萊迪思半導體 (LSCC) 2007 Q1 法說會逐字稿

Good afternoon.

Welcome to today's conference call.

Copies of the Lattice Semiconductor first quarter ending March 31st, 2007, earnings press release may be obtained from the company's website which is www.lscc.com.

This calls 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.

And now, at this time, I'd like to turn the conference over to the Chief Financial Officer, Mr.

Jan Johannessen.

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 you a financial review of the first quarter.

Then Steve will provide a business review followed by our second quarter outlook.

We'll then hold a question and answer session.

I will now read the Safe Harbor statements.

This conference call may contain forward-looking statements within the meaning of the federal securities laws including statements about future financial results, 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 and such factors as rising pressures, competitive actions, the demand for our products and abilities to supply products to customers in a timely manner.

The potential impact of design and activity on future revenues is inherently uncertain because it's unknown whether or when any particular designing may ultimately result in the sales of a significant volume.

Gross margin percentage and operating expenses could vary from estimates due to changes in revenue levels, product pricing and mix manufacturing costs and yield, stock based compensation charges and other factors.

In addition, actual results may differ materially from our forward-looking statements due to the other risks that are described in our 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 thereof or to reflect the occurrence of unanticipated events.

Let me now turn to the first quarter results.

Revenue for the first quarter was $58.1 million, up 1% from revenue $57.5 million in the same quarter last year and down 6% sequentially from fourth quarter revenue of $61.8 million.

Gross margin for the first quarter came in at 54.9% below the 56.5% we posted in the fourth quarter.

The change in gross margin was due to combination of one-time items and product mix.

In preparation of a (inaudible) program we plan on implementing during the current year, wrote off certain products during the quarter, and secondly, the effects of our fixed manufacturing costs over less revenue also negatively impact -- impacted the gross margin for the first quarter.

As we do not expect the one-time items to -- to recur, we expect the margin to rebound on higher revenue levels.

R&D expense $2 million which includes $.7 million in stock option expenses.

That was up $1.8 million from the prior quarter.

The increase in R&D expenses were mainly due to higher maps costs and higher employer payroll taxes and compensation expenses.

Quarterly SG&A expenses was $14.6 million including a $.6 million in stock option expense and was down $.4 million from fourth quarter SG&A expense of $15 million.

The lower SG&A expense was primarily due to a reversal of an accrual of legal expenses offset by higher employee taxes and compensation expense.

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

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

Amortization of intangible assets will substantially eliminated at the end of 2008.

Total stock-based compensation expense for the first quarter was $1.4 million, an increase of $.2 million from the fourth quarter.

Other income for the fourth quarter was $3 million, down $1.2 million from the prior quarter and included a $.7 million gain related to the repurchase of zero coupon convertible notes.

We recorded tax provision for foreign taxes during the first quarter of $169,000, primarily related to our foreign subsidiaries, down from the $362,000 we recorded in the prior quarter.

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.

Expect the quarterly tax provision for the remainder of 2007 in the $150,000 to $200,000 range.

The net loss was $4.4 million or $0.04 per share as compared to net loss of $.8 million or $0.01 per share for the comparable quarter a year ago and compared to $.9 million net income or $0.01 per share we posted in the fourth quarter.

These results include charges of $3.9 million, $3.6 million and $3.8 million respectively for the amortization of intangible assets, stock-based compensation expense and restructuring charges.

On a nonGAAP basis which excludes the aforementioned intangible asset amortization, stock-based compensation expense and restructuring charges, we posted a net loss of $.5 million.

This compares to a net income of $2.8 million or $0.02 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 fourth quarter.

Turning now to the balance sheet.

Cash and short-term investments at March 31st were $170 million down $63.5 million from December 2006.

During the quarter, we paid Fujitsu the fourth and final installment of $37.5 million for prepaid wafers.

This payment will conclude our $125 million wafer prepayment obligation to Fujitsu under our agreement.

Going forward, all wafers received from Fujitsu will be credited against our prepaid asset on the balance sheet which will significantly help our future cash flow.

Our liquidity partition remains strong with cash, short-term investments and foundry investments and advance -- advances combined totaling -- totaling $292.6 million as of March 31st.

Foundry investments in advances total $122.9 million of which $27.5 million is classified as a current asset.

During the first quarter, we also used $19.6 million to repurchase our zero coupon convertible notes.

We have now purchased $110.9 million in principal amount of the zero coupon convertible notes and the balance at March 31st is $89.1 million.

Accounts receivable at March 31st was $28.7 million compared to $22.5 million at December 31.

And day sales outstanding return to our target of 45 days as distributor billings with back end loaded in the first quarter.

Distributor billings for the first quarter grew 18% over the prior quarter.

Inventory increased by $1.5 million from December 31st to $40.3 million at March 31st and remained so slightly at about four months on a cost of sales basis, which is close to our target range.

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

We spent $3.9 million on capital expenditures during the first quarter, mostly for manufacturing equipment and tooling and a quarterly depreciation expense was $3.4 million, up approximately $100,000 from the prior quarter.

Deferred income at March 31st was $7.5 million up $1.3 million from December 31st.

Increase was due to higher inventory levels at distributors and a higher credit provided to our distributors for the credit arrangement we instituted at the beginning of the year -- last year.

Lastly, our balance sheet reflects the adoption of FIN 48 which provides new guidelines for uncertain tax position.

Effect of this new requirement what to increase our stockholders' equity by -- by $7.2 million with the offset decreasing other liabilities.

Now this concludes our financial review portion of the call and I'd like now to turn the call over to Steve Skaggs.

Thanks, Jan.

Last quarter we continue to be impacted by subdued industry conditions primarily related to the communications end market and continuing work off of excess inventory.

We also experienced unanticipated -- anticipated seasonal weakness in the consumer end market and unanticipated weakness in Japan and the storage end market.

Revenue came in within the range of our original forecast issued at the beginning of the quarter and declined 6% sequentially while still growing 1% on a year-over-year basis.

That's the end of the negative news.

On a positive note, we see several signs that we believe indicated the first quarter will mark a bottom for the communications and market in our industry.

And I'll talk more about that at the end of my comments.

Additionally, within our own business, we were gratified in what was a weak quarter for our industry to post sequential revenue growth within our strategically important FPGA business and also report solid double digit revenue growth within our new product category.

Let me now provide detail on our business for the first quarter.

Revenue by end market for the quarter was as follows: Communications 45% of revenue, industrial 32%, consumer 12% and computing 11%.

You will note that we are now breaking the consumer end market out separately as it's grown to a meaningful percentage of overall revenue.

The communication market -- end market shrank 7% sequentially as I mentioned an anticipated decline and that decline was significantly less than the 15% sequential decline we experienced in that end market during the fourth quarter of 2006.

That decline was once again driven by one of our largest customers that recently consummated a major merger.

We also saw weakness in our Japanese communications account base in what traditionally has been a strong seasonal quarter for those customers in that market.

Business from all other communication customers in aggregate was slightly up.

The consumer market declined 12% sequentially due primarily to seasonal softness in Asia.

However, when measured on a year over year basis, the consumer end market still more than doubled from the levels in the first quarter 2006.

The computing end market posted a double digit sequential decline driven as I mentioned primarily by the storage subsegment.

On the other hand, the server market was flat, and we anticipated a return to growth in this overall end market as the calendar year progresses as a result of past design wins in the server application area.

The bright spot last quarter was once again the industrial end market which grew 12% sequentially and was generally healthy across all subsegments and application areas.

Geographically, during the quarter Asia made up 55% of revenue and declined 11% sequentially.

The Americas accounted for 23% of revenue and declined 2%, while Europe made up 22% and grew 4% sequentially.

For the first quarter, FPGA product revenue was $11.9 million or 20% of revenue and grew slightly on a sequential basis and 10% on a year-over-year basis.

Significantly above the market growth rate which we estimate -- we estimate declined 3% on a sequential basis and the same amount 3% on a year-over-year basis.

PLE product revenue accounted for $46.3 million or 80% of our revenue and declined 7% sequentially and 1% on a year-over-year basis.

Growth in our new MachXO product line was more than offset by declines in our older product families.

Now during the first quarter, we reclassified our products by life cycle as we indicated we would do during our last earnings call.

Our new product category now predominantly reflects our new 130 and 90 nanometer products.

New products accounted for $4.8 million of revenue last quarter or 8% of the total and grew 17% sequentially and 126% on a year-over-year basis.

From a product standpoint, last quarter we continued to move our newest products into volume production and during the quarter we fulfilled our first quarters for production qualified devices within all three of our new 90 nanometer FPGA families.

The high performance LatticeSC family, the low-cost LatticeECP2 family and the low cost, high performance LatticeECP2M family with SERDES I/O.

Design activity for these 90 nanometer products also grew dramatically and we demonstrated the ability to win competitively contest designs however we call the major accounts.

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

Mainstream products which accounted for 48% of revenue declined 13% sequentially last quarter, but were up 11% on a year-over-year basis.

Mature products, which now account for 44% of revenue were flat sequentially, but declined 15% on a year-over-year basis.

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

We expect the second quarter to mark the beginning of gradual recovery in our market.

I believe this for a number of reasons.

First the end business of our two largest -- largest communication customers, which for the past two quarters has been negatively impacted by merger activity and related inventory compression appears to be improving based on their public comments.

Second and more specifically, beginning in the second half of last quarter and continuing through the present, we've seen booking activity from these accounts resume -- resume.

These bookings will shift during the current quarter and I expect revenue from these accounts to grow sequentially in the second quarter.

Third, as Jan noted in his comments, distributor shipments were fairly strong last quarter growing 18% sequentially.

Most of that growth occurred in -- in March.

As you know, we report distributor revenue upon resale not upon shipment.

But this does mean that our distributors built inventory towards at the end of last quarter.

Something they are hesitant to do unless they anticipate improving demand.

Finally, we are seeing good booking patterns thus far in the quarter with direct channel bookings up 17% sequentially on a quarter to date basis.

Of course these are all somewhat anecdotal (inaudible) indicators and our business remains highly dependent.

I do believe all these aforementioned factors indicated that we are likely to benefit from an improving business environment throughout the second quarter.

Consequently, we currently estimate our second quarter revenue will be flat up 4% on a sequential basis.

Our turns estimate for the second quarter's approximately 60%, up modestly from the 52% we had experienced in the first quarter and in line with the historic levels we achieved in similar periods of market recovery.

For the rest of the P&L, we currently have the following expectations for the June 2007 quarter.

We expect gross margins as a percentage of revenue to be approximately 55% to 56%.

Total operating expenses excluding amortization of intangible assets but including an estimated $1.3 million noncash charge for stock compensation expense are expected to be approximately $35 million.

We expect intangible asset amortization to be approximate $2.7 million.

We expect approximately $3.5 million in other income.

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

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

Operator, we can start to take questions.

Thank you, gentlemen.

(OPERATOR INSTRUCTIONS) Time permitting, we'll come back to you for additional questions.

And we'll pause for just one moment.

We go first today to Mr.

Chris Danely at JPMorgan.

Hi, this is Larissa [Palshek] calling for Chris Danely.

I just had a question on the overall market expectation for the PLD market.

Can you give us an idea with that growth you're expecting for the year?

Sure.

Unfortunately in general we have very little business visibility in our future business beyond the current quarter.

If you look during 2006, by my account the industry grew 13%.

It started strong and ended weak.

2007 has now started weak both on a sequential and year-over-year basis.

And I think mathematically, it will be very difficult to grow at anything near the same level as last year.

Now my personal expectation is for a relatively flat year for the market or up in the low single digits.

Okay.

And then just FPGA versus PLD growth for the year?

Do you expect FPGA --

I think last year, the FPGA business grew a couple percentage points faster than the PLD business.

By my count, probably about 15% to 12% or there abouts.

I would expect that to be kind of a similar phenomena going forward with the same relative growth rate.

Okay.

Thank you.

We'll go next now to Mr.

David Duley at Merriman.

Yes, a couple questions.

As far as the expense guidance for the June quarter, I seem to recollect there was a bump up in R&D driven by the incremental maps costs in the March quarter.

Would that R&D go back down or are we still starting lots of new products?

Dave, the R&D expense will go down in Q1 -- in Q2, excuse me and Q -- in Q1, we have quite a bit of engineering maps going through the P&L.

And we'll see less than that in Q2.

So we're looking at a total operating expense decrease from Q1 to Q2 in the 4% to 5% range.

And most of that will be in the R&D.

And -- a couple -- you mentioned you're kind of like moving into full production of your 130 and 90 nanometer families.

I think on past conference calls you've given us an idea about how much design activity there has been.

Is there any metric, Steve, that you can give us around some of these product families?

Some of the information you've shared with us before?

Sure, David.

Just to clarify, when I say we move into full production, that's more of an operating term given that we have production qualified those devices and are taking orders for production devices as opposed to engineering sample devices.

It's a common thing that most people in the industry move through.

And it's really separate from the status of our customer designs because customers could still be prototyping with production qualifying device -- devices.

And, frankly, that's what most customers would prefer to do because that really signifies if a device is final and is past the quality and reliability standards.

So I do want to draw that distinction.

But I'm going to go ahead and answer your question with regard to design activity anyway.

So, I mentioned that new 130 nanometer and 90 nanometer product designs continue to grow last quarter.

In fact, they continue to grow on a steady trajectory at a double-digit sequential growth rate.

And last quarter once again established a new overall high.

The 90 nanometer design activity was especially strong and almost doubled from the fourth quarter.

At this stage, we're starting to see an expecting plateauing of our 130 nanometer FPGA designs.

That's to be expected, and as this design activity within those families begins to flatten and decline, we fully expect it would be more than replaced by 90 nanometer design activity.

And consequently, I continue to expect healthy and growing design activity through at least the current calendar year and perhaps beyond what the current portfolio products.

At this point, we've secured nearly 10,000 total customer designs for all our new 130 and 90 nanometer products.

57% of those designs have come from customers that are new to Lattice and have not designed with or bought products from us in the last three or four years.

And although these -- although these designs continue to move into production as evidenced by our growing new product revenue, the large majority of designs still remain in the prototyping stage.

Yes.

That was one of my follow ons.

Is there a way you can help us understand of the 10 -- I would imagine it's quite a small number, but maybe you can help us.

If there's 10,000 designs out there, waiting to queue up the funnel how -- or some are in there, what percentage is starting to roll in production and what is yet to put into production?

So at present, only 21% of the designs have entered production.

55% are in the prototyping stage.

And the remaining 24% have been lost for one reason or another.

Hopefully, I would expect the steady state production yield of designs to wind up about 50%, that is to lose about 50% of those designs.

And that's been my planning thesis all along.

So, basically, the majority of the designs are not in production.

We continue to look forward to strong future revenue growth from these products.

To remind everyone last year these products accounted for slightly over $10 million or about 4% of revenue.

That's up from zero in 2005.

Just doing the math, those products drove -- drove 5% points of our industry-leading growth rate last year of 16%.

We continue to expect revenue from those products to grow strongly this year and drive a greater percentage of our future revenue growth.

So whatever revenue number we would pick for you as far as a growth rate more than 5% points of the growth rate would come from the new products.

Is that what your message is?

Yes.

The way to look at it was last year that 33% of our growth was driven by these products.

I'd expect that percentage contribution to be much higher this year.

Okay.

One final thing from me, Jan.

You mentioned $27 million of the prepaid wafer payment was classified as a current asset.

How do I interpret that?

Does that mean that you'll use that amount of wafers during the current quarter, and because if you divide that by your gross margins, you'll come up with a number around $50 million.

So I'm wondering what that number means.

What that number means is that we expect to use $27.5 million over the next year in terms of wafers that we take and we'll use in the next year.

Oh, it's over a yearly period?

Yes.

The current is over a year.

Right.

So that means you're still getting a majority of your wafers from other locations?

Right.

Most of the wafers we have come -- come to support our POD business.

So the wafer prepayments are all for the new FPGA products

Go you.

Thank you.

Yes.

We'll go next now to Mr.

Robert Toomey at E.K.

Riley Investments.

Hi, good afternoon.

Hi.

I wondered first of all if, with respect to R&D expense, you did say that would be down sequentially in the second quarter.

And I'm wondering if for the full year, are you expecting R&D to still remain at these lower levels in the low to mid 80s -- $80 million range?

Yes, we expect it to go down significantly in the second quarter as Jan mentioned.

Basically, I think, Robert, the way to think of that is we'll be operating pretty much at the same level that we ran R&D in 2006.

So we -- we plan to kind of hold it relatively constant at that level for the remainder of the year.

Okay.

As a corollary to that, you mentioned that the design -- the design industry of the 130 nanometer products has kind of flattened out.

And I'm wondering, Steve, is that a problem in the sense of new products and also as you look beyond 90 nanometer, can you talk about some of your plans to continue the technology road map and having the financial wherewithal to continue to invest in -- in new technology line with that and the like?

Sure.

First, I don't think it's a problem.

I think it's a natural fact of the business that products aren't in their design modes forever.

So, I think that's kind of a natural phenomena.

I also did say that I expect the 90 nanometer activity to more than fill the hole that's created as those designs go down.

The third thing is they're not declining yet.

They're -- they're slowing in growth.

So you need to kind of parse it by, we offer the nonvolatile products in 130 nanometer technology, which really is leadership technology for that market segment, and in SRAM technology there is more advanced technology available, and we are planning to fulfill that.

So again, I think it's a natural phenomena of the business.

The second question you asked is will we be able to continue to drive new technology?

And the answer is yes.

We have a fairly focused approach to the marketplace where we're concentrating not on all of the segments that are larger competitors are.

We have a strong approach in the nonvolatile area.

We're focused on the low-cost market.

And then we have a SERDES product which leverages what we're doing in the low-cost market.

So we do think that if we execute our plans and generate revenue out of these products that we will have the financial wherewithal to continue to invest in the areas that we've chosen to focus on, in a manner that continues to provide new technology to our customers in a timely fashion.

Can you kind of update us, Steve, on the nonvolatile low cost and SERDES?

How big you think those opportunities are and kind of some idea, I don't know how fast you can penetrate -- I guess the longer term potential you think in those markets and how substantial that would be to -- for Lattice?

Well, I think today that the nonvolatile part of the market is kind of a niche part of the market, but we do see it growing and potentially can account for 20% of the markets over time.

And so that that's an attractive area that's somewhat distinct.

The low-cost part of the market probably is about 30% of the market today, but I see it growing to 50%.

And really depending on how one architects low-cost products, it has the capability to address even a much broader part of the market.

Particularly if really those -- those products can cannibalize some of the higher performance, higher capacity devices in the marketplace.

And we've explicitly tried to do that by adding memory content and SERDES contents into -- and relatively fast I/O into a kind of low-cost fabric.

And that's been a successful approach for us as evidenced by the (inaudible) industry recognition that we received for the ECP2M architecture and really the design success we've had with that product in the very short time it's been in the marketplace.

So that really is how the market's defined today, but I believe that there's the potential to expand that sector over time.

The high end of the market is probably a similar magnitude as the nonvolatile segment, and so basically, we're addressing what you might find on the low end 40% or at the high end probably about 75% of the market depending on where the boundaries are drawn.

We believe our products allow growth and expansion of those -- those segments above and beyond how they're currently defined by the competition.

So really markets addressing -- addressing the market is not my concern because I feel that our products address a much larger piece of the market than clearly we own today.

And last question, if I might just quickly is, just comment on the status of your relationships with some of your large communications customers.

You said that it appears sequentially that the business appears to be picking up, and I'm just wondering how you're doing with some of your larger accounts?

I think we're doing well.

Okay.

And again, unfortunately, those accounts tend to have the largest design cycle and tend to be have a lot of decision makers involved.

But at all our large accounts, we have one sockets with out new products.

More importantly we've been elevated to a better supplier ranking position as a result of our 90 nanometer products at several of those accounts.

And I'm optimistic about the potential to engage deeper with those accounts in areas where our products make a difference to them.

And I do think there's ample opportunity to do that at those accounts which tend to be reasonably broad with respect to the product platforms and applications they target.

So, strategically, I feel comfortable with the progress we've made there.

Tactically, with regard to the current business levels that's actually really driven by their own end market demand and inventory issues in the channels which I've tried to describe.

And it really impacts our mainstream products, not our new products.

But I did try to provide in my prepared remarks my thinking with regard to where things are with regard to the short-term business trends with those communication accounts.

Thank you.

We'll go next now to Bill Dezellem at Tieton Capital Management.

Thank you.

We had a group of questions.

First of all, from a big picture perspective, the FreedomChip that you introduced here in this quarter, would you please detail the significance of this?

Especially given the implication is it may start to encroach upon the ASIC market which is certainly a sizable market.

Sure.

Basically, FreedomChip is not in a -- it's not a separate product offering but it's an architectural capability in our SC silicon in our software tool that really allows customers to have a seamless cost reduction path for high density FPGAs.

Customers really demand some form of cost reduction path for their highest capacity parts that typically cost hundreds of dollars.

And in the past, really, the only cost reduction path has been a conversion to a different piece of silicon, either an ASIC or structured ASIC or the like which typically involve a lot of design work, a lot of risk and it's really not a seamless process.

So -- so we need to offer that capability to augment the sale of our LatticeSC device and we feel that's important to gaining access to the high volume designs for that device.

And it's important to our customers to have that flexibility to be able to achieve cost reductions in their systems that happen to be successful from a volume standpoint.

So what we're doing with FreedomChip is really providing a seamless, a risk free cost reduction path that allows customers to migrate to a pin compatible device that is tested to their own specific pattern, all of the devices are programmable.

So it's tested to their specific design with an ASIC level of test coverage.

So we've built the capability into our software tool to allow utilization of again specific architectural features that we designed in our silicon to transparently to the customer build when's called a scan chain of registers within the customer's actual design.

So really, we can do this without a negative impact to the design, with no performance or utilization penalty.

And then if a customer so chooses, we can then provide a silicon device that's tested to their specific design with a very high degree of test coverage.

And more importantly with test coverage that's validated by industry standard ASIC tool, called Synopsys TetraMAX.

Now the downside is through the customer because things -- most things in this world aren't free is that we cannot guarantee a field reprogrammability because we're selling them a device that's tested only to their specific programmed pattern.

So really, this is only a capability that makes sense for high volume stable designs, which, by the way, are the designs that really are in need of cost reductions.

Of course an ASIC is not reprogrammable.

So we'll be offering this capability with minimum order quantities and a modest NRA charge to set up the test program that we need to do in our factory.

And, so, we think compared to the alternatives, it's much less up front effort and risk then an ASIC approach.

And we believe it's a better technical solution than the one offered by one of our larger competitors because it's using kind of the ASIC test coverage tool and the actual registers in the silicon to implement a scan -- a true scan chain in the design.

I don't know if that was overly technical but really, it's a -- it's an innovation that will allow kind of a better capture rate and adoption of our SC family.

That won't impact revenue in our current quarter, but it's something that we believe is important to allowing better and faster market adoption rate of our LatticeSC product line.

Steve, would it be fair to say that the target for this product is the ASIC market rather than some sort of existing FPGA market?

Yes, yes, but basically, the FPGA market is really encroaching upon the ASIC market as we as an industry make FPGAs cheaper and a higher capacity.

This really is a technique to help accelerate that trend, and as I said, I think it makes good business sense for us to and our customers who have high volume stable designs to do that.

So it extends the market of FPGAs and yes it does so at the expense of alternative technology, which [tip of] your ASICs.

That is helpful.

And then relative to the second quarter guidance, help me understand what we might be missing here, if quarter to date bookings are up 17% and billings at the distribution level are up 18%, that sounds like you're off to a mid -- mid to upper teens sort of start to the quarter that you're guiding 0% to 4% sequential increase.

Well the -- those two that was billing's last quarter so that would assume that distribution sells through all their inventory and I don't have perfect visibility into that.

Bookings are a quarter to date number, and bookings in the first quarter tend to start out relatively soft because of the holiday period.

So, it's a good start.

We need to have a good quarter from a turn standpoint and fortunately we've started in the right trajectory.

Thank you.

We'll go next now to Mr.

Danny Kuo at Bear, Stearns.

Hi, Jan, how much -- I guess of your gross margin is this was due to one-time items, and how much was it due to the mix?

It was about -- it was about 50% and 50%.

Mix was quite a bit and the one-time item so it's about the other 50%.

So roughly in that order of magnitude.

Sure.

So if you look at the gross margin guidance, 55% to 56% for the quarter, you think you bought a longer term perspective dragging itself going forward, or is it just -- am I missing something here it might get back up to 60%?

We said all along, Danny that our gross margin target was 55% to 60%.

We -- we're pricing our new products for penetration and we expect with yield and wafer price projections to earn corporate targets on those products as we drive them into volume production.

So, Jan discussed the reason last quarter why we will be able to rebound this quarter the longer term trend.

We believe can be up if we continue to drive yield improvements and cost reduction, which obviously is a key goal of our operation's organization.

And as we pointed out in the past as well, there is some component of costs that are fixed and that tends to be spread more effectively over higher revenue dollars and that's a positive thing that derives from revenue growth.

That's our target and we'd expect to stay within that and drive upward if we're successful on all of the fronts I outlined.

Got you.

How much can -- typically can yield improvements skew your gross margins on a quarterly basis typically?

It depends on the magnitude.

I mean it depends.

So we're running 12 processes and multiple assets and so it's hard to answer that directly.

I will say that our yield started out fairly erratically with regard to our new 90 nanometer products and that's been brought into control from a variability standpoint and we're now kind of on the trend line where we want to be and we hope to improve yield significantly through the year.

I'd say we're about kind of half way through our ultimate goal.

I'm confident from the engineering standpoint that the goal is achievable by the end of the year.

So we'd expect steady improvement towards our target throughout the year.

Got you.

And just on the FreedomChip, now would that path be in line with your (inaudible) margins?

Yes.

Won't retard our margins.

Probably would slightly expand our margins.

Okay.

And so lastly, I mean, do you guys believe you can get back to GAAP profitability for the entire year '07?

That's dependent upon revenue growth, and again, we're focused on new driving our revenue upwards with our new products, controlling expenses and its revenue growth dropping down 33% to 40% of the growth into the operating profits.

Thank you.

Yep.

(OPERATOR INSTRUCTIONS) We go next to Brian [Thon] at SAC Capital.

Hello, gentlemen.

Hi.

Hi, Brian.

Few questions for you.

First off, (inaudible) introduced a nonvolatile product in FPGA, looks -- looks to compete head to head with your LatticeXP family.

Can you just talk a little about your competitive positioning versus that product as you understand it.

Sure.

Their product really is not a product that's based upon nonvolatile process technology.

What it is, it's a repackaged volatile product with a flash memory packaged in the same package.

So really, that approach is an interesting approach, but I believe it has several significant disadvantages towards kind of a true nonvolatile part.

It obviously leverages their existing product platform, so that's probably why they did it.

But if you look at what the value is of a nonvolatile FPGA, it's really security, the fact that the device functions very quickly upon power up, the fact that the device can be more seamlessly programmed in the field and upgraded without powering off the system and fourthly there's some board savings and some cost savings because it's a single chip solution.

Really by implementing what's called a stacked-eye approach, they are really only solving or providing one of those benefits which is a single chip solution.

Doesn't do much for security because you can really decap the part fairly easy and you have the flash prong there.

From an instant on standpoint, it doesn't really accelerate the time which the FPGA gets loaded with the pattern, they are just moving the prong from a few inches away to kind of a millimeter away.

And we all know light travels very quickly.

So really the loading problem isn't really solved in that matter, because is still loading the same algorithm through the same interface to the chip.

And then, finally, it doesn't help a field upgrade solution at all.

Then there's additional disadvantages the bigger which is you cannot offer multiple package options within a given density, so there's only a single package option for a given density count.

If you look at every other family in the programmable logics space, the FPGA space, the intensity three packaged combinations for every different density point that allow users to migrate upwards and downwards while holding the same pin out to achieve a higher density or a smaller density part, smaller density if they want to get a cost reduction, because their design is not as big as they budgeted for, or a larger density part, because their design grows and they don't want to relay out their board.

So the (inaudible) approach really fails to provide any pin migration and that's a big deficiency.

So nonetheless, I think it's a double-edged sword.

It's never good having competition, but at the end of the day, I suspect having a company with many multiples of our market share, advertising the need for nonvolatile parts will create more opportunities for us to bring our solution to some customers we may not have been able to unearth on our own.

So I guess in a way I'm happy they validated our approach to the market and we believe we have a superior technical solution.

So that's how I'd summarize.

Great.

And just kind of housekeeping question, what turns requirements is required to make your number this quarter?

It's about 60%, we did 62% last quarter, up from 35% the quarter before.

That's well within kind of the norm for our business and kind of a -- I would caveat recovering market environment.

Though it's a bit higher but I think within the patterns that the business is demonstrated in the past and positive market environment.

Great.

Thank you very much.

Sure.

We go next now to [Siev Julie] at Goldman Sachs.

Hi, thanks.

Steve or Jan, just in terms of, if I think about the new products currently what percentage of that do you think is driven by what's down sort of prototyping phases versus what would be in production, or in product production at this point?

I don't have the ability to parse things at that level.

I think the best guidance I could give you would be to use the status of the sockets.

So 20 -- 20% is probably driven by production revenue and probably the other 80% by prototyping revenue.

That would be my best guess.

Okay.

And then in terms of the portion that's in the prototyping phases still, how do you see the end product ramps?

Are those still sort of consistent with the expectations there and the timing of those, or does the limited visibility in the market and some of what's going on at certain customers --

They're slower than I would expect.

Things -- things in this world unfortunately -- especially in the engineering world tend to push out.

Very few things tend to pull in.

So -- so we pulled all of the designs every quarter.

And I give you those statistics.

More things push out than are cancelled or pulled in.

I guess you never know which one's going to be the home run sort of end product either as well.

That's for sure.

Great.

Thanks, good luck.

Sure.

We'll go back now to Mr.

David Duley at Merriman.

Just a coupled quick followups.

Is your guidance this quarter impacted by the large networking customer that's put into a fairly significant inventory program?

No.

Okay.

And does the -- Jan, you might have reviewed this, but just what was the nature of the one-time items that impacted gross margin this quarter?

What did you write off?

And what was the size of the write-off?

We -- we're doing an on is an obsolescence program for this year.

In anticipation of that, we wrote off some -- some inventory.

And that was about .5% of the margin.

So and the .5%, I know I can calculate, but what was roughly the dollar amount of inventory write-off?

It's small.

Okay, great.

It was in the few hundred thousand dollar range.

That's what I kind of figured.

I wanted to make sure I was in the right ballpark.

And final question from me and -- or actually two.

And two clarifies.

What is the size of your NOL now, and do your margins, are there -- are the gross margins of your FPGA families higher or lower or the same as your corporate gross margins?

Jan can answer the NOL question.

Just answer the NOL question first.

We have a very large NOL.

It's over 100 -- $200 million.

So it will take a while to work it off.

And how I interpret that is you won't pay taxes on $200 million on cash earnings in the United States?

That's correct.

And that would go on the balance sheet with that $200 million, divided by your tax rate?

It's not on the balance sheet now, right?

It's not on the balance sheet now.

Okay.

And the FPGA stuff?

So the FPGA business is typically on average has higher gross margins than the PLD business slightly, so that's the direct answer to your question.

But within the FPGA business the older more mature products are higher margin than the new products.

So --

I guess you would hope as your FPGA business becomes a larger percentage of revenue that might help your gross margin trends?

It won't hurt.

Okay.

Great.

Thank you.

Sure.

We'll go back now to Mr.

Bill Dezellem at Tieton Capital Management.

Thank you.

We wanted to circle back to the 10,000 design wins which you had noted earlier in the commentary, and you'd mentioned that of those 10,000, I believe if we heard the number right, 57% were from new customers.

And we are curious, is there a difference in the rate of adoption of these new customers versus your existing customers?

And whether that would be speed of adoption between the design and the prototyping phase or the prototyping to production?

I don't know the answer to that.

I would expect not.

But I can tell you that in 2005, we were attracting kind of a 40% new customer rate and that's gone up to 60% in 2006.

So you do not tend to find this from a general qualitative perspective that once they make the design win decision tend to be a bit more cautious?

Only because an older customer, and again, this is the qualitative viewpoint, Bill.

But an older customer, there is a higher probability that you're -- that he's using you for a design spin or some sort of modification to an existing production program.

Those tend to have shorter adoption cycles than kind of a design from ground up.

So, by definition with the new customer, we're either starting a design from scratch, kind of a white board or the customers converting from a incumbent FPGA vendor which is not Lattice.

And both of those things probably would -- now that I think about it would tack a little bit longer than an existing customer's just updating an older board.

Now existing customers also do Greenfield designs or kind of new projects as well.

So -- But I don't have any data to tell you, Bill.

That's helpful.

And then more for me, another big picture perspective.

Do you look back over the last three to five years and your endeavors in the FPGA arena.

What has gone better than you originally anticipated and what has gone worse than you originally anticipated?

Well, I think clearly in retrospect, our first foray into the market was no particularly well thought out with regard to our first generation products.

Those didn't deliver the revenue we thought and planned for.

So that's probably what I would highlight as not having gone as well.

That being said, I think what has gone well is I think we've done a very good job at defining products and executing on the second and third generation of products in terms of rolling out products that are well received, well designed, well conceived, differentiated and done so in a pretty steady and consistent fashion that's very impressive for a company of our scale.

Frankly, if you talk to any independent industry observer who either sells or distributes or follows the FPGA technology, I think people would say that that's been fairly impressive.

Our 130 and 90 nanometer rollout.

That's something I'm proud of and I think has gone well.

I, of course, would have liked -- I would like to have more revenue sooner from those products, but I think that's a function of customer design cycles and the things that we've discussed.

So that's how I would answer your question, Bill.

Thank you again.

(OPERATOR INSTRUCTIONS) We go back now to Brian Thon at SAC Capital.

Hi, guys.

I'll try to tease maybe a little bit more on the design side.

You mentioned, Steve, that I'll get that terminology wrong, but basically your 90 nanometer products have now gone into a kind of production phase.

Once that happens and things have kind of been nailed down production wise, is this a time when you start to see more a steepening of the revenue ramp?

I would assume yes, but is there anything we can take from the 130 nanometer ramp?

No.

The terminology is an operating terminology from the company.

It's really distinct and decoupled from customer order accounting.

I don't want to go down that path.

It's a necessary step that a company -- a silicon company goes through to satisfy orders from its customer base.

I think it's positive that we did that for all three families and demonstrate our ability to make available a qualified reliable and hearty device that meets our data sheets.

So, that I think stipulates additional design activity of course because customers would like to be assured that when they go into their production that devices will be available consistent with the data sheet.

That's all that means.

Doesn't mean that people are going to order them any faster or anything of that nature.

It's really decoupled.

Okay.

Very good.

Thank you.

And gentlemen, it appears we have no further questions this afternoon.

I'd like to turn the conference back to you for any closing comments.

That's it from this end.

Thanks.

Please follow up with the company if you have additional questions, and we'd be proud to answer them.

And again, that will conclude our conference for the day.

We thank you all for joining us.

Wish you all a great afternoon.

Good-bye.