from these new product families is still relatively small as the vast majority of customer designs with these products are still in the prototyping phase.

And, as such, it's still premature to make any future revenue forecast.

However, on the other hand, I will tell you at this point the customer design-in and early prototyping revenue ramp we have seen from these product families is far better than those of our first generation FPGA families at similar points in the life cycle.

Yesterday we also announced the restructuring of our operations and workforce reduction.

This restructuring encompasses three major components.

First, the closure of four relatively small R&D sites; second, a voluntary separation program for our longer-term employees; and third, an organizational consolidation within our largest design center.

We will reorganize our silicon product development activities and consolidate the effort into four scale design centers instead of the current seven.

We will also close a small software development center and consolidate this work into our four scale R&D centers.

Additionally, in the future we will rely more heavily on our existing scaled design center in Shanghai, China to provide engineering capacity and leverage for our remaining domestic silicon development sites.

This action,when complete, will lower our costs and improve, I believe, our operational efficiency and allow a greater level of of managerial accountability.

It will not change our product strategy or our roll-out plans.

We expect the restructuring to be completed in the current quarter and result in an estimated 12 to 14% reduction of our workforce.

As the action will be predominantly focused in the R&D areas of the Company and currently about half the Company's headcount is dedicated to R&D, we expect the percent reduction of force in R&D to be approximately double the percentage numbers I quoted earlier.

As Jan mentioned, we expect to record an one-time charge in the quarter and also to realize a significant reduction in the quarterly operating expenses as a result of this restructuring.

To close my prepared remarks, I would like to turn now to the fourth quarter of 2005 financial out look.

We enter the fourth quarter with a sequentially higher backlog and an anticipation of continued sequential revenue growth from both our new products, our FPGA products.

Our current best estimate is for total sequential quarterly revenue growth in the range of 1 to 3% for the fourth quarter.

As many of you know, due to the holiday period the fourth quarter tend to be a shorter quarter and has less opportunities for turns bookings.

We have already factored this expectation for lower turns bookings into the guidance I just gave you.

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

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

Total operating expenses, excluding the aforementioned restructuring charge, are expected to be approximately $36 to $37 million.

We expect the intangible asset amortization, as Jan mentioned, to be approximately $3.7 million.

We expect approximately $2 million in other income.

We should continue to report approximately $200,000 in tax expenses, and finally, we expect a share [cap] to be relatively flat.

So with that, I would like to open the call now for your questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

We will go to [Chris Finelli] at J.P.

Morgan for our first question.

Thanks, guys. [Inaudible] restructuring.

Can you give just give us a sense of what programs you're -- you're sort of cutting off on the R&D side.

Is it anything on the FPGA or is it mostly CPLD?

And then also, can you give us a sense of what the target operating margin and OpEx will be after this?

I think I can do that.

In terms of programs, we're not cutting any programs.

We're reorganizing the development, as I mentioned, to concentrate on our four scale sites.

The centers that are targeted for closure really serve to augment the capacity of the existing sites.

We'll need to backfill that capacity through some minor transfers and headcount additions at the main sites.

And as I mentioned, we plan to rely more heavily on our Shanghai site to provide that -- that capacity for development efforts.

That's a site we have had in place for ten years.

The R&D headcount is relatively cheaper in Shanghai.

Our facility there is experienced enough to take on some additional tasks, so we'll rely a little bit more heavily.

So -- we're are not going to cut any programs.

I believe we will get some operation efficiencies by focusing the development efforts on the scale sites instead of spreading them out geographically across many sites over the world.

So there is no intention to cut platform programs that we have in process.

With respect to the business model, 2006 will really be a transition year.

As I mentioned with the restructuring, our strategic goal is to -- to lower operating cost and improve our operational efficiency.

We believe it is very prudent to continue the heavy investment in R&D to push forward in the FPGA markets, along the product course we've embarked upon which I believe is a successful and well thought-out strategy.

However, over the long term, after the transition we believe we can migrate to a model which -- which is gross margin of about 55 to 60%, R&D of about 27 to 30%of revenue, SG&A about 18 to 20% of revenue.

Really the pace at which we approach the model will be driven by how successful we are in growing our top line, which in turn will be mostly dependent by how successful we are at penetrating the FPGA sector with our new products.

I think tactically, Chris, it's -- it's a good time to implement the restructuring for a variety of reasons.

But one of the main ones is, now we've fully released ECP and XP products.

The next generation of product development is well-initiated and coordinated, and tactically it's -- it's a reasonably optimal time as well to change the R&D focus.

I agree.

Any time we see increase increases in profitability we like it.

Just one quick question, can you give us any end market color for Q3, and then also what you expect for Q4?

Sure.

You look at our business, you've the breakout by end market.

Comm, as a whole, was down modestly sequentially but then it grew last quarter, I believe.

There's really three major segments in comm as we looked at it.

Wireless, first.

The wireless area for us was mixed, some customers were up, some were down in the last quarter.

And the way it netted out, that slightly more were down that up.

So, the wireless business on the whole was slightly down for us, but I expect that to bounce back in the current quarter.

The other areas are, in terms of our classification, are wireline or really kind of switching into data networking, and both of those were up.

So, I believe as I said in past forums that the comm market from PLD consumption standpoint is probably healthier structurally than it's been in a long time.

So we look for that to be a good engine of growth for us moving forward.

Computing showed a strong growth last quarter, but that was off a pretty weak Q2.

The main segments there are servers.

Those were up smartly last quarter but that was kind of a rebound from the quarter before and that offset some continuing weakness in storage.

The other markets overall were flat, the other sector of the business.

But that's really a combination of industrial, consumer, military, medical and automotive.

Consumer for us last quarter was very strong in displays, high-end displays and handheld electronic appliances.

The military business also was strong.

Industrial was weaker for us last quarter but that was off a very strong Q2.

So, we look for a kind of continued broad-based growth in our business and again, I think for us, the big driver is a new product growth and then moving into 2006.

I hope to have a good contribution from the second generation of FPGA products we talked about.

Great.

Thanks, guys.

Our next question is from Mark Edelstone at Morgan Stanley.

Good morning, guys.

First question, Steve, what is the total headcount now for the Company?

It's a little over a thousand, Mark.

Okay.

Thanks.

And just two other quick ones.

One, can you talk about any assembly and test constraints that you're seeing in the business at all?

Yes, assembly capacity is definitely tightening.

In fact, last quarter we had to -- we had some schedule misses, which is the first time I can remember in a long time we were unable to ship products within a quarter to customers who -- who wanted that product.

So, assembly capacity is tightening and we've taken operational steps this quarter.

Our inventory's coming down, but to ensure that we try to book in the business a little bit earlier in the quarter, particularly with the holiday period.

So, capacity is tightening and we are trying to get ahead of it a little bit faster this quarter than last quarter.

As a follow on to that question, do you think that that's had impact on orders?

And just in general, can you talk about the -- how orders tracked as you went through the quarter?

Orders were reasonably linear.

This quarter there really hasn't been a noticeable change that I've seen in the pace of orders as a result of what I talked about.

We really haven't pushed out our lead times any, because, again, we're trying to build a little bit earlier in the quarter.

Was the -- when you said that there was some scheduled misses, was that a meaningful amount of delinquencies that you entered Q4 with?

Or can you give us some sense of that?

It's not material, but if we would have shipped those last quarter when the customers wanted those and when they -- when we scheduled them, we would have grown a little bit faster last quarter.

But, on the main, those shipped in the first or second week of the current quarter and I don't think it is a huge impact.

I am clearly not going to cull it out as a change in our guidance or our results last quarter, but it's clearly something that we're watching.

Thanks a lot, Steve.

We will go to Tristan Gerra at Robert W. Baird.

Good morning.

You mentioned that one of the main reasons for the timing of the restructuring is the [inaudible] new product [inaudible].

Should we look at restructuring strictly as a response to you [financial] performance or also, as a preemptive move in expectations for, perhaps, a more difficult environment in the PLD [inaudible].

Tristan, the restructuring has nothing to do with really any change in our outlook for the market, or in our belief that our future revenue will be successful.

I mean, [inaudible] became CEO in August.

A little bit -- not so long ago.

It was clear to me something needed to be done to accelerate the time to profitability for the Company. wanted to do it in a sensible way, in a way to preserve our product strategy, which I think fundamentally is the correct one.

So strategically, I felt it was important to do, given the cost structure of the Company. don't believe that having, essentially, nine development sites spread across the world, many of which came to the Company by acquisition, was the optimal way to structure the R&D for a company of our scale.

And, therefore, I felt it important that I correct it sooner rather than later.

As I mentioned, it also happens, tactically, that it was an opportune time to do it.

So, really all those factors entered into the decision.

I believe we can do this fairly quickly, and really reorganize things to improve efficiency, improve accountability.

And I hope that if we can be successful in that task, the result will be a continuation of our recent strong execution on new product and delivery.

Okay.

And also, in reference to your comment about the expense reduction must be falling into R&D.

Are there any plans on the higher-end engineers in your Shanghai side, or is it a partial upset, or is it U.S. based reduction and that's pretty much it?

The reduction is focused in the U.S., we also do have a center in the U.K., which we've begun the, sort of, regulatory legal process of evaluating the closure.

So, there is an intended reduction in the U.K.

On the other hand, I did allude to the fact that we did have a center in Shanghai, and strategically we we want to be adding capacity to that site over time to augment our development efforts in the U.S.

Okay.

Last question.

How would you characterize the pricing environment of the past few months?

Any -- any changes directionally that would be [inaudible] norm, and -- or going forward into Q4?

I haven't seen any changes directionally.

You know, the pricing environment is aggressive, as always.

One of the major trends in the FPGA market is the emergence of the so-called low cost FPGA sector.

Both our ECP and XP products are lower priced FPGA's.

Unlike our competitors, we really don't have a high ASP/FPGA existing business, so really, that's all up side for us, the emergence of, sort of, the low cost market.

So from that kind of mixed standpoint, that trend doesn't really impact us.

So, I guess to directly answer your question, I haven't seen any really near-term change in the pricing environment over the last three months.

It's just more of what we have seen over the last year or two.

Great.

Thank you.

Next is [Gary Montley] with A.G Edwards.

Good morning.

We will start out with the top pick of revenue from employee.

If I'm doing math correctly, the target of revenue per employee is about $240,000 per year after the restructuring, which is still quite a bit below some of your peers.

Just wonder if you have a longer term revenue per employee target in a year or so out?

We don't, but mathematically, I don't really want to [quibble] with your numbers for the next year.

I'm trying to balance the need to aggressively invest in the new FPGA products, which I believe our cash position in our business model can support with achieving optimal R&D productivity.

The intention longer-term would be most definitely to grow [inaudible] lower than headcount growth, and I articulated a long-term business model that really requires that.

And, could you give us an update on the SEC review?

There's no update to give.

We are cooperating fully and when there is something to say we'll fulfill our obligation and disclose it.

Okay.

Thank you.

We will go next to Bill Dezellem at Titan Capital Management.

Thank you.

It's Tieton Capital Management.

And I think we heard in our opening remarks that Europe grew sequentially, and this a seasonally down quarter, if we understand Europe correctly.

What were the dynamics that led to growth there, if we did hear you right?

We did grow in Europe, Bill.

And really, two dynamics.

Well, three.

First, Q2 was a disappointing quarter in Europe for us.

So there has been some rebound in Q3 that was kind of programmatically driven for specific customers as they were either over-inventoried or going through a program transition in Q2 and that kind of corrected itself in Q3.

So that drove some of the growth.

Also, we have participated in some business, the wireless side, that grew in Q3 and again, that was sort of different than the normal seasonal business in Europe.

Did you mention that there was a third factor also?

Well, those -- those two things were the reason.

Okay.

Great.

Thank you.

One additional follow-on question.

Relative to the gross margin and given that one of the things that has impacted the margin over the last couple of years has been the introduction of new products and their initially lower margins.

Would it be fair to characterize that we have most likely reached the bottom in gross margin, given where we're at in the whole product rollout process?

Gross margin is very difficult to predict on a quarter to quarter basis because there are lots of moving parts in the equation.

But we have and we are pricing our new products to carry at a kind of lower initial gross margin in the mainstream [inaudible].

So we're really trying to balance improving gross margin on new products by enhancing yield and achieving lower wafer prices, kind of, with the mix changes in our business.

And I think we've done a reasonable job at doing that.

You know, I articulated the vision for the business model to gross margin to be between 55 and 60%, and that's what we're going to attempt to manage to.

And the 55, when you're down towards the lower end of that range, that's when you're in a -- early stages of product rollouts in the 60% would be when, theoretically, the market is stronger and you have less -- less new products that are rolling out at the time?

Correct.

But then there's one other phenomena that is more specific to the Company, which is a certain proportion of cost of good sale are fixed, and as the Company grows its overall revenue base those fixed costs are amortized over a larger revenue base.

And hopefully, structurally, that shrinks as a percentage of revenue.

So that can provide some expansion potential.

That's helpful.

Thank you.

We will go next [Simic Sanda] at Bank of America Securities.

Hi, this is Jason Jones for [Simic].

Just a couple of questions.

Your FPGA product category, can you give an idea of how much of that is from your new products, and specifically excluding ORCA products?

ORCA products are running about $3 million out of our FPGA revenue.

We've given that number out in the past.

We don't parse out the FPGA number it out any more finer than that.

The rest of it is, kind of, the products that we have delivered since the [Agera] acquisition of about four years ago now.

In terms of the revenue of our newest products.

Really what I call our second generation FPGA products.

Those are not really at the material point yet.

Okay.

And the second one was in terms of your [take out] activity.

The MASK cost you're incurring right now, would you consider those, kind of at normalized levels or above or below?

Like in Q3 for instance.

In Q3 it came down from Q2, so they were a bit lower than normalized level.

We said that R&D expenses can vary by a million or two per quarter depending on where we are in the specific MASK activities and that will continue for the foreseeable future.

Restructuring impact aside which, as Jan articulated, we believe will have a $3.5 to $4.5 million improvement on our overall operating expense, primarily in R&D.

Okay.

Thanks, that was it.

Our next question comes from Ruben Roy at Pacific Crest Securities.

Hi, thanks.

Steve, you made some comments just now on the your second generation of FPGA product.

Can you give us an idea -- you mentioned strong customer reception in the past.

Can you give us an idea of what end markets you're seeing.

The strongest customer reception for some of those new FPGA products?

Yes, we track it.

It's really, Ruben, no different than the design activity in our -- in our prior -- prior generation products.

So, it's really at the same level of mix of our existing business.

So we're seeing the same relative performance in all the market sectors that we target.

So, there is really no either strong market sectors or weak market sectors that really stand out in my mind.

I also said last conference call, and I'll reiterate it now, that we we're seeing good activity out what I call new customers, customers that haven't, at least in the past year and a half, done any design with Lattice products.

About 43% of the designs cumulatively now, for the generation products come from customers that are new or returning to Lattice after a long gap in design activity.

Is there a typical design cycle time for these -- for FPGA products and when do you think you will see some material revenues for the second generation products?

In the first quarter of '06 is when I would, depends on what -- we call it material.

But in my mind $1 million is a key milestone.

The typical time lag is a customer does a design, and nine months later, six to nine months later, they buy some prototypes, and 15, 18 months later, they begin volume production orders.

I really don't see anything different from that from these products.

I think it's consistent with what our competitors experience in rollout and in my mind, it is still a bit early to expect those production volume orders.

Okay.

And then finally on the MACH XO product family that you talked a bit.

It seems to me that that's going head up against one of the recent [Alterra] products.

Can you give us an idea of why -- how your product is differentiated and what you are seeing with that product family?

Sure, I would be happy to.

The competition at this point really only comes from the [Max 2] from [Alterra].

Sonics really doesn't have a competitive product at the moment in this space.

And I believe we have several notable competitive advantages against the other larger competitor's product in this area.

First, as the [Max 2] is produced on, I believe, 180 nanometer process technology.

Our product has 130 nanometers, one generation ahead.

Secondly, I believe we have a superior architecture.

Our X L product line offers embedded memory and at all the devices in the family, at the two larger density points embedded block RAM and PLL's.

These architecture features are more typical FPGA devices and are valuable at higher density points.

For example, our larger XO devices that have the embedded memory can support our new [soft] eight bit microcontroller, embedded memory is important to support microcontroller applications.

And third, we have implemented a power down feature which, along with our chip scale packaging, makes our XO device more desirable and portable in consumer applications.

All the features I mentioned aren't in the competitor's product line.

The microcontroller, have you done a micro controller in the past?

We released one, I think, about three months ago.

So it's a --

This is the first time you have gone that, though.

Yes, it is.

It will fit into this family.

Strategically, looking at this product line.

We would at, sort of, the ideal family to transition to historic CPLDcustomers, whether they be Lattice or our competitors, the CPLD customers to an FPGA architecture, and then hopefully to scale them up in, kind of, the non-volatile world to our bigger XP line.

We like our positioning against [Max 2].

However, of course, [Alterra] has a larger customer base, so we've got our work cut out for us. [Inaudible] we fell good about our position and feel we can continue to gain PLD market share moving forward with this product line contributing future revenue growth.

Okay, and then, finally, for real this time.

With the R&D cuts coming, you mentioned no specific program cuts with FPGA or new products, but can we assume this is -- the road map we've got here with the ECXP and the other FPGA product, as well as the MACH XO, is that going to be it?

Do you think that's enough for the next, I guess, what, 12 to 18 months?

Those products are all out.

We obviously are working on products and our intention is, when we're in a position, to sample future products.

We'll make those product announcements.

No, it is not going to be it in terms of product deliveries from Lattice.

My intention is to continue to produce innovative products that push forward our story and strategy we've mapped out already.

Thank you very much, Steve.

[OPERATOR INSTRUCTIONS]

We'll take our next question from Pat Becker at Becker Capital Management.

Hi, Steve.

Hi.

Two questions.

One is on the design win, now your last two quarters beating the cumulative total.

Do you have enough sales coverage to support this sort of activity?

And the second question is, do you have a way to quantify -- we have seen the design win activity, but quantifying the prototype activity, what sort of increase have you seen quarter over quarter?

In terms of sales coverage, yes.

By definition we have sufficient sales coverage to support that activity because, really, once we achieve a design-in, Pat, I believe the sales job is mostly done because the customer has specified our part and actually then built a prototype board using our FPGA device.

So, really, at that point, the customer system needs to move into production.

I guess there's always a chance that there'a competitive Hail Mary catch of the program, but really, that would entail a customer redesigning their PCB, and that has some substantial costs.

Really, the sales job is to get to the design-in a design win as you called it.

So, obviously, more sales coverage is better, but we, by definition have sufficient sales coverage to generate the design activity that I talked about.

Prototyping revenue grew in the high double-digits last quarter, so it's just growing nicely.

It's just not at the point where I'm comfortable making any revenue forecast or giving any finer detail on the revenue figures.

But again, I pointed out, I'll point out again, that the -- both the design activity and revenue ramp from the prototyping phase is far ahead of first generation FPGA at similar points.

Do you have any estimates on, going back and looking in those past cycles, what an average design win is worth?

I do, but none I'm willing to disclose.

That's all I have.

Thank you. [OPERATOR INSTRUCTIONS]

We will take our next question from Gary Mobley at A.G. Edwards.

Hi, I just had a couple of follow-up questions.

You mentioned 43% of the design wins for the new FPGA product were coming from customers you haven't dealt with in a while.

Just a function of your new product [inaudible] CPLD's and FPGA's?

Or just those customers that have switched over CPLD design sockets to F PGA's?

Most customers use both CPLD's and FPGA's, so they're typically not switching sockets to FPGAs.

These are customers who traditionally have used competitive solutions, who find the Lattice solution, for whatever reason, to be a better solution at this time for their design needs.

Okay.

And last follow up, how diversified are the design wins for the new FPGA products [inaudible] by customer diversity.

Well, I said last quarter, as an example, just to focus on the current time here, we achieved over 500 designs in the third quarter and those came from approximately 350 customers.

So I believe they are quite diverse.

In terms of revenue.

How diverse -- right now the revenues are fairly small, but if you at ten FPGA revenue, how diversified is that right now?

Again, the end market mix pretty much mirrors our end market mix as a company which is very diversified.

So, we disclose our business by communications, computing, and industrial other.

The FPGA business, in general, tends to be a business that's not dependent on a single end market, but regionally broad-based in its application reach, and I see nothing to indicate that our new products will be any different.

Okay.

Great.

Thanks.

We will take our next question from [Danny Kwo] at Bear Stearns.

Hey, Steve, looking at the MACH XO product. [Inaudible] transition away from macrocells to look-up table over time and if so, what is driving that change?

I guess, is it market demand for a lower priced product or is it feature driven, and can you talk about that a little bit?

Well, we haven't announced a macrocell-based product for the last three years and really have focused on the XO product line.

The look-up table is -- architecture is, I believe, a more effective architecture to address the higher-density CPLD designs above, say 128 macrocells.

So, really, it offers an architecture that is more effective to -- in the past it was difficult to get the performance levels required out of a look-up table architecture.

Now with the smaller geometries it's achievable.

And the second thing that happens, it's more and more difficult because the chips become pad limited to shrink the smaller devices and achieve cost reductions.

So really, those two equations, I think, drive a need to evolve the architecture and we have done that.

Separately, we've made it a very good, again,we call it a crossover architecture, as a mechanism to provide an easy transition path to our higher density device.

Great.

Thanks.

That's all I have.

There are no further quest.

Mr.Skaggs, I will turn the conference back to you for any additional or closing remarks.

That's it.

Please give the Company a call if you have any additional questions.

Thanks, everybody, for attending our call.

This concludes today's conference.

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