萊迪思半導體 (LSCC) 2006 Q4 法說會逐字稿

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

Copies of the Lattice Semiconductor fourth quarter ending December 30, 2006 earnings press release may be obtained from the Company's website, which is www.lscc.com. [OPERATOR INSTRUCTIONS].

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

Please go ahead, sir.

Thank you, and good afternoon, everyone.

Joining me on the call today 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 fourth quarter and the year, and 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 future quarterly financial results, revenue, gross margins, customers, product offerings, and the Company's ability to compete.

Estimates of future revenue are inherently uncertain due to the high percentage of quarterly turns business.

In addition, revenues affected by such factors as pricing pressures, competitive actions, the demand for our product, and the ability to supply products to customers in a timely manner.

The potential impact of defining activity on future revenue is inherently uncertain because it is unknown whether or when any particular design in may ultimately result in sales of a significant volume.

Actual gross margin percentage and operating expenses could vary from estimates due to changes in revenue levels, product pricing and mix, wafer, assembly and test costs, manufacturing yields,stock-based compensation charges and other factors.

In addition to the foregoing, actual results may differ materially from our forward-looking statements due to the Company's dependencies on its silicon wafer suppliers, technological and product development risks and other risks described in the filings with the SEC.

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.

Let me now turn to the financial review. 2006 was a very good year for our company, so I would like to begin my remarks by highlighting some of the key accomplishments for 2006.

We returned to full year profitability for the first time since 2000.

We posted net income for the year of $3.1 million as compared to a net loss of $49.1 million for 2005.

On a pro forma basis, we posted net income in 2006 of $17.8 million or $0.16 per share as compared to a net loss of $21 million or $0.18 per share for the prior year.

We enjoyed industry-leading revenue growth of 16% with strong growth in both PLDs and FPGAs. 2006 operating expenses declined by approximately $30 million from 2005 with R&D expenses representing about half of the expense reduction.

This is a direct result of the restructuring plans we implemented a year ago.

We continued to generate significant cash from operations in 2006, a total of $22.6 million for the year excluding the Fujitsu payments.

Let me now turn to the fourth quarter results.

Revenue for the fourth quarter was $61.8 million, down 2.6% sequentially from the third quarter revenue of $63.5 million, and up 15% from revenue of $54 million in the same quarter last year.

As a result of restructuring a year ago, the Company realigned department and cost centers as well as job responsibility changes and updated how the Company reports operating expenses.

Amounts previously reported in prior 2006 quarterly reports have been reclassified and now better segregates between R&D, SG&A and cost of sales for improved comparability.

The quarterly effect in 2006 of these reclassifications is that R&D expense has been lowered by about 700 to $800,000, SG&A increased by about $800,000 to $1 million, and cost of sales lowered by about $100,000 to $200,000.

There is no impact on previously reported net income or loss as the reclassifications offsets.

Gross margins for the fourth quarter came in at 56.5%, slightly above the 56.2% we posted in the third quarter.

This change in gross margin was primarily due to product mix and lower costs.

Quarterly R&D expense was $20.3 million, which includes $0.6 million in stock option expenses and was down $0.6 million from the prior quarter.

The decrease in R&D expense was mainly due to lower mass costs for the quarter.

Quarterly SG&A expense was $15 million including $0.4 million in stock option expense and was down $0.2 million from the third quarter SG&A expense of $15.2 million.

Intangible asset amortization was $2.7 million for the quarter, the same as the prior quarter.

Intangible asset amortization for the first quarter of 2007 will be flat at $2.7 million, and the total for 2007 about $9.8 million.

Amortization of intangible assets will be substantially eliminated by the end of 2008.

Total stock-based compensation expense for the fourth quarter was $1.2 million, up slightly from $1.1 million in the third quarter.

Other income for the fourth quarter was $4.2 million, and included a $0.9 million gain primarily related to the repurchase of zero coupon convertible notes and sale of foundry investments.

We recorded tax provision for foreign taxes during the third quarter of $362,000, primarily related to our foreign subsidiaries.

The Company currently has the benefit of significant net operating loss carry forwards and therefore we do not expect to pay domestic income taxes in the foreseeable future.

The December quarter net income was $0.9 million or $0.01 per share, a significant improvement over the net loss of $23 million or $0.20 per share for the comparable quarter a year ago and essentially flat with a $0.9 million net income or $0.01 a share we posted in the third quarter.

These results include charges of $2.7 million, $15.5 million and $2.8 million million respectively for amortization of intangible assets and restructuring charges.

On a non-GAAP basis, which excludes the aforementioned intangible asset amortization, stock-based compensation expense and restructuring charges, we posted net income of $4.8 million or $0.04 per share.

This compares to a net loss of $7.3 million or $0.06 per share posted in the comparable quarter a year ago, and net income of $4.8 million or $0.04 per share posted in the third quarter.

Turning now to the balance sheet, cash and short-term investments at December 31st were $233.2 million, down $34.9 million from September 2006.

During the quarter we paid Fujitsu the third installment of $37.5 million for prepaid wafers.

We used approximately $3.7 million to repurchase our zero coupon convertible notes and received proceeds of approximately $3.1 million for the sale of foundry investments.

Operating cash flow for the fourth quarter was $5.6 million, excluding the Fujitsu payments.

During the fourth quarter we met the third and fourth milestones in our Fujitsu foundry relationship.

We made a $37.5 million payment as previously mentioned, and we will make the remaining payment in the first quarter of 2007.

Therefore, in the fourth quarter we accrued $37.5 million on the balance sheet for the fourth payment.

These two payments will conclude our $125 million wafer prepayment obligation to Fujitsu under our agreement.

Accounts receivable remained essentially flat from $22.9 million at September 30th compared to $22.6 million at December 31st.

Day sales outstanding remained at 33 days, well below our target of 45 days.

Inventory increased by $2.3 million from September 30 to $38.8 million at December 31st, and it is now slightly above four months on a cost of sales basis, close to our target range.

The slight increase was due to lower than expected shipments during the quarter.

Foundry investments, advances and other assets settle increased by $66 million from September 30th, and represents the two Fujitsu prepaid milestones totaling $75 million, a reclassification of a foundry investment to current assets and the sale of a foundry investment during the fourth quarter.

We spent $2.7 million on capital expenditures during the fourth quarter, and a quarterly depreciation expense was $3.3 million, up approximately $100 ,000 from the prior quarter.

Deferred income at December 31st was $6.2 million, down $4 million from September 30th.

The decrease was due to lower inventory at distributors, and a higher credit provided to our distributors for the credit arrangement we instituted at the beginning of this year.

This concludes the financial review portion of the call, and I would like now to turn the call over to Steve Skaggs.

Thanks, Jan.

As this conference call marks the end of our fiscal year, I want to take a moment to highlight our annual results and accomplishments prior to turning to the fourth quarter details.

Last year as Jan mentioned, we grew our total revenue by 16%.

We estimate the overall growth rate of the programmable logic market, not all competitors reported as you know, but our estimate for 2006 market growth rate of 13%.

Therefore, I believe it is quite safe to say that last year we accomplished our goal of gaining market share.

We also will post the highest revenue growth rate of any programmable logistics supplier during 2006, and I believe that this is the first time since 1992 that we have led our industry in terms of overall revenue growth.

Additionally, we gained market share within both of the major product categories.

In the strategically important FPGA segment, our revenue grew 25% during 2006, nearly double the 13% rate we estimate the FPGA market grew last year.

In the PLD segment, we grew a bit over 14% in 2006 compared to our estimate of 10 to 11% growth for that market.

So last year not only did we gain overall market share, but we gained market share in both the FPGA and PLD segments and in each segment we were the fastest growing supplier last year.

We also accomplished the very important goal of returning the Company to profitability.

We returned to GAAP profitability in the second quarter and as Jan, mentioned reported an annual profit for the first time since 2000.

This was made possible by the combination of our industry leading revenue growth and the operational cost reductions implemented during our restructuring at the end of 2005.

Perhaps of most importance, particularly for the long-term competitiveness of the Company, we continued to execute nicely on our aggressive new product road map. 2006 sow the rollout of three highly competitive 90-nanometer FPGA product families, the Lattice SC Extreme Performance FPGA families featuring embedded SERDES and high IP blocks.

The low cost Lattice ECP2 with the industry's best price performance and the award winning Lattice ECP2M which charts new territory in the high volume FPGA market as the first low cost FPGA fabric to offer SERDES I/O and substantial memory resources.

During the year we also completed two major software releases, introduced the soft 32-bit microprocessor core and brought 86 additional IP cores to market.

These software and IP solutions provide important system level support for our innovative 90-nanometer products.

Our new products have been well received by our worldwide customer base, and we believe they have meaningfully improved our competitive position, particularly in a large and attract active FPGA segment and will allow us to continue our positive market share trends.

All in all, 2006 was a very positive year for Lattice.

Unfortunately it is ending on a downward trajectory.

Like our direct competitors and several other semiconductor suppliers who are dependent on the communications equipment end market, our business weakened during the fourth quarter.

In particularly our revenue level was negatively impacted by a sharp decrease in business from a handful of large customers in the communications infrastructure end market.

I attribute this weakness to merger activity in that sector into a build-up of inventory at these select customers and their EMS partners.

Last quarter as a result of these negative industry conditions we saw our revenues decline 2.6% on a sequential basis and our string of seven consecutive quarters of sequential revenue growth was broken.

Despite the rather abrupt change in business conditions, we are able to improve our gross margin significantly reduce operating expenses, and are pleased to have preserved profitability.

Let me now provide you some more detail on our business for the fourth quarter.

As we continue to experience some dramatic changes in our mix changes in our business on an end market geographic channel and product basis.

Revenue by end market for the quarter was as follows: Communications, 45% of revenue, computing, 15%, and the other markets 40%.

The communications market shrank 15% sequentially and was the only end market that declined for us last quarter.

Unfortunately, it is our largest end market.

Four large customers, as I mentioned, accounted for the entire decline in the communications end market.

The business of these customers was concentrated in both the wireline and wireless equipment spaces which should be distinguished from what we call the data networking or enterprise equipment segment.

My belief as I mentioned is that the sharp fall off in our business level doesn't reflect a change in the end demand of these customers and as I mentioned previously is due to merger activity as well as excess inventory.

All other end markets were healthy last quarter.

Revenue from computing grew slightly while other markets grew at a double digit rate driven by strong growth in the industrial, consumer and military markets.

Geographically during the quarter, Asia made up 56% of revenue, the Americas 23%, and Europe 20%.

Asia grew 5% sequentially while North America declined 12%, and Europe declined 8%.

Growth in Asia was generally broad-based and primarily driven by the consumer end market.

Europe and North America were down due to the communications end market.

During the fourth quarter, FPGA product revenue was $11.8 million or 19% of our revenue and declined 11% sequentially but grew 20% on a year-over-year basis.

This decline in FPGA revenue was due to our first generation 180-nanometer XPLD and 160-nanometer FPSC products as well as a lesser extent due to our mature ORCA products.

These particular product families happen to make up a significant percentage of the revenue stream we enjoy from the large communication customers whose business was impacted by the conditions I described.

Consequently, these products and our FPGA revenue bore the brunt of the revenue decline for these customers.

PLD revenue accounted for $50.0 million or 81% of our revenue and was essentially flat sequentially but grew 13% on a year-over-year basis.

During the quarter we saw strong growth from our MACH 4000 and 4000Z product families, driven by the consumer end market.

However, this growth was substantially offset by declines in our more mature PLD families, and we also saw very substantial sequential decline, approximately 50% in our power and clocked mixed signal products, which again can be directly related to conditions at our major communication customers.

I should note that despite the sharp sequential quarterly decline, revenue from these products still doubled on a year-over-year basis and we believe they will grow rapidly during 2007.

I really only point this out because I believe it lends credence to the opinion about conditions within our major communication customers.

These mixed signal parts are relatively low-priced parts which have been adopted by several large OEMs in the communications space in a fairly ubiquitous fashion.

That is to say, they're used as standard parents on a wide variety of boards and end systems, they're not dependent on a single product or design within those customers who have adopted the technology.

Therefore, a broad inventory correction is really in my mind the only logical explanation for such a steep sequential decline in revenue from these products.

During the fourth quarter, revenue from products classified as new declined 12% sequentially.

This may seem a bit alarming at first.

However, this decline was entirely driven by the change in revenue levels of our FPSC, XPLD and power and clock mixed signal products within the communications end market.

The FPSC and XPLD products have been in the market three or four years, and accordingly we plan to reclassify our new product category beginning next quarter to better reflect the revenue trends of our newest products.

Our 130-nanometer and 90-nanometer products which make up a subset of the new product category grew at single digit rate sequentially and grew over four times on a year-over-year basis.

The vast majority of this revenue stream still comes from our three families of 130-nanometer products introduced over the last two years.

During 2006 as you know, we announced three new 90-nanometer product family that contain about 16 total devices.

We're currently sampling the majority of those devices and generated last quarter for the first time meaningful prototyping revenue from those 90-nanometer products.

We just announced the volume production availability of our first two nanometer devices and preponderance to move to volume production for all remaining 90-nanometer devices during the first half of this year.

Going forward, we continue to expect substantial revenue growth from our 130 and 90-nanometer products during 2007.

Mainstream products, which accounted for 53% of revenue last quarter grew 3% sequentially while mature products, which now account for 32% of revenue declined 5% sequentially last quarter.

I want now to turn to our 2007 first quarter financial outlook.

We entered the first quarter with a substantially reduced backlog and consequently we are more heavily dependent on turns business than in the past quarters.

Although the first quarter is typically the strongest calendar quarter for Lattice and for our industry, I believe we will continue to be impacted by lower demand from our major communications customers and through a lesser extent by seasonal softness in Asia and the consumer market.

Consequently, we currently estimate that our quarterly revenue will decline on a sequential basis by 2 to 7%.

Our turns estimate for the first quarter is approximately 50 to 55%, up significantly from the 35% we experienced in the fourth quarter, but very much in line with historic levels.

For the rest of the P&L we currently have the following expectations for the March 2007 quarter: we expect gross margin as a percentage of revenue to be approximately flat at the current level plus or minus 1 percentage point.

We expect total operating expenses including amortization of intangible assets but -- excluding amortization of intangible assets but including an estimated $1.3 million non-cash charge for stock compensation expense.

Are expected to be approximately $36 million.

As Jan mentioned we expect intangible assets amortization to be approximately $2.7 million, and we expect approximately $3.5 million in other income and finally we expect a share count to be relatively flat.

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

Operator, if we can start taking questions at this time?

[OPERATOR INSTRUCTIONS] Let's go to Mark Edelstone for our first question.

Hey, guys.

Hope all is well.

The first question I had it sounds like, Steve, you are going to maybe reclassify some of the products here going forward, and just wanted to get a sense of what you would consider to be true legacy products for the Company.

What percentage of revenues does that make up today?

Is that more than what you articulated as 32% in the mature category?

No.

I think the mature category is probably fine where we'll look at reclassifying products, mostly, Mark, in the first quarter and again we'll provide comparable data so you can look back a year in time in the mainstream and new products, and specifically looking at our first generation FPGAs which are now four years old, moving those into the mainstream sector, and that would be the FPSC products and the first generation XPLD products.

Those are products on 180-nanometers, 160-nanometers.

So that's what we'll be looking at.

In terms of new products, outside of that we'll be focusing on obviously all the new FPGAs, the new XO product which is classified as a CPLD and the mixed signal products, we'd expect those to be somewhere around the 10% level of revenue in the first quarter but obviously we'll report on that at that time.

Okay.

Very good.

And I guess when you just take a look at all of 2007 given the fact you're going to start off here in a little bit of a hole, what do you think the prospects are for growth?

Do you think the Company actually can grow year-over-year because that will take some decent sequential compares to say sort of get you there?

I believe we can grow in 2007, and we plan to grow.

I think you're right, you know, as I said during 2006 industry grew 13%, really started strong and ended weak for everyone. 2007 will clearly start weak, given our outlook, and our largest competitor has already reported and has a down outlook, and we'll need it to finish stronger, but nonetheless I think mathematically we're looking at kind of a lower growth year for the industry given those dynamics, but clearly our expectation and we believe we have the product position to continue what we did this year which is outgrow the industry, so we do believe that we can grow faster than the industry and report positive growth in the current year.

And then just lastly, as you try to lever that revenue growth, how should we be thinking about your operating expense budget as we go through '07 so for every incremental dollar that you generate in revenues, what are you thinking about in terms of the need for increased operating expense?

Well, we'll obviously be constraining operating expense as revenue hopefully grows, so our intention is to hold the growth of operating expense to sort of a very minimal level and to have most of the revenue growth fall down to the bottom line throughout the year.

Okay.

Thanks a lot, guys.

Sure.

Chris Danely.

Hey, thanks guys, JPMorgan.

Following on Mark's question about OpEx, if we continue to operate in this subdued environment, will you guys look at pruning some programs and perhaps reducing the OpEx?

That's an open issue, Chris.

My current belief is this is a transitory phenomenon driven by the communication end market, as I mentioned, four major customers, due to some transition in their business and inventory back up that's mainly in the EMS channel.

I believe it will dissipate, in fact the business from those folks has already started to pick up.

I don't expect it to pick up at a rate fast enough to generate growth in the first quarter, but I do expect after that to be in a more normal business posture, so that's kind of a thesis we're operating on today.

If that's the case, we'll plan to really hunker down on operating expenses and move on after that.

If there is a different dynamic that occurs, we'll obviously have to revisit our planning these.

How do you feel about inventory both in inventory and the channel?

Inventory in the distribution channel is very healthy.

I feel good.

Outside of these specific customers I believe inventory is very, very lean in the customer arena.

Our internal inventories as Jan mentioned is very close to our four-month goal, and we feel very good about the mix of inventory between finished goods and work in process and new versus legacy products.

We feel from an inventory perspective that outside the issue I point out on these four customers that things are very much in balance and good shape.

Okay.

Thanks, guys.

David Duley.

A couple questions from me.

I guess, first of all what triggers do you reclassification from new products into mainstream, mature?

Is it when they stop growing we move them over there or is it time frame?

What drives that decision, and then I didn't hear what you said about outside of these older newer products that are going to be reclassified, what the growth rate are going to be reclassified, what the growth rate was of the 130-nanometer product which I think what's the balance that's left there?

Right.

What triggered it, David, is we like to do that on a reasonably regular basis at the beginning of the year, so that provides the investment community with the best kind of visibility and comparability to prior years.

You should have done it last quarter.

Well, we want to provide the best visibility and transparency of the numbers, so I want to let people know what we're going to do and do that.

The second thing is in new products we would like to have products that are really just ramping on their design and momentum as opposed to products that are really no longer deemed designed in.

That's really the only input that go into that decision.

Okay.

We'll do that as a normal course of our business in Q1, and provide again the comparable numbers going back so people can analyze that.

I did say that the 130/90-nanometer products grew at single digit sequential rates last quarter and four times on a year-over-year basis in the fourth quarter.

Okay.

And do you think in the future will you be trying to secure capacity in similar methods that you secured this logistics capacity?

Do you think that's the requirement to basically make up-front payments for future wafers or do you think now you have enough attention from these guys that your relationship will be more normal per se?

I think it really depends on interest and conditions at the time that we're trying to cement a foundry partnership.

In the past that's been a normal mode of operation for us and other people in the fabless space.

We believe that with the Fujitsu partnership we have sufficient capacity for the next few years, and really when we're planning beyond that we need to respecify that provision depending on the conditions at that time, so I wouldn't want to really speculate about that.

It is a possibility, again, depending on the supply and demand balance of the industry at any given moment in time when one is trying to cement a foundry partnership.

And I seem to recollect this partnership with Fujitsu had multi-facets to it, one was a manufacturing relationship, foundry relationship, but I thought there could be a sales relationship and hopefully further penetration of the product lines.

Can you talk a little bit about how some of those initiatives might be going?

There is three aspects of the partnership.

One is a technology partnership.

The second is a manufacturing partnership.

The third is a sales and marketing partnership.

With regard to the technology partnership we've codeveloped an embedded flash process for our XP products which is currently in production on 130-nanometers with products that we introduced last year.

We're obviously actively working on finer geometry nodes, the 90-nanometers and beyond in that partnership, and we're very pleased with the results of that that manifests themselves as a competitive and industry leading nonvolatile FPGA product.

Second is manufacturing, and I won't talk too much about that, but we're clearly in the volume production phase with our partnership there.

The final aspect of the partnership is a sales and marketing partnership.

We've franchised Fujitsu as a distributor in the Japanese market, and that's begun, and the intention of both parties is to use the sales and marketing partnership as a way to increase the penetration of the Fujitsu equipment company with Fujitsu manufactured products, so that's something that needs to play out in the future, and both companies are working very hard at achieving the mutual benefits of that third leg of the partnership.

Okay.

Final thing from me.

Could you just give us your opinion on how important you believe it is for Lattice to move aggressively to 90-nanometers and then 65-nanometers, if you listen and degree of function of where we are and the cycle for the current industry or whatnot.

You listen to the Xilinx conference call and they spout off about having 100% share at 65-nanometers and 75% share of 90-nanometer FPGAs.

Do you really think that is something that you need to be competitive in the marketplace or is that less important for you?

Well, I think it is absolutely critical to have competitive product from a density power performance and cost perspective.

Advanced technology gives you the opportunity to architect and craft those products, but technology in itself doesn't result in a product that has the best attributes on all those dimensions, by default.

For example, our ECP2M product which is made on 90-nanometer technology which offers very high density logic capacity, very high memory capacity, along with SERDES I/O competes very favorably with the 65-nanometer product that Xilinx software is targeted at the same sockets, so I think it is critical to have a road map to advanced technologies and to use those technologies to differentiate the product, but it is not necessarily critical to be the first to offer a given product on a given node if you've made other architectural decisions that allow you to differentiate your product on one of the key criteria that the customers make decisions upon.

Thanks, Steve.

Bill Dezellem.

Thank you.

We had a couple of questions.

First of all, relative to those four specific telephone customers, if we understand correctly, you do not view this as a structural phenomenon, but temporary specifically with the inventory build that did take place and is now coming back into line, and the mergers that their customers are dealing with, is that correct?

Yes, very much do not view it to be a step function change in the market or a long-term issue.

I view it to be a short-term phenomena that impacts the specific customers, yes, that's correct.

And then, Steve, in an answer to a prior question you had mentioned that inventory both in the distribution channel and your direct customers excluding these four you felt was in good shape, and yet at another point you had mentioned that the business of these four customers was beginning to improve from levels that you had seen earlier.

Does that or maybe I should ask what does that imply about the inventory levels at those four customers in aggregate?

Do you feel like they're back in line or still working that way?

How would you characterize it, please?

I feel that the if you look at the bookings and billings and resell into those customers which obviously occurs because they're multinational customers through many different geographies through many different channels, but really I am starting to see some order rates come back from these customers, and some growth in the billings and resales to these customers which again leads me to the conclusion that we're starting to get back to kind of a more normal business posture and inventory levels.

That's a process I believe will occur throughout the quarter, and my belief is by the end of the quarter or somewhere close to that time frame we'll be back to kind of what I believe is a more balanced business level with those customers that reflects their end consumption.

The issue that you didn't start off at the beginning of the quarter or end last quarter at those business levels, so you'll have some dampening of the business in Q4 and Q1 from that impact.

Thank you.

That's helpful, and then on a completely different topic, programmable analog, what's the update relative to where that's at today and opportunity that you see in the future?

We view that -- we've really focused our efforts on the power management and clock management arenas.

We have two families of products that combine our programmable analog capability with essentially programmable logic capabilities, so there are really parts that address certain applications that we believe can gain the benefits of programmability and leverage our EPLD business.

We have a family of products that today represents a minority of our revenue.

It is 2 to 5% which we include in the CPLD space that we believe has the potential to grow over time, and to really allow us to expand the PLD market and increase our share there.

In 2006, I mentioned we grew faster than the market.

One of the reasons I believe we're able to do that was the contribution of these products.

Going forward we will continue to expand our portfolio in these areas and believe that we'll grow that portion of the business, kind of in a steady long-term fashion.

As a follow-up to that, what would be the time frame that you would hope that the programmable analog business would be able to achieve 5% of revenues or more?

I think it is possible exiting or really in kind of I think it is possible exiting or really in kind of the first half of 2008, exiting 2007.

Great.

Thank you.

[Luke Shaw. ]

Hi.

A couple quick questions for me.

One is, Steve, I know you don't want to talk specifically about design wins, but can you give us a sense of where maybe just a little bit of a clue as to what design wins are start to go look like for you and give us a direction on some of those and then also on the FPGA side, just want to get a sense kind of I guess I know you're kind of in the fourth year, but kind of just give us a sense of what you think the next cycle could look like for you guys?

Is it going to be the same kind of typical cycle for you guys or is it going to be looking somewhat different over the next few years?

Sure.

We had actually a good quarter at 130-nanometer 90-nanometer FPGA designs that continue to grow nicely and establish a new high.

Really we have six families in the marketplace today, 3 in the 130-nanometer space and 3 in the 90-nanometer space.

Of those six families, only one family the design activity has peaked, and that was our first family, the ECP family.

All other families exhibited very good growth and set new high records. 90-nanometer designs nearly tripled, so at this point we have secured almost 8,000 total FPGA design from our new 130 nanometer, 90-nanometer products and about 57% over half of those designs come from customers who are new to Lattice.

So we're quite pleased with that level of design activities.

However, we're trying to increasingly focus on the revenue potential of those designs and less on the quantity of designs.

To remind you and everyone else, the products have not been in volume production for very long, and as many people are aware in the industry, there is a very long time lag between any given customer design and the actual revenue ramp of orders from that design.

So based on the relatively recent release dates of those products rolling out, entering the production order cycle, and I don't expect the revenue from the 130-nanometer products to reach peak level until perhaps five or six years from their initial volume production release.

Last quarter in this forum I gave some data regarding the status of our historic 130-nanometer time.

I just have the analysis updated.

The pictures essentially unchanged.

At present only approximately 20 to 25% of our historical designs have entered production, and most of those only recently.

About 55% are in the prototyping phase, and the remaining 20 to 25% have been cancelled.

Ultimately I expect the cancelation rate should stabilize between a third and half of the design.

The designs can be cancelled for a variety of reasons, lack of funding, an upgrade of the product by the customer, the other business reasons that the customers, competitive reasons, and I don't think those cancelation rates should be alarming.

During the review I also developed a detailed bottom up revenue forecast which I am not going to share publicly, but I will say that the forecast actually increased.

When compared to the forecast I received last quarter, so accordingly we still look forward to very strong future revenue growth from those products.

Last year they accounted for slightly over $10 million of our revenue.

Slightly under 5%.

The bulk of that was as I mentioned prototyping revenue, but nonetheless those products alone drove 5% of the 16% of our overall revenue growth, and as I mentioned we did grow faster than the market, so it is really due to the contributions of those products.

We expect next year for them to drive much more of our growth, and a greater percentage of our future revenue growth.

So to kind of answer your original question about the product cycle, I expect the cycle to be stronger from these products than it was from our kind of first foray into the market four years ago which is really the products that produced the revenue level that we enjoy today from the FPGA market in kind of the $50 million per year level.

Great.

Thank you very much.

Sure.

Seogju Lee.

Hi, Steve.

How are you?

Good.

Thanks for taking my question.

I had, two questions.

One, I just wanted to ask about how you're looking at freedom chip which you introduced earlier in the week, how, when, how you're looking at the revenue opportunity and when we might expect that to contribute?

Sure.

Thanks for asking the question.

We did announce it recently, and I do think it is a fairly innovative approach to a key customer need in the high-end of the FPGA market.

Customers really expect some form of cost reduction path for high density FPGAs, particularly those that cost hundreds of dollars, and we feel our freedom chip approach is a substantial innovation.

What we're really providing is a seamless cost reduction path that allows customers to migrate to a pin-compatible device that we can offer with a ASIC level of test coverage.

We've built capability into our tool that allows customers to utilize specific architectural features that are inherent in our silicons.

These are additional registers in the architecture.

To transparently build through the software tool a scan chain of registers within their actual design including the routing.

We can do this without a negative impact to the design, either performance or utilization, and if a customer so chooses, we can then provide a silicon device that's tested to their specific pattern with a very high degree of test coverage that's validated by industry standard tool synopsis tetra max that will be very familiar to customers who have kind of an ASIC methodology.

Of course there is one downside, and the downside is that given that we've tested it to this specific pattern, we can't guarantee field reprogrammability if a customer chooses to change that pattern, so really it is an offering and capability that's only valuable for high-volume stable designs, so we're choosing to offer it with minimum order quantities and a modest NRE charge.

Fortunately I think the business case for high-volume stable designs is one that those are the ones that need cost reductions, not prototyping efforts, so it is we believe kind of a different path than our competitors have gone down, and one that provides value to the customers.

In terms of its revenue impact, really we see this as a vehicle to garner more success with SC designs and to convert customers when they reach volume production if they so choose based upon the business terms we're offering, so I don't expect to really start to have a substantial number of freedom chip designs so perhaps the end of the current calendar year moving into 2008 as the S T designs mover into the volume production phase.

Okay.

Great.

And then just I question on the expense structure.

If we look at '07 or '06 you did a great job, especially on the R&D side, but as we go into '07, how should we think about it?

Is there any new projects or ramps of new families of products that could impact that or it any color would be very helpful.

Thank you and good luck.

As I answer the first question on the call, we're going to be very judicious in managing our operating expenses as the revenue is forecasted to be down in Q1.

Depending on the trajectory of the recovery, we'll be less aggressive in managing or more aggressive in managing those expenses throughout the year.

Strictly from a business standpoint, a lot of the 90-nanometer expenses are kind of moving behind us.

We are going to be migrating to the 65-nanometer noticed, but I think those R&D expenses will coincide with kind of an increase in revenue towards after the first quarter, so we expect to hold expenses reasonably tight, and then to increase those for normal business reasons as well as 65-nanometer R&D in the latter half of the year.

Okay.

Thank you.

Good luck.

Mark Edelstone.

Hey guys, just a couple of housekeeping items.

One on the other income you have forecasted for the first quarter, does that also include some gains on sales securities?

It -- yes, Mark, it does include some debt buyback and sales.

The interest income after we make this last Fujitsu payment will be a little under $3 million.

Okay.

Very good, and, Jan, do you have a sense for what your tax rate might look like in 2008?

Do you continue to -- I assume you're not going to be at a full rate, but assuming profitability moves up nicely in '08, where do you think you have to start paying?

We're not going to pay -- our NOL is a couple hundred million dollars, Mark, so we're not going to pay any state or federal income tax for the next few years.

We'll continue to pay and record like 100, $200,000 in foreign taxes, but no taxes next year.

So basically just keep it at that sort of run rate of a couple hundred thousand a quarter and we should be in good shape?

Yep.

Thanks, guys.

Okay.

There are no further questions at this time.

I would turn the conference back over to the speakers for any additional or closing comments.

That's it from here.

Thanks, everybody, look forward to catching up with you at a later time.

Bye.

This concludes today's call.

You may now disconnect.