萊迪思半導體 (LSCC) 2007 Q2 法說會逐字稿

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

Copies of the Lattice Semiconductor Corporation second quarter ending June 30th, 2007, 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 conference over to the Chief Financial Officer, 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 would like to read a Safe Harbor statement, and then give a financial review of the second quarter.

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

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

I will now read the Safe Harbor statement.

This conference call may contain forward-looking statements within the meaning of the Federal Securities laws, including statements about 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 pricing pressures, competitive actions, demand for our product, and the ability to supply products to customers in a timely manner.

The potential impact of design activity on future revenue is inherently uncertain because it's unknown whether or when any particular design may ultimately result in 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 cost 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 hereof, or to reflect occurrence of unanticipated events.

Let me now turn to the second quarter financial results.

Revenue for the second quarter was $59.2 million, up 2% from revenue of $58.1 million in the prior quarter, and down 6% from the $62.7 million reported in the same quarter a year ago.

Gross margin for the second quarter came in at 55.1%, slightly above the 54.9% we posted in the first quarter.

The sequential change in gross margin was primarily due to the absence of the one-time items we experienced last quarter, and by mix changes.

In the second quarter, we sold a greater proportion of new products, which carry gross margin below the corporate average, and a reduction in mature products, which carry higher margin than the corporate average.

Quarterly R&D expense was $20.8 million, which included $0.7 million in stock option expenses, and was down $1.3 million from the prior quarter.

The decrease in R&D expenses was mainly due to lower [mask] costs and engineering wafers in the second quarter.

The operating expenses came in slightly higher than our Q2 guidance of $35 million, as we had one more mask in Q2 than we had budgeted.

We had better than expected initial results on the LatticeXP2 family, which allowed us to [tape up] the last product in the family in the second quarter.

Quarterly SG&A expense was $14.8 million, including $0.5 million in stock option expense, and was up $0.2 million from the first quarter SG&A expense of $14.6 million.

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

Intangible asset amortization for the third quarter will be slightly down at $2.5 million and the total for 2007 about $9.8 million.

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

Total stock-based compensation expense for the second quarter was $1.3 million, slightly down from $1.4 million in the first quarter.

Other income for the second quarter was $4.3 million, and included a $0.4 million gain related to the repurchase of the zero coupon convertible notes, and a $1.6 million gain related to the sale of a [land investment].

We recorded tax provision for foreign taxes during the second quarter of $181,000 primarily related to our foreign subsidiary, which was essentially flat compared to the prior quarter.

The Company currently has the benefit of significant net operating loss carry-forwards, and therefore we do not expect to pay U.S.

federal income taxes in the foreseeable future.

We expect to record a quarterly tax provision for the remainder of 2007 in the $150,000 to $200,000 range.

The June quarter net loss was $1.5 million or $0.01 per share, an improvement over the $4.4 million loss of $0.04 per share we posted in the first quarter, and compared to net income of $2.1 million or $0.02 per share for the comparable quarter a year ago.

These results include total charges of $4 million, $3.9 million and $3.4 million respectively for the amortization of intangible assets, stock-based compensation expense 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 $2.6 million.

This compares to net loss of $0.5 million posted in the first quarter, and net income of $5.5 million posted in the comparable quarter last year.

Turning now to the balance sheet.

Cash and short-term investments at June 30 were $165.2 million, down $4.4 million from March 2007.

During the first quarter -- during the second quarter we used $8.7 million to repurchase our zero coupon convertible notes.

We have now repurchased $120 million in principle amount of the zero coupon convertible notes and the outstanding balance at June 30 is $80 million.

Net operating cash flow for the second quarter was $3.7 million.

Accounts receivable at June 30 was $29.7 million compared to $28.7 million at March 31st, and days sales outstanding remains close to our target of 45 days.

Inventory decreased $2.1 million from March 31st to $38.2 million at June 30, and remains slightly above four months on a cost of sales basis, close to our target range.

We spent $2.9 million on capital expenditures during the second quarter, mostly for manufacturing equipment and tooling, and the quarterly depreciation expense was $3.4 million, flat from the prior quarter.

Deferred income at June 30 was $7.3 million, down $0.3 million from March 31st.

This concludes the financial review portion of the call.

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

Thanks, Jan.

Last quarter we saw strong growth in our strategically important FPGA business as a result of improved conditions in the communications end market, and more significantly, accelerated growth of our new products.

Total revenue came in within range of our original forecast issued at the beginning of the quarter, and grew 2% sequentially to $59.2 million, as Jan mentioned.

FPGA product revenue established a new record level at $13.5 million or 23% of our total revenue, which is again, a new high for the Company in terms of mix of FPGA revenue.

And that revenue grew 14% on a sequential basis and 4% on a year-over-year basis.

These growth rates were significantly above the FPGA market, which during the second quarter, we estimate grew only modestly on a sequential basis for the industry, and declined about 5% on a year-over-year basis, again for the total industry.

Our FPGA growth was driven by our new 130 and 90 nanometer products, which posted approximately 50% sequential quarterly growth, and in particular by our nonvolatile 130 nanometer LatticeXP family, which more than doubled when compared to the first quarter.

In addition we also benefited from growth in our first generation FPGA product families, as those products experienced a rebound in orders from major communication customers during the second quarter.

Growth in those two product areas, first generation products, and then our new 130 and 90 nanometer FPGA products, which collectively represent our internally developed FPGA products, more than offset a significant quarterly decline in our legacy ORCA products, which we acquired in early 2002.

As you may recall, in early 2006 we announced plans to obsolete certain older ORCA products.

Most last time customer shipments for those obsolete products were completed in Q1 of 2007, and thus revenue from those products declined significantly during Q2.

The remaining non-obsolete ORCA products now account for approximately 15% of our total FPGA business.

PLD product revenue accounted for $45.7 million or 77% of revenue, and declined 1% sequentially and 8% on a year-over-year basis.

We posted growth within our newest PLD families, namely the MachXO, the Mach 4000 and our mixed signal product lines.

However, growth in those families was more than offset by declines in our mature PLD families.

In aggregate, new products accounted for $6.5 million last quarter or 11% of total revenue, and grew 35% sequentially and 85% on a year-over-year basis.

And the mix grew from 8% in the first quarter to, as I mentioned, 11% in the second quarter.

Mainstream products, which accounted for 50% of revenue last quarter, grew 7% sequentially and 3% on the year-over-year basis.

Growth in this product category was primarily driven by our first generation FPGA products, as well as our Mach 4000 CPLD family, within our major customers in the communication end market.

Mature products, which now account for 39% of revenue, were down 9% sequentially and declined 24% on a year-over-year basis.

This decline was primarily due to the absence of last time buy revenue within our ORCA FPGA families and a general decline in mature PLD families.

Geographically during the quarter, Asia made up 58% of the revenue and grew 9% sequentially.

Although we experienced softness in Japan, we saw growth in other areas of the region, in particular China and Korea.

Business in China benefited both from local demand, as well as increases in transfer business, primarily from European communications OEMs.

The Americas accounted for 24% of revenue, grew 3% sequentially, while Europe made up 18% of revenue and declined 17%.

The European decline is really attributable to issues of primarily the accelerated transfer business to Asia, as I spoke of, and to a lesser extent, a decline in ORCA product revenue, that I also spoke of earlier.

Revenue by end market for the quarter was as follows: communications 52% of revenue, computing 13%, consumer 11%, and industrial and other 24%.

The communications end market grew 19% sequentially, reversing a trend of two sharp declines that began in the third quarter of 2006.

As we predicted during the last quarterly call, we saw a general recovery in our communications customer base, which was led by our largest accounts.

These accounts have now, for the most part, completed their merger-related supply chain consolidation and reshuffling activities, and have resumed consumption of our products.

Quarterly revenue within our top 15 communications accounts grew 21% sequentially, but it still remains below peak revenue levels established for those accounts in Q2 of 2006.

We anticipate continued sequential growth from these customers in this end market as we continue to return to a more normal business posture within the communications end market.

The consumer market grew 9% sequentially, due primarily to seasonal recovery from a soft Q1 and strength in Asia from customers in the display market.

The computing end market was flat on a sequential basis, with no notable trends.

On the other hand, the industrial and other markets experienced a sharp drop last quarter, declining over 20% sequentially.

We saw general weakness in the military and tester end markets after two strong quarters in those segments in Q1 and the last quarter of 2006.

And additionally, as the ORCA product revenue is primarily concentrated in this sector of the market, the absence of the last time buy revenue had a large negative impact in Q2.

Turning to our recent product development activities.

At present, the majority of our 90 nanometer SRAM-based devices have passed qualification tests and have been released for production orders by our customers, and we expect to release the handful, the few devices that remain this quarter.

In addition, last quarter we an announced a new 90 nanometer product family, the nonvolatile LatticeXP2 family.

This family is essentially a sequel to our successful 130 nanometer LatticeXP family, and as such, it offers the traditional benefits of sequel product families.

That's to say, higher density improved performance and most importantly, lower cost per function.

In addition, we have dramatically reduced power consumption and made several important enhancements to our nonvolatile programming technology in response to customer requests.

The LatticeXP2 family has two strategic objectives.

First is to increase our penetration within those customers who have already adopted our XP product family.

And second, to expand our penetration in the overall market by driving the adoption of nonvolatile products by additional customers who either need higher density parts or lower price points in order to switch from their legacy SRAM-based devices.

We're on schedule to sample the first two devices from the XP2 family during the current quarter, and plan to have the entire family available by year end.

If we accomplish that goal, it will mean a two year window, a two year time gap between the release of the 130 nanometer XP products and the 90 nanometer products, which in my mind, is very good execution with regard to a follow-on product line on the new process technology node.

And that's good work by the Lattice engineering team, working in conjunction with our foundry partner, Fujitsu, whose process technology expertise in the FLASH memory area really makes these products possible and allows us to offer the most advanced nonvolatile products in the marketplace today.

I want to close my prepared remarks with our third quarter of 2007 financial outlook.

We expect to see continued new product growth and improvement in the communication end market during the third quarter, and consequently, we expect continued growth in our FPGA business, as well as in our overall revenue.

As most of you are aware, the summer quarter is typically a slower quarter for our industry.

However, we do have a growth outlook for the following reasons: Our direct backlog is slightly up going into the quarter, and more importantly, we have strong forecasts from the large communication customers with whom we have direct business relationships.

And finally, we do expect to see continued solid growth from our new products, as historic customer design-ins continue to transition to volume production orders.

We currently estimate our third quarter revenue will be flat to up 4% on a sequential basis.

Our turns estimate for the third quarter is approximately 60%, which is consistent with the 60% we achieved in the second quarter, and in line with historic levels we have achieved in similar historic periods of positive market conditions.

For the rest of the P&L we currently have the following expectations for the September, 2007 quarter: We expect gross margin as a percentage of revenue to be approximately 55% to 56%.

We expect total operating expenses to be more or less flat.

We expect approximately $3 million in other income.

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

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

Operator, we can begin to take questions when you're ready.

(OPERATOR INSTRUCTIONS) Chris Danely, JPMorgan.

This is [Larissa Polisha] calling for Chris Danely.

I was wondering if you could talk about your OpEx trends going into Q4 or just following Q3?

Do you see them flat sequentially as revenue grows?

Or are they going to grow with revenues?

Our intention is to continue to hold R&D relatively flat.

It came down in the second quarter versus the first quarter as we finished a lot of engineering expenses associated with our 90 nanometer product rollout, and we see that more or less flat through the year.

There should be some slight upward trend in SG&A because there is variable cost associated with revenue level, and assuming we continue to grow revenue, those costs should trend up.

And additionally, we're planning to provide our employees with a well-earned raise in the summer timeframe.

Okay.

Also, can you -- do you have an actual book to bill number?

We don't give that out, but our book to bill was slightly above one for the second quarter.

All right, thank you.

Seogju Lee, Goldman Sachs.

Encouraging activity on the new product, Steve.

Just if we could delve into that a little bit.

Was there any significant, like the number of programs that ramped?

Or how should we think about the growth in the new products this quarter, was it just as they moved to production or is it just increased prototyping activity?

I think it was both.

As most people are aware, we do have a substantial number of historic designs across all our 130 nanometer families.

And as I pointed out in past calls, those designs are really mostly still in the prototyping phase.

So, we have seen growth in our products, mainly in the 130 nanometer products as those designs move into production and we're layering on prototyping revenues from our 90 nanometer products, which have been good contributors to our revenue growth.

So, we did have another good quarter of design-ins last quarter, as overall design-ins continue to grow.

And 90 nanometer design activity obviously, was especially strong.

As I indicated last quarter, the 130 nanometer products are really starting to plateau.

But we do feel that we have a significant number of very competitive 90 nanometer products that can more than take up the fall off, the natural fall off of the 130 nanometer products and continue to drive strong overall design activities.

I'll give the same statistics, which I have tended to give, as I've done another roll-up.

At present, only 19% of our historic designs have entered production.

That's actually lower than it was last quarter because we got more designs.

And 50% of our historic designs are in what we would view to be the prototyping stage.

And the remaining 31% of the designs have been lost for one reason or the other.

Again, that's consistent with our expectations.

And ultimately, if we stop developing new products, I would expect the designs to be lost, to stabilize at about 50%.

But those are the metrics that I have given out.

And we continue to look for a good revenue ramp from our new products as those historic designs continue to move into production phases at our customers, and they increase in order production quantities to support their product rollouts.

Great.

That's very encouraging.

And then just if we could look at the near term outlook, Steve, a little bit.

You talked about coms and the expectation that that would continue to grow in third quarter.

But can we also just look at how you're thinking about the other business segments?

Thanks.

Sure.

The computing market was more or less flat, as I stated.

I do think that that can grow for us longer term, because we feel like with our products that are new, particularly the XO product line, that we have been able to garner some good designs in the server area.

So I think that's a growth area.

The consumer markets did grow sequentially, as I mentioned.

And seasonally it tends to be stronger in the third and fourth quarter, and slower in the first and second quarter.

So I expect that to contribute some increased growth, particularly as we move to the end of the year.

The industrial markets, historically has been a big driver of growth for us, and we did kind of have a blip last quarter, which I attribute to a couple strong quarters in the military market and the tester market in the first part of the year and last half of last year, and that's sort of pause.

But I do believe that particularly with our nonvolatile product offerings, we have a good ability to penetrate that market and enjoy kind of a longer term growth from that.

So in the short-term, I feel the communications and consumer market can drive growth.

And in the longer term, I'm actually reasonably confident that there are decent growth prospects in all the end markets that we target, either because those markets are generally right markets for programmable technology, or in the case of -- in particularly the computing market, I believe our design position has improved over prior generations of product.

And so I believe we can gain share in some of those markets, as well.

So in 2008 I see, assuming normal economic conditions and those caveats, I see good growth coming out of all our target markets.

Great.

Thank you and good luck.

David Duley, Merriman.

Yes, a couple questions from me.

Have you mentioned in the past -- or I was just kind of wondering, give us a historical reference.

Do you think your 90 nanometer design funnel has been a little bit steeper than the 130 nanometer design funnel?

I haven't given out metrics and I won't at this time.

We will consider doing that in the future.

But qualitatively, I do believe it's a better funnel because of the quality designs.

As we gained experience in the FPGA market, we have been able to target, I think a better and more profitable opportunities for our product.

And in addition, I believe our 90 nanometer products are quite competitive.

And in particular, our ECP 2M product, which experienced very strong design growth last quarter, designs from that product line more than doubled sequentially.

To remind everybody, that's a low cost product where we really are leading the industry by adding three things that haven't really been present in low cost architectures.

One is ample memory.

We put memory blocks that are more consistent with the higher end, in terms of the amount of memory, more consistent with the higher performance devices offered by our competitors.

We're offering a high performance DSP block in that architecture that's again consistent with the high performance architectures of our competitors.

And we have also added SERDES I/O to that product line, and furthermore engineered the SERDES to be very low cost and low power by targeting the [three and an eighth] gigabits and below market, which allows us to offer that product in very low cost packaging.

And then finally, we have enhanced the performance of the I/O on that architecture to handle very high performance memory interfaces and communication protocols just in the standard I/O.

The combination really makes that a very attractive part to service and manage bridging functions in high volume, cost sensitive systems like cost reduced base stations, and other communication applications that need to drive high volume.

But, I think we have actually hit a -- and also it addresses the burgeoning PCI Express interconnector market.

I think we have really hit a sweet spot in the market with that product family, and I'm quite excited about that and feel that we can be very successful with that.

So it's a little too early, Dave, to quantify the trajectory versus the 130 nanometer, just because of the small number [phenomenon].

But I do think ultimately we will actually have more designs from the 90 nanometer node than 130 nanometer node.

But I am very confident that those designs will be higher quality than the 130 nanometer designs because of the competitiveness of the product portfolio.

So to summarize, they're clearly higher quality designs and hopefully you end up with more of them when it's all said and done over the same timeframe?

Right, and our focus is on the former.

Because I'm really not interested in driving numbers just for numbers sake.

Ultimately, as you guys know and I'm very focused on, those designs need to turn into revenue, and meaningful revenue.

Otherwise the business aspect of this enterprise, which is what it's about, is not going to work.

Today what percentage of your revenue comes from 90 nanometer products in the new product area?

It's very small and we don't disclose that.

So we do tell you what percent come from our new product category which is -- the majority of that is made up of our new FPGAs, and that's 11% as of last quarter.

I guess what I'm trying to at here is at 130 nanometer, you've clearly have got a huge rack up of design wins that's coming to production, and that's most of the revenue now.

But it sounds like the 90 nanometer funnel is even stronger.

We can't see that revenue yet, but when it hits, it should be a little bit higher trajectory than the 130 nanometer.

We will see.

But yes, I do believe we have a good follow-on products that can continue to drive new product growth.

And we need to do that.

But that's why I'm very confident that the new products will continue to grow.

Just one more thing from me and then I will pass it on to somebody else.

You did -- your new product sequential growth this quarter was significantly higher than both of your bigger competitors.

And I'm just wondering if you could take a moment and tell us why you think you were able to achieve that, and which applications or end markets really differentiated you in this current timeframe?

Again, I think it's important to point out, as you did that the bulk of that growth is still coming from the 130 nanometer products really, and it's because we have a successful nonvolatile product that's differentiated.

And as I've pointed out in the past, it's really not dependent upon specific applications that are different and distinct from general applications for the FPGA market.

So we're seeing good success with those products across the spectrum of applications that are typically served by FPGA markets, and those tend to be in the same revenue mix as our current business mix.

So about half in the communication area, 10% or 15% in the computing area, 10% or 15% in the consumer area, and the rest in kind of a mix of industrial and other markets.

Thank you.

(OPERATOR INSTRUCTIONS) Bill Dezellem, Tieton Capital Management.

We had a group of questions.

First of all, relative to your communication customers, OEM customers that is, you'd mentioned that you felt that their situation was normalizing.

May we read into that that you believe that the inventory, excess inventory that they have -- that they did have, has been worked off?

And it that's not a correct assessment, would you please give us an inventory update?

And then secondarily, the R&D fell as a percentage of revenues and on an absolute basis versus the first quarter, and that's in light of the fact that you had one extra mask that you had not anticipated in the second quarter that did take place.

Can you kind of provide us the fill-in details there, please?

Sure.

Correct.

And so first focusing on your first part of the question, the communication market.

I do feel that the inventory issues we're beginning to experience in Q3 lingered in Q4 and began to be cleaned up in Q1, are now behind us.

I do think we saw the bottom of the communication market.

It's easy to say that now in retrospect in Q1.

But last call, we indicated that we believed it would be the bottom.

And a lot of that was driven by merger activity in the communications infrastructure market and at the service provider.

And it did take some time to consummate and get back to normal for those customers from a business standpoint.

They also took the merger as an opportunity to really reshuffle, consolidate and optimize their supply chains.

All those actions really compressed inventory.

And now as we exit Q2, it's very clear to me that the supply chains are now back up and running and been moving back to a normal business posture.

The way that I can tell that, is if I look at the business level from Q1 to Q2 in our top 15 accounts, which tend to include all those accounts that were impacted by merger activity, the consumption in the business level grew 15 -- 21% sequentially, which was higher than the communication market growth of 19%, and clearly grove that growth.

With regard to inventory, I do feel inventory is fairly lean.

And again, I don't have perfect visibility into that.

And I don't believe I will ever have perfect visibility.

But currently our lead times are in the normal range, kind of two to six weeks, depending on which part.

And we're seeing a lot of strong demand, increasing forecast and expedite requests from the communication markets as they kind of return to a more normal business posture.

So I think we're clearly moving back to a more normal standpoint in the industry, in the communication market.

Longer term, obviously growth is going to be dependent upon design activity, and share trends within that industry.

And I do feel that there is ample opportunities to participate in new design activity in the communication end market.

And I believe our product is well suited to serve those customers.

So I answered an earlier question about longer term growth trends in that market, and I do think it's going to be a growth area for us and for the industry.

With regard to R&D, R&D did come down.

And that's because we're nearing the completion phase of R&D efforts for our 90 nanometer product.

Jan did mention that we chose to release an extra mask set that was budgeted in Q3 for Q2 for the XP 2 product line.

And that's because we had very good results with regard to validation and characterization of the first devices in that family, which you would expect when you do a sequel part, hopefully you should get better.

There should be an experience and learning curve.

And we did a good job getting those products designed and characterized on time.

And they happen to be fully functional, and we were able to release the extra masks so that we can get the full family into product -- into market quicker.

So, without that, obviously the R&D amount would have been a little bit lower, but then it would have been a little bit higher in the current quarter.

Putting all that together, we feel that the R&D will be flat to slightly down in the third quarter.

And then circling back if we could please, to the com customers that have gone through mergers.

Presumably when those mergers took place, you did not have an equal presence in the merging parties.

And assuming that that is accurate, are you finding that you are gaining an additional or better position in the merger partner that you were weakest in of the two?

Or is it too early to see whether anything materializes there?

It's a bit too early.

I can say that we have not lost position as a result of the mergers.

And really, I think position in the accounts for us is more predicated upon the attractiveness of our product portfolio and road map.

I believe that that's -- I commented earlier that our 90 nanometer products I think are highly competitive.

And I think that is a bigger driver of our position within an account, rather than just kind of a merger or reshuffling from that activity.

But we're not losing position in any account that I'm aware of.

Great, thank you.

Louis Gerhardy, Morgan Stanley.

This is [John Ahn] calling in for Louis Gerhardy.

Let me kind of get back to the design win.

I know in the past, you kind of quantify the number of design wins.

It sounds like obviously, this past quarter you grew your design wins again.

In the past, I think cumulative was about 10,000.

Can you quantify that again this time around?

The design-ins grew and established a new record.

I'm trying to shy away from providing specific design win numbers because I think revenue's more important, and we're trying to increasingly focus on that.

But designs did grow and establish a new record.

Those of you who track that can usually estimate what the design-ins were last quarter.

But we're happy with our design win performance.

And we believe that if we can stabilize designs at about a 2,000 per quarter level and transition that to the 90 nanometer products, that that's a -- sets a good foundation in place to continue to grow the new product revenue aggressively.

Okay.

That's fair enough.

Kind of going along the lines with design wins again, or actually new products, I'm just kind of curious about the design cycle that you're seeing for some of your new products, especially now that the designs that go into your newer products, the newer FPGAs are a little bit more complex than before, especially with the legacy type of products.

Do you think those design cycles are actually stretching out a bit from the past?

I do.

Unfortunately the design cycles are longer than I would like.

But they tend to be on the short end, 18 months, on the long end, up to three years.

So that's what we're experiencing is obviously varies all over the map.

But more importantly, after that occurs, an end customer system goes into production, there is their own revenue ramp of that new system.

Putting -- and then of course, every customer is not designing at the same time.

They have design cycles, where they're starting a new architecture, doing development, releasing a product, optimizing a product for mass production and so forth.

So design cycles -- design windows don't open at customers every quarter, every six months for that matter.

But putting that altogether, John, my view, which I think I've expressed before and I'm definitely not changing it, is that an FPGA product family will not see peak revenue until six years after the release of a product family.

It's just the nature of our industry, and the nature of the customers we serve.

So, I do believe given the number of new products we have introduced, the competitiveness of the new products, and the design activity we have been able to drive and participate in with our customer base, bodes well for new product growth, new product revenue growth over the next several years.

Okay, sure, that's great.

And if I may, just one more question, kind of changing gears a little bit.

In terms of just booking activity, or [disti] activity, I think last -- at the end of last quarter, it sounded like disti inventory was pretty lean, and they started to really build up a lot more.

So how did it go in in past quarter?

Well, Jan mentioned the deferred income was down a bit, that's probably the best measure on the balance sheet of distributor inventory.

Distributor inventory is a little over one month.

It did go down a bit.

I attribute that to our distributors being cautious going into what is typically a seasonally slow period for our industry.

So distributor inventory is well within normal ranges, and down slightly from last quarter.

Okay.

Great, thank you.

[Brian Fahn], SAC Capital.

Three questions for you.

First off, do you believe that you are shipping -- under-shipping consumption, or do you think that consumption is roughly equal to what you're shipping today?

I think it's roughly equal to what we're shipping today, and that's because our lead times are fairly short.

Got you, thanks.

Second, on the new product front, in the past you've talked a little bit about competitive entrants that have -- they've kind of taken aim at some of your new products.

And sometimes when that happens, everyone thinks the new product -- the competitive product that is going to come out from the more established competitor is going to be the latest and greatest, and better than anything else.

Now that we have actually seen those products come out, can you just kind of walk us through a bit how your product lineup compares with some of these recent introductions from the competition?

Sure.

They say imitation is the sincerest form of flattery.

So I'm pleased that most of our new product innovation are being imitated by our larger competitors with three or four times the R&D budget and product definition budget of us.

So we talked last time about a new offering in the nonvolatile space.

I'm not going to reiterate that, but I do feel strongly that if a customer seeks the benefit of a true nonvolatile FPGA, we have a very good story to offer and a very competitive product line.

And now we've introduced in a very timely manner a 90 nanometer product.

And I think that gives customers confidence that we will continue to innovate and enhance our nonvolatile product line.

So if they adopt those, seeking the benefits that only we can offer, that they can continue to see a road map and continue innovation from Lattice in the nonvolatile area.

And again, those products are really made possible by the foundry technology we have access to through Fujitsu, which is not, I believe, commonly available in the foundry market.

The second product, and I alluded to this in an earlier question, is our ECP 2M product, where we have taken the initiative to define a new class of products targeting what we believe will be a very attractive segment in the market.

In fact, I would go so far as saying that over the next two to four years, it will be the fastest growing part of the market, that's low cost PCI bridging applications.

And similar to the competitive introduction in the nonvolatile space, we saw another competitor introduce a new product offering into this space.

But despite a competitive [complaints] I don't see any real competition for our ECP 2M device.

In this case, our competitors introduced a repackaged high end device that's been software disabled in order to have less features and lower performance than its higher priced customer -- than its higher priced cousin.

However, it's the same high cost die, if you actually dig into the details, it's just a rebranded high end device.

I think that's marketing 101.

I think it's very smart.

It's an age old business practice to sell an existing product to different customer segments at a distinct, and in this case lower price, and a different margin structure to take advantage of segmenting your business.

But, unlike our die and package combination, their product's not been optimized from an engineering standpoint, for the high volume, low cost market that we target.

And consequently, we have a compelling advantage with our cost structure, and therefore we can and will complete quite successfully.

The competitor's product has the same silicon and same cost structure as their high performance product, and it really hasn't been optimized for the market we're targeting.

And that's the reason I think we can compete quite successfully.

And better yet, we now have another of our larger competitors really exposing their much larger customer base to a concept that we have a product that's optimized for.

In this case, PCI interconnects applications.

So I'm sure that they will do quite well with the product line.

But really having an additional partner, if you will, to market a low cost SERDES-enabled product line I think will open a few doors for us that we otherwise wouldn't have been invited into, in terms of making our technology available to our competitor's customer bases.

So I'm feeling quite about about our product line.

I think it's well defined.

I think it targets the right areas of the marketplace.

And more importantly, I think it offers compelling differentiation to those customers who are seeking it, and take the time to evaluate more than one solution.

Got it.

And one last quick question.

You succeeded in ramping your new product up to 11% of revs as of this quarter.

A year from now, what do you think that percentage will be?

Higher, Brian, higher.

I haven't given a specific target, and I'm not going to take the opportunity to do that now.

But we grew from 8% to 11%.

Obviously we would like to keep on an aggressive path of growing the percentage of revenue from new products.

Very good.

Thank you very much.

(OPERATOR INSTRUCTIONS) Danny Kuo, Bear Stearns.

Just a clarification.

You mentioned in your prepared remarks that ORCA issued a last time buy during the quarter.

Is that for all of your ORCA products?

And how should I think about your mature revenue trend going forward?

Should we expect a step down sometime in the future?

First part of the question, no, we did not obsolete all the ORCA products.

We obsoleted certain older products that were based upon older process technologies and older packages that were cumbersome to support.

So we will still have some ORCA business going forward.

And as I said I believe, it's about 15% of the overall FPGA revenue today.

With regard to the mature products overall, we do see a downward trend in those products.

It's a little a little hard for me to predict.

In fact, it's one of the hardest parts of the business to predict, because they do kind of go down in kind of a chunky fashion.

But, overall I expect those products to decline 15% to 20% per year, but in a pretty nonlinear fashion.

Great.

That's helpful.

And maybe on the communications revenue growth that you have seen this quarter, is there any way you can figure out where is the growth coming from, i.e., (inaudible) networking, can you -- ?

Yes, sure.

I didn't cover that previously.

But the strength last quarter, and we didn't have a very strong quarter in communications, was primarily in the wireless base station segment, and to a lesser extent in wire line, although both areas grew.

The data networking area was relatively flat.

And going into this quarter, we expect similar trends to continue.

Although I do expect a pickup in the wireline business, as well, through the second half.

Great.

That's helpful.

And just last question, Jan, what's causing the decline in the interest income for this coming quarter?

Well, we have two gains that we recorded in the second quarter.

We have a convertible bond buyback, where we record a $400,000 gain, and a land sale, a $1.6 million gain.

So we don't expect to have both of those this quarter.

So the interest income, in fact, is pretty much flat from last quarter.

Got you.

Great, thanks.

[Scott Hurleman], Robert W.

Baird.

This is Scott calling in for [Tristen].

I was wondering if you could give us a little bit of an update on your FreedomChip program, and how that's going with customers and how they're responding to that?

Yes, we have no active programs yet in FreedomChip because most customers with RFC family are still in a prototyping stage and FreedomChip is a volume production program.

But we have received very strong interest from major OEMs for that type of program.

And so we're actively marketing it to our major customers, and are getting good reception to the concept.

And we would expect to see that really contribute to revenues in the 2008 timeframe.

Again, it's really, I think a necessary way to help customers adopt higher price, higher performance FPGA.

I don't see it as a distinct business per se, but really as an augmentation to our Lattice (inaudible) product line.

Right.

And then talking about the pickup in the wireless and then some of the wire line, can you give us actually any indication of geography or is that, especially on the wireless, is it more of a 3G?

Or is it just the GSM, 2G kind of back end, or do you not have that kind of visibility into that?

Anecdotally, it's more customer driven than either geography driven or program driven.

So, and I really hesitate to get into the naming of names of customers.

It's something we don't do.

Our customers tend not to appreciate that.

But we did see success in the European area, which then transferred to Asia in terms of consumption.

And then we saw success in the Asian markets in terms of local OEMs there, with the exception of Japan which was soft last quarter.

Most people and you would know who the kind of key OEMs and programs are within those geographies.

Right.

And then just kind of on a housekeeping question, you have usually said -- .

I'm sorry, I'm not hearing the audio any more for the -- .

Hello.

Can you still hear me?

Then on a housekeeping question, normally you give how many percent of customers are new to you on your 130 nanometer and 90 nanometer.

Could you just throw out that number for us, please?

Operator, I'm not hearing the question.

I don't know if we have a technical problem with this one line or the overall call.

Hello.

Okay.

I guess I'll go back in the queue.

Operator?

Yes, sir, can you hear me?

Mr.

Johannessen?

Hello, sir?

Operator?

I don't know if we're still live or being recorded, but we seem to have an audio problem.

We can't hear any questions.

So unfortunately, I think we will have to close the call at this point.

Jan and myself will be available for investors who want to call the Company separately.

But I thank everybody for their attendance, and we will talk to you next quarter, or whoever wishes to call in.

Thank you.

This concludes today's conference call.

You may now disconnect.