萊迪思半導體 (LSCC) 2007 Q3 法說會逐字稿

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

Copies of the Lattice Semiconductor Corporation third quarter ending September 30, 2007, earnings press release may be obtained from the company's web site which is www.lscc.com.

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

A live broadcast and replay of the call will be available on the Lattice investor relations website, www.lscc.com.

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

Please go ahead, sir.

Thank you and good afternoon, everyone.

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

Before we begin, I would like to read a Safe Harbor statement then give a financial review of the third quarter.

Then, Steve will provide a business review followed by our fourth 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 Law, 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 terms, business and such factors as pricing pressures, competitive actions, demand for our new mainstream and mature products and the ability to supply products to customers in a timely manner.

Potential impact of defining activity on future revenues is inherently uncertain because it is unknown whether and when any particular defining 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 costs and yields, stock-based compensation charges and other factors.

In addition, actual results may differ materially from our forward-looking statements due to 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 current of anticipated events.

Let me now turn to the third quarter financial results.

Revenue for the third quarter was $58.3 million, down 2% from revenue of $59.2 million in the prior quarter and down 8% from the 63.5 million reported in the same quarter a year ago.

Gross margin for the third quarter came in at 54.2%, slightly below the 55.1% we posted in the second quarter.

The sequential change in gross margin was primarily due to mixed changes and costs associated with a warranty issue.

In the third quarter, we sold a greater proportion of new products which carry a gross margin below the corporate average and experienced a $3.8 million decline in mature products which carry a higher margin than the corporate average.

On the positive side, we're continuing to see gross margin improvements on our new products in line with our expectations.

Total operating expenses for the third quarter came in at 35.2 million, which is slightly lower than our guidance of 35.6 million.

Quarterly R&D expenses was 20.2 million, which includes 0.7 million in stock option expense and was down 0.6 million from the prior quarter's expense of $20.8 million.

The decrease in R&D expenses was mainly due to lower mass costs partially offset by a higher amount of engineering wafers in the third quarter.

Quarterly SG&A expense was $15.1 million, including half a million dollars in stock option expense and was up 0.3 million from the second quarter SG&A expense of $14.8 million.

During the third quarter and continuing into the fourth quarter, we initiated and are actively implementing cost control measures designed to further reduce the operating expenses.

These initiatives will contribute to an operating expense reduction in the fourth quarter of approximately $1.7 million to $2.2 million as compared to the third quarter and will further positively impact our expense structure in 2008.

As a result of these previously announced actions, we recorded a structuring charge in Q3 of $1.7 million and expect to record another restructuring charge in the fourth quarter in the range of $1.5 million to $2.5 million.

These charges primarily relate to head count reductions and costs incurred to vacate lease facilities.

Intangible asset amortization was 2.5 million for the third quarter down from 2.7 million in the prior quarter.

Intangible asset amortization will be $2 million and the total for 2008, about $5.6 million.

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

Total stock-based compensation expense for the third quarter was 1.3 million, flat with the 1.3 million recorded in the second quarter.

Other income for the third quarter was $3.6 million and included $1.7 million gain related to the repurchase of the zero coupon convertible notes.

We recorded a tax provision for foreign tax during the third quarter of $0.2 million, primarily related to our foreign subsidiaries, 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 report quarterly tax provision in the fourth quarter of 2007 and in all of the quarters of 2008 in the $200,000 range.

The September quarter net loss was $4.4 million, or $0.04 per share, as compared to $1.5 million loss, or $0.01 per share.

We posted in the second quarter, and compared to net income of $0.9 million, or $0.01 per share, for comparable quarter a year ago.

These results include total charges of 5.5 million, 4 million and 3.9 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 amortizations, stock-based compensation expense and restructuring charges, we posted net income of $1.1 million.

This compares to a net income of 2.6 million posted in the second quarter and net income of 4.8 million posted in the comparable year quarter last year.

Turning now to the balance sheet, cash and short-term investments at September 30 were 128.4 million, down 36.9 million from June 2007.

During the second quarter, we used $38.3 million to repurchase our zero coupon convertible notes.

We now have repurchased a total of $160 million in principal amount of the zero coupon convertible notes and the outstanding balance at September 30 has been reduced to $40 million.

The current and long-term Fujitsu prepaid wafer asset at the end of the third quarter was $111.8 million, and our liquidity position remains strong with cash, and if you include cash and prepaid wafers totaling a total of $240.2 million and our convertible debt of $40 million for a net of $200.2 million.

For the third quarter, our net operating cash flow was $3.8 million.

Accounts receivable at September 30 was 31.1 million compared to 29.2 million at June 30 and day sales outstanding was 49 days.

Inventory decreased by 1.5 million from June 30 to 36.7 million as of September 30 and remains slightly above four months on a cost-of-sales basis close to our target range.

We spent $2.1 million in capital expenditures during the third quarter and a quarterly depreciation expense of $3.4 million, flat from the prior quarter.

Deferred income as of September 30 was $7 million, down slightly from the prior quarter.

This concludes the financial review portion of the call.

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

Thanks, Jan.

Last quarter we once again posted mixed performance with respect to revenue trends within our business.

Overall, revenue declined 1.6% sequentially in what amounted to a weak quarter for our industry.

However, despite this decline in total revenue, we continued to make progress against the important strategic goal of transforming our product mix to newer products with higher growth potential.

In the third quarter, new products accounted for $8.3 million or 14% of total revenue.

During the quarter, these new products grew 28% sequentially and 73% on a year-over-year basis.

Over the last two quarters as our historic customer design ends, transition to production orders, we have grown our new product revenue in excess of 25% on a sequential quarterly basis.

And based on our past design and success, we believe we can sustain this rate of growth for the foreseeable future in this product segment.

Consequently, we currently expect new product revenue to double in 2007 over 2006 and in 2008 our current expectation is that our new products will grow at or above the rate established in 2007.

Mainstream products, which accounted for 53% of revenue last quarter, grew 4% sequentially and were relatively flat on a year-over-year basis.

Growth in mainstream products last quarter was primarily driven by our large customers in the communications end market.

On the other hand, mature products, which now account for 33% of revenue, were down 16% sequentially and almost 30% on a year-over-year basis.

This is the largest sequential decline in mature products that I can personally recall at Lattice.

Driving this decline was a substantial drop in revenue from legacy ORCA, FPGA products and a general decline in our mature PLD families, exacerbated by the absence of orders to support a large -- a handful of large customer programs within those mature PLD families.

ORCA, FPGA products declined 45% on a sequential basis.

As most of you know, we acquired the ORCA products in early 2002 well after they finished their design-in phase.

In percentage terms, last quarter marked the steepest decline in our nearly six-year history with the ORCA products.

Last quarter, ORCA products accounted for approximately $1.5 million in quarterly revenue and the good news, if any, here is that given this relatively small revenue level present, it is impossible for us to experience a similar absolute dollar quarterly revenue decline in future periods.

Digging into the details of the mature PLD family decline, about two-thirds of the decline is attributable to four specific customers.

Two were Chinese customers on the consumer-end market who buy from us on a sporadic basis and bought nothing in Q3.

We expect their business to return in the future.

One customer is a domestic customer in the wire line communication market who became overinventoried on a particular program, and the last is also a domestic customer in the computing end market who has now transitioned their design to a newer model in which we have also secured the PLD sockets.

Excluding the impact of the ORCA decline and these four specific PLD customers, our mature product declined about 6% sequentially, which we believe is more or less a normal rate for that product category.

In next quarter, we would expect a return to this normal rate of decline.

Long-term, we would expect our mature product to decline 15 to 25% per year, depending on market and economic conditions.

Turning now to our revenue performance by product family, FPGA product revenue has a record $13.6 million or 23% of revenue and grew slightly on a sequential basis and 2% on a year-over-year basis.

Double digit sequential growth within our new and mainstream FPGA product families was offset by the sharper than expected decline in our mature ORCA, FPGA products that I just described in detail earlier.

As I also mentioned, due to the relatively small current revenue level of the ORCA products, we do not expect any further material drag on our FPGA revenue growth from this older product family.

Year-to-date, thus far in 2007, our FPGA product revenue is up 5% versus the comparable period in 2006.

This growth rate is significantly higher than the FPGA market, which we estimate has declined by about 5% thus far during 2007.

Going forward as our FPGA revenue mix becomes increasingly oriented towards new products, we are increasingly confident we can continue to grow our FPGA revenue at a rate higher than the FPGA market.

PLD product revenue accounted for $44.7 million or 77% of revenue and declined 2% sequentially and 11% on the year-over-year basis.

We posted growth within our newest PLD families, namely the MachXO, the Mach 4,000 and mixed signal product lines.

However, growth in these families was more than offset by declines in our mature PLD families that I described and was exacerbated by the four customer conditions that I had talked about.

Geographically, during the quarter, Asia made up 59% of revenue and was more or less flat sequentially.

Regionally, we did experience strong growth in China and also saw a rebound in Japan while the other Asian geographies declined sequentially.

Business in China benefited both from the local demand and also increases in transfer business.

The Americas accounted for 21% of revenue and declined 12% sequentially.

Europe made up 20% of revenue and grew 8% sequentially.

We're very pleased to grow strongly in Europe during what typically is a seasonably soft quarter.

This growth was due to new products and, to a lesser extent, an absence of dramatic declines in the mature products I talked about for whatever reason we didn't experience those in Europe.

Revenue by end market for the quarter was as follows: Communications, 54% of revenue.

Computing 11%.

Consumer 11%.

And industrial and other, 24%.

The communications end market grew 2% sequentially.

We saw strength from Asian communication customers both in China and Japan.

Additionally, we saw generally positive conditions from manufacturers of wireless infrastructure equipment and set top boxes.

On the other hand, we experienced weakness from domestic wire line customer that I talked about that had an overinventory situation on a particular program.

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

The consumer market declined 15% sequentially due primarily to the two Chinese customers I spoke of earlier.

The industrial other market declined 3% sequentially in generally what was a broad-based fashion with no notable application trends.

I would like to turn now to our product development activities over the last quarter.

At present, all of our 90 nanometer S-ram based product families have passed qualification testing and all device in those families have been released to volume production.

This is a major milestone for the company and we believe we now have a unique and highly competitive product within our low-cost ECP2M family that offers (inaudible), I/O and high capacity memory at a very compelling price point for customers.

I now expect this product family to ultimately be our most successful FPGA family.

In addition, we are now well into the sampling phase of our final 90 nanometer product family, the nonvolatile Lattice XP2 family.

We plan to release the first three devices out of five in total of this family to volume production this quarter and are on track to have the entire family released by the first quarter of 2008.

I would like to close my prepared remarks with our 2007 fourth quarter financial outlook.

During the fourth quarter, we expect to see continued healthy new product growth as our historic designs continue to transition to production orders from a variety of customers worldwide.

As I mentioned, and for the reasons I previously described, we also expect to see a substantial moderation in the rate of decline for our mature products.

On the other hand, with regard to our mainstream products, historically, the fourth quarter can be a difficult one with a shorter shipping period due to domestic and European holidays.

And also year-end customer inventory pressures.

We do not expect anything different this year.

In fact, one of our top three customers, an Asian communications OEM, has already informed us that they plan to significantly work down inventory of products, particularly our products, this quarter.

This will result in a substantial decline in their consumption of our mainstream PLD products during Q4.

I would note that business with this customer will still be up very significantly during 2007 when compared to 2006, and we have not been designed out of any program, so I'm not concerned about an extended decline from this customer.

Nonetheless, due to this phenomena, which I expect may repeat itself with several other large communications customers, we currently expect our mainstream products to decline sequentially during the fourth quarter.

Consequently, on an overall basis, we currently expect our fourth quarter revenue will be $57 to $59 million.

Our turns estimate for the fourth quarter is consistent with the 59% turns we experienced in the third quarter.

For the rest of the P&L, we currently have the following exertations for the December 2007 quarter:

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

We expect total operating expenses, excluding amortization of intangible assets, to be $33 to $33.5 million, as Jan mentioned down approximately $2 million sequentially from the third quarter.

As Jan also mentioned, intangible asset amortization will be $2 million even, and we plan to take a further restructuring charge of $1.5 to $2.5 million during the fourth quarter.

We also expect approximately $2.5 million in other income and finally expect the share count to be relatively flat.

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

Operator, we can begin to take questions.

Thank you very much.

(OPERATORS INSTRUCTIONS) This comes from Chris Danley from J.P.

Morgan.

Hi.

This is [Larisa Palosheck] calling for Chris Danely.

Could you give us an idea of where you see operating expenses going in the next few quarters?

I know you said they're going to be down next quarter.

Is this similar sort of trend supposed to be expected for the next couple quarters, about $1.5 to $2 million?

Q4 from Q3, we'll be down roughly $2 million.

Ok.

For next year, we're going to have -- we're not going to see the same kind of decline every quarter.

We expect next year's operating expenses to be kind of in line with the current -- the current operating expenses we'll have in Q4.

Ok.

We're currently looking at a number of things to minimize operating expenses and we'll report further on that when we -- if we do something there.

Ok.

And then as far as gross margins are concerned, can you remind us again what your long-term gross margin target is?

55% which is where I believe we're headed for in Q4.

And do you think it peaks there?

Are you expecting to make more cost reductions?

There's a lot of factors that play into the gross margin.

As Jan mentioned, the new products are slightly below the corporate average so to extent and mature products are higher than the corporate average.

So, the extent that we -- as we did last quarter, grow our new products aggressively and have mature products shrink, that can retard the gross margin.

The other input is really scale.

So, to the extent they were successful in growing revenue, that's a positive effect to the gross margin.

And then finally, obviously as our operation team focuses on cost reductions and yield enhancements, that tends to be a positive to gross margin.

I think putting off those things into kind of the assessment, out belief is that 55% is the appropriate target for gross margin for 2008.

Ok.

And then finally, on the end markets, could you just kind of highlight trends you're seeing currently in the current quarter and what you're expecting maybe beyond that, if possible?

Sure.

You know, as I mentioned, you know, communications is the biggest end market for us and for the industry.

For our business as I mentioned last quarter is up 2% sequentially.

Really, last quarter we saw strength primarily in the wireless and set top box segments.

And, particularly, we were able to satisfy some requests from some pull-in requests from some of our largest customers in those segments.

This quarter, we expect to see a moderation of consumption as OEMs and their EMS partners minimize year-end inventories.

So, my outlook for COM is kind of flat to down.

With respect to the other end markets, computing was essentially flat last quarter.

We do see some activity in the competing sector, mainly in the server arena which we believe will lead to revenue growth for us, perhaps as early as next quarter but definitely into 2008.

The consumer markets, again, for us, when measured against last year, we have significantly less business in hand-held products.

In general, we found margins in that area to be unacceptable and consequently probably been less aggressive in pursuing some designs in the consumer area.

So, my outlook for the consumer market in the fourth quarter also it tends to be seasonably softer quarter towards the end of the fourth quarter, so I would expect that arena to be flat to down.

The industrial area was slow last quarter for us and for the industry.

I think some of that, frankly, was seasonality in Europe, industrial tends to be a fairly high penetration in European customers.

This summer, as we all know, was a slow quarter for European even though we did quite well in Europe, last quarter growing 8% sequentially.

A lot of that was with the larger customers and also in the communication area.

So, I would expect the industrial other area to grow in the fourth quarter as we kind of recover from that general seasonal malaise from the third quarter.

Ok.

Thanks.

Can I just ask one more question.

Just on book-to-bill.

Do you have a number for that?

It was one.

Ok.

Thank you.

And moving on, we will hear from Dave Duley with Merriman.

Yes, a couple of questions.

If I hear your guidance statements right, it sounds like the new products are going to continue to grow at the pace that they recently grew at this 25 to 30 -- 28% range.

As you mentioned, that would imply a couple of million dollars of sequential growth.

So, that would mean that either mature or mainstream would be down roughly the same amount and I think what you said is it would be out of the mainstream category this time?

Yes.

Unfortunately, we had a poor quarter in mature products in Q3, David.

I see that moderating and a return to kind of a more normal conditions in that product sector, which is down 15% to 25% a year.

Really kind of depends on market and other conditions.

The mainstream products, I do believe will be down in the fourth quarter.

We could pull a rabbit out of the hat and get a lot of turns orders that we satisfied but I'm really not counting on that and, in fact, my history with the business, I know that the fourth quarter tends to be a difficult quarter and there's a lot of year-end inventory pressures and I'm basically assuming the mainstream products will be down pretty consistently with the mature products in the fourth quarter for that phenomena.

And just to recap, I think you mentioned, if I read my notes again, that that's mainly in the communications sector where people try to work down their inventory levels.

Yes.

Ok.

And just another question.

Just looking at the breakouts, you may have mentioned this but if you could talk briefly.

I noticed the U.S.

revenue was down $2 million and everything else, Asia was flat and Europe was up.

What was it in the U.S., was it a calm customer in the U.S.

that caused that to be down or could you just review that again?

Yes, the U.S.

trend for -- you got to remember we're talking about consumption as our competitors do as well when they report results.

And, in general, domestic revenues tend to not be very robust from a consumption standpoint because of the increased offshoring of manufacturing.

So, that does provide basically an underpinning to North American revenues.

But, despite that, we did see weakness in the two customers that I talked about up front, one in the communication area where they ran into an overinventory situation and we saw a significant falloff of consumption from that customer who happens to be in the wire line communication space, who happens to procure those products through North America.

So, that accounted for some additional falloff in North American revenue.

And I commented on a computing customer who is transitioning programs where we've secured the design ends on the new program but winding down the program had an impact on the North American revenue.

So, I would say general market conditions and then those two events of those specific customers in those market places had kind of the equivalent impacts.

Ok.

I noticed you bought back some converts.

I thought the balance you transferred to the current asset line was roughly half.

Went from 80 million to 40 million.

Have you continued to buy back those converts since the quarter ended?

And where is the balance now?

It is still at $40 million.

We're currently not looking at buying anything at this point.

Ok.

That would lead me right to my next question is if you kind of look at the company as you guys do with the prepaid wafer account as kind of a pile of cash sitting there, you have $200 million in cash, not very much debt.

So, are there any thoughts to the -- and I think you're generating some cash as you mentioned even though you might be losing money on a GAAP basis.

Doesn't appear that you need a lot of cash, so is there a thought to doing a buyback?

You could buy 10% of the floatback for like $40 million.

Two comments.

First, David, yes, we're generating cash and if you exclude the non-cash charges, we're making a profit on a non-GAAP basis.

I really don't want to go into a long discussion of that.

I think most people who follow the company can discount our non-cash charges and see we're generating cash and earning money every quarter even at the current revenue level, with the current costs on a cash basis.

So, that's the first point.

Second point is we -- we will look at any and all measures to enhance shareholder value.

So, that's something that Jan and I do in conjunction with the board and we'll continue to do so.

Ok, well, along those lines, it seems like you have a pretty good pile of cash and you're generating cash and when the stock's down here, you can have a significant impact on the flow with a minimal amount of cash.

So, this shareholder is suggesting that you take advantage of that.

We appreciate the input.

Thank you.

moving on, we'll hear from John [Ahn] with Morgan Stanley.

Hi, good afternoon, folks.

Let's see, looks like new products are definitely getting a lot of traction.

I mean that's -- Steve, you've been talking about that for the past couple of quarters with design wins and things like that.

Any updates, in terms of new design activity?

I know you started de-emphasizing it last quarter but I just wanted to see if you got any more color.

Sure.

You're right.

New products are seeing traction.

Our new product segment is growing faster than anybody in the industry.

We're clearly happy about that.

But, nonetheless, our job is to grow the overall revenue and produce a profit.

So, we're definitely not satisfied with where we are as a company, but the new products are growing and that's a very big positive for the company because that's what we've focused a lot of our intention on over the past two years.

So, last quarter, new product designs continue to grow and 90 nanometer designs grew most strongly amongst all our products, in particular, EPC2M family has good design growth, and also I would point out very high quality design activity because at least that's as important as the share numbers of designs.

I really think we've hit a sweet spot in the market with that product family.

As I mentioned in the past and you alluded to, I kind of want to focus the discussion more on revenue from a new product standpoint as opposed to design activity.

So, what I will give you some data on is what we've talked about in prior calls, which is really the status of those historic designs.

The designs continue to move into production as evidenced by our growing new product revenue.

However, the large majority of our historic designs still remain in the prototyping phase.

I rolled up the numbers again this quarter.

At present, only 22% of our designs have entered production while 51% remain in prototyping stage and the remaining 27% have been lost for one reason or another.

Those numbers are pretty similar to what I gave out last quarter.

In fact, they might even be richer in the prototyping phase because you have to remember we generate new designs every quarter.

And so we're still, very clearly still in the prototyping phase with the bulk of those designs even though we're now generating $8 million of revenue from those products as a whole.

So, we continue to look forward to strong revenue growth from those products.

If I look at just the 90 nanometer products, only 10% of those designs are in production.

Ok.

So, we think that, driven by the change of mix of our FPGA business with the ORCA products really shrinking dramatically last quarter, that we're increasingly in a much better position to grow our FPGA business in excess of the markets.

Unfortunately, it has been a subdued period for the market.

But we established a strong relative performance position during 2006 with the FPGA products growing at double the rate of the market.

We continue to grow faster than market and, unfortunately, the FPGA market is not growing at this point but we believe our new products, the design activity, the momentum we've established with revenue from those products position us to grow better than the market for the foreseeable future.

Ok.

So, shifting to your end markets and looking at it from a little bit more of a longer term perspective, just trying to get a read on the tone from your communications customers going into 2008.

I know you talked a lot about what it looks like for Q4, but any read on 2008 at all from your communications customers?

Most of them are experiencing, except for one in particular which is still struggling with merger activities, general positive business conditions.

I would say the business from those customers last quarter was positive.

The trouble that I have with that sector is that they have very short lead times from their own end customers.

Typically, they're committing to large -- lots of large contracts that require very rapid delivery.

So, really, the visibility in that business, in terms of specific revenue opportunity, is very short.

And that's, in essence, why I'm very cautious on Q4 from that market just based upon past history with those customers in the fourth quarter.

Longer term, there is good design activity in the communication customers, focused on Next Generation wireless, Next Generation networks, GPON and a whole host of other activities which are increasingly using FPGA technology as the primary logic implementation for those systems.

So, I'm reasonably optimistic about business conditions in the communication markets over the long run with the caveat that it's becoming an increasingly more volatile business to service from a programmable manufacturer standpoint.

Ok, great.

Thank you very much and good luck going forward.

Thanks.

And moving on, we will hear from [Seogju] Lee with Goldman Sachs.

Great, thanks.

Steve, just to clarify, you talked about the growth that you expect for new products.

You said that you'll double the revenues in 2007 and then you'll grow at the same rate or better in 2008.

Is that correct?

That's right.

Ok.

And so the revenues from new products in 2006 was about 15 million, was that correct?

Yes.

14.5 or something like that.

Ok, great.

Then, just in terms of -- you gave an outline in terms of what the historical decline you would expect for mature products and so going forward you'd expect it to sort of return back to that.

Just, if we think about mainstream products, on a sort of annual basis, how should we think about how that trends on a historical basis?

That's a good question, Seogju.

Mainstream products are the products, and I've said this in the past, they're the most susceptible to economic industry and conditions and inventory movements.

If I look back over the past two years, we had a great year in mainstream products in 2006 where we had 25% annual growth in those products.

Then we had a large inventory-related sequential decline in Q1 of this year followed by 5% sequentially quarterly growth rates and you know, again, my current outlook in Q4 is for kind of a falloff in those products.

So it is, unfortunately, a volatile portion of the business that's most impacted by inventory and industry and economic conditions.

My best guess for those products would be kind of single digit annual growth but, again, as we've seen from past results, that can be pretty variable.

Ok, great.

That's very helpful.

Thanks and good luck.

Sure.

And moving forward, we will hear from Bill [Dezellem] with Titan Capital Management.

Thank you.

We had a couple of questions.

First of all, circling back to the new product revenues, at least doubling in 2008 versus 2007, if we remember correctly, at the beginning of each fiscal year you often will recategorize products and basically refresh the new category, the mainstream and mature.

When you make reference to the -- at least doubling in 2008 versus 2007, are there any changes that you're incorporating into your thought process as to how new products are categorized today or is that the new products as categorized today that you expect to at least double?

Yes, Bill, that's a good question.

We don't -- we won't make any changes to the categorization.

I think it is an effective way to provide visibility into our business and I think it is important that you all have kind of a -- a steady state picture of that.

So, we don't plan to make any changes going into next year.

That's helpful.

Thank you.

And then looking at the mature products, over the last decade, what is a normal percentage of revenue to come from mature products or maybe what is the range?

And I ask the question because if we look over the course of the last year, it has gone from 43% to 33%.

It is -- 10 percentage points seems to be a pretty wide swing.

Yes.

I believe it was over 50% at one point.

Again, it depends on how you classify the products.

But, unfortunately, this company missed the cycle of new products and we've talked about that in the past in the early part of the decade.

We paid the price for that clearly.

Now, the positive side of having the mature products fall off is we're getting them back down to kind of a more normal level of revenue at 33%.

I mean you all can look at our competitions, percentage of revenue of mature products and, again, they may classify them different.

But I think a third or lower is definitely getting into kind of the more normal point of where things should be in terms of a business.

Clearly, if you've got three categories of products, a third, a third, a third, would be the best and typically if you're growing the company, you'd like to have more revenue in kind of the newer products than the older products.

But, 50% is clearly much too much and a third is getting -- a third to a quarter is getting to where I think they should be.

That's helpful.

Thank you.

Yes.

And moving on, we will hear from Robert Toomey from E.

K.

Riley Investments.

Hi, good afternoon.

Hi, Robert.

Just a couple questions.

Steve, I've noticed in some of your last public information news releases you've been talking about taking charges and downsizing the company.

Does that in some way reflect a lower level of confidence in your growth potential or just downgraded growth expectations looking out the next couple of years?

Bob, I think it purely and solely reflects the desire of the senior leadership of this company, including both management and the board, to get to a profit-making position as soon as possible.

So, we've taken it upon ourselves to aggressively and in kind of a zero-based fashion, look at our cost structure to think of how we can do things more efficiently and more optimally to get our job done and you know, produce a profit as soon as possible.

We streamlined our operations really in the September time frame to try to lower our operating break even level, which we define as GAAP operating income less restructuring and noncash amortization charges.

And we're at the point now where it is about 60 million.

So, we're trying really to balance the long-term growth of the company with the short-term profitability.

And we believe that the current level of operating expenses we can still manage a good investment in R&D that produces attractive differentiated products that can -- assure that we continue to have the ability to grow nicely within the industry and still achieve a profit as soon as possible.

That's probably the best answer I could give you to your question.

Ok.

I appreciate that.

You also said that you're growing faster than the FPGA industry and I'm wondering, can you elaborate a little bit on where you think you're gaining share and is it across a large number of accounts or is it a limited number of accounts?

Well, first, let me say that the industry is, by my account, shrinking 5% through three quarters.

So growing our business at 5% while the industry shrinks 5% is good, but I would rather have the industry be growing at double digit rates.

But, nonetheless, we need to grow faster in the industry.

We're being successful, Bob, in the areas where we've defined and where we've been able to produce different products.

So, we basically, at this time, have three product lines that are different.

We have nonvolatile products which our competitors really don't have and that's made possible by our relationship with Fujitsu who's worked with us to optimize an embedded flash process for FPGAs which we can bring to customers and provide some unique benefits that traditional FPGAs don't offer.

More importantly, we've been able to provide a road map to our customers to bring the cost of those products down fairly aggressively to the point where they're fairly competitive with traditional sRAM FPGAs.

So, we're seeing kind of a -- not a narrow, a broader -- we don't have a broad customer base as our competition but we're seeing across our customer base good interest in that story and it is across the normal applications in -- that we deal with in the FPGA business.

That's the first thing.

The second thing is we focus on the low cost arena and in particular, by providing -- the industry's low cost price point, a chip that offers a much more in the way of features and performance and we've taken the leadership in engineering in engineering a chip that has functionality and features that are more common in the high performance, high-cost fabrics of our competition.

So, we've got the lowest cost (inaudible) chip with high capacity memory and ESP functionality that really is a product offering that can catch attention of a lot of major suppliers and we're seeing some good interest in that product as I talked about.

Again, that's an offering that's fairly unique to our company at this point.

And, as you know, finally we've got a product line that's a high performance product line that is probably the narrowest product line, but it does offer embedded Asic cores and high-speed I/O that's faster than anything available on the market today that has some particular utility for communication customers who are concerned about designing those functions in the soft fabric or need some advanced performance.

So, that's the FC product.

That's probably the narrowest product, but it does have strong interest in its target market which is for bridging applications in the communications market.

Ok.

And one last question if I might, Steve.

And that is the CPLD market, is that sort of in a permanent long-term decline, if you will?

Do you think for you guys in terms of looking at a longer term model, say into '09, should we kind of model those revenues actually being down over that time frame?

I believe, again, that that business can perform generally like what I talked about for kind of a main -- it is going to be dependent upon industry and economic conditions.

I think in poor climates, we would see kind of a slight decline in that market for the industry and in better and more robust environments, we might see single digit growth type of numbers for the industry.

So, that's my viewpoint on the PLD market in general.

Ok.

Thank you very much.

And moving on, we'll hear from Danny [Kuo] with Bear Stearns.

Hi, Steve.

Can you give us a review on what kind of inventory adjustment we are going to see in the communications market?

How significant that would be I guess this time around?

Do you think that could extend to first quarter of next year?

I don't think it will extend to the first quarter.

I'm only aware of one single customer who's adjusting their inventory.

I worry about other customers behaving in the same manner because of history.

I expect it will be the tune of $1 to $2 million in our mainstream product.

I don't think it will spill over into Q1.

The one customer I'm aware of, their business with us in 2007 will be up strongly over 2006 and their forecast for 2008 is to grow strongly over 2007.

So, I expect it to be a one quarter phenomenon and I expect Q1 from this customer to be a growth quarter.

So, your turns expectation of 59%, which is flat compared to last quarter, I mean that's -- or are you making some inventory adjustment and possibly some other customers?

Yes.

Ok.

And the other thing was on the restructuring charges, I mean do you think that could continue into the first quarter?

How should we look at that?

No, Danny.

I think we'll complete that in Q4.

I don't expect it will continue into Q1.

And on to some of the Op Ex reduction for the current quarter, 2 million, how should we split that out between SG&A and R&D?

Ok, so I would say that the R&D is -- I would say about 60% to 70% R&D under SG&A.

It looks like your stock-based compensation have creeped up this year as compared to last year.

How should we look at that for '08?

For '08, it will be -- it will go up just a little bit.

It will not continue to go up.

Right now, it is about 1.3 million.

I think next year, it will be a little bit up from that.

Just want to point out that our stock-based compensation is a percent of -- relatively the size of the company of most other companies in our space.

Lastly,.

I don't know if you are going to (inaudible) on this question, but can you give us a breakdown of your -- I guess looking at the gross margins, can you give us a sense of how far below is the corporate average for your new products?

Obviously new products will account for a higher percentage of revenues going forward.

I mean, how should we think about the gross margin mix.

Obviously you kind of talk down your gross margin expectation for next year as compared to your earlier local term target.

I'm trying to get a sense how should we think about that?

Mature products are well above the corporate average.

New products and mainstream are fairly close at this point.

With new products -- with improvement potential in both based upon cost reduction and yield enhancements that we've achieved in the second half of the year.

So, we're guiding up for gross margin primarily because we had a small one-time charge that we won't have next quarter and because the value of the improvements that we've made on the cost side that we believe will flow through the P&L this quarter.

I'm sorry.

Just a followup.

How much was the charge on the gross margin this quarter?

It was a couple hundred thousand dollars.

Ok.

So are all of your products above 50% gross margins?

Are all of our products?

Yes.

I doubt it.

We have 300 products.

I don't have the date in front of me, so I would say no.

Ok.

Last question, are your new products above 50% gross margins?

Yes.

Thank you.

That's it.

And we do have a follow-up.

This comes from Bill [Dezellem] with Titan Capital Management.

Thank you.

A couple of additional questions.

First of all, relative to the restructuring that's taking place in the additional activities in the fourth quarter, are any of those new activities or are those all associated with the announcement that you made last quarter?

We made an announcement last quarter that has to do with head count.

We don't anticipate any in additional head count actions at the current time and that's not incorporated into the restructuring charge that Jan talked about.

We'll look for nonhead count ways to save costs either from third party expenditures, facilities charges and so forth.

And that's the kind of an ongoing process that we'll consider each and every quarter.

And I believe that in the footnotes of the release it makes reference to part of the fourth quarter charge will be for vacating space.

What locations are you going to be vacating?

We've consolidated space in Silicon Valley, commensurate with the head counts reduction that we made.

And we've also closed some smaller offices to support sales in some parts of the world where we've moved to kind of a home office or in the case of Hong Kong, consolidated out with our [Chen Zu] office.

That's helpful.

And then relative to the share buyback question before, not intending to push you on -- put you on the spot and have a public debate on the issue but what is your -- from your perspective, what are the arguments against doing a share buyback program at this point?

We and the board have an obligation to enhance shareholder value.

We'll look for any way to do that.

The company needs to consider its sh balance and its cash needs and its cash flow and so forth as part of that debate.

And so, we do that on a regular basis and we'll continue to do that.

As we've talked about in the past in the public forum, we believe that the -- that the best thing and the quickest opportunity was to buy back convertible debt at a discount.

Jan mentioned we've now bought the convertible down to $40 million in face value and we don't plan on doing anything more with regard to that.

And so the company will continue to look at other ways to effectively use its cash balance.

And maybe we should have actually asked why is it that you do not anticipate bringing or buying back any more of the additional $40 million that's remaining?

There are securities.

a lot of considerations given the narrow nature of that bond.

We also have a shareholder's -- the bond holders have a put option, I believe one year from July, and so we think that at this point the best thing to do is just to redeem that when that put option comes up.

The discount now, Bill, is such that it isn't that much of a benefit anymore.

That's helpful.

Ok.

Thank you, both.

Thank you.

At this time, we have no further questions in the queue.

I'll now turn it back over to our hosts for any additional or closing remarks.

We have none.

Thanks, everyone.