萊迪思半導體 (LSCC) 2007 Q4 法說會逐字稿

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

Copies of the Lattice Semiconductor Corporation first quarter ending December 29, 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 call over to 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 the Safe Harbor statement and then give a financial review of the fourth quarter and Steve will provide the business review followed by our first quarter outlook.

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

I will now read the Safe Harbor statements.

This conference call may contain forward-looking statements within the meaning of the Federal Securities laws including statements about future financial results, customers, product offerings and the company's ability to compete.

Estimates of future revenue are inherently uncertain due to the high percentage of quarterly turns business and such practice as pricing pressures, competitive actions, the demand for our new Mainstream and Mature products and the ability to supply products to customers in a timely manner.

The potential impact of the signing activity on future revenues inherently uncertain because it is 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 costs and yield, stock-based compensation charges and other factors.

In addition, actual results may differ materially from our forward-looking statements due to the other risks that are described in our filings with the SEC.

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

Let me now turn to the fourth quarter financial results.

In the fourth quarter, as required by the accounting rules, we recorded an impairment charge of $223.6 million for the entire goodwill amount that we have carried on the balance sheet.

Because the estimate is fair value of the company was below book value at our measurement date, December 29, 2007, we performed an impairment analysis and remeasurement of goodwill in accordance with financial accounting standard number 142.

Good will and other intangible assets.

The goodwill related to the acquisition of Vantis Corporation on June 15, 1999.

The acquisition of integrated intellectual properties on March 16, 2001 and the acquisition of the FPGA business of the Agere Systems on January 18, 2002 was determined to have no implied fair value and as a result, the company concluded all of the goodwill on the balance sheet was impaired and recorded a non-cash charge of $223.6 million to the consolidated statement of operations.

There's separate accounting rules, financial accounting standard number 144, the [guise] valuation of other amortizable intangible assets.

We have $5.8 million of intangible assets on the balance sheet at December 2007 related to the acquisition of the FPGA business of Agere Systems on January 18, 2002.

After performing the required capital tests that we do annually, we determined that our intangible assets do not require an impairment charge.

The amortization of these intangible assets will be substantially eliminated at the end of this year.

Revenue for the fourth quarter was $53.1 million down 9% from revenue of $58.3 million in the prior quarter and down 14% from the $61.8 million recorded in the same quarter a year ago.

Gross margin for the quarter came in at 55.4% slightly above our guidance and above the 54.2% we posted in the third quarter.

The sequential change in gross margin was due to mixed changes and from our continued cost reduction efforts.

Total operating expenses excluding the aforementioned goodwill charge, intangible assets amortization and restructuring for the fourth quarter came in at $34.1 million which was slightly above our guidance of approximately $34 million.

Quarterly R&D expense was $20.1 million which includes $0.7 million in stock-based compensation expense, and was down $0.1 million from the prior quarter.

The decrease in R&D expenses was mainly due to lower head count and related expenses, offset by higher math cost.

Quarterly SG&A expense was $14.1 million including $0.6 million in stock-based compensation expense and was down $1 million from the third quarter SG&A expense of $15.1 million.

The decrease in expenses was primarily because of lower head counts and related expenses.

During the third quarter of 2007, we announced the restructuring design to lower operating expenses.

This continued in the fourth quarter and will now be completed in the first quarter as we were not able to vacate a leased building in the fourth quarter.

These initiative contributed to lower operating expenses in the fourth quarter by approximately $1.4 million as compared to the third quarter.

The restructuring charge in the fourth quarter was less than originally now at $0.8 million at the balance of approximately $1.3 million would be booked in Q1 of 2008.

That is this quarter.

The charges in the fourth quarter, primarily relate to head count reduction while the expected charge in Q1 primarily relates to cost incurred to vacate leased facilities.

Intangible asset amortization was $2 million for the fourth quarter down from $2.5 million in the prior quarter.

The intangible asset amortization for the first quarter will be $1.5 million and the total for 2008, about $5.6 million.

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

Total stock-based compensation expense for the fourth quarter was $1.4 million, slightly up from the $1.3 million recorded in the third quarter.

Other income for the fourth quarter was $1.7 million and included half-a-million dollar gain related to a UMC share dividend.

We recorded a tax provision for the foreign taxes during the fourth quarter of $0.1 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 carried forwards and therefore, we do not expect to pay U.S.

Federal income taxes in the foreseeable future.

The December quarter net loss was $229.5 million or $1.99 per share as compared to the $4.4 million loss or $0.04 per share, we posted in the third quarter and compared to net income of $0.9 million or $0.01 per share for the comparable quarter a year ago.

The fourth quarter result includes total charges of $227.8 million for the amortization of intangible assets, stock-based compensation restructuring charges and goodwill impairment.

On a non-GAAP basis which excludes the aforementioned intangible asset amortization stock-based compensation expense, restructuring charges and goodwill impairment, we posted a net loss of $1.7 million.

This compares to net income of $1.1 million posted in the third quarter and net income of $4.8 million posted in the comparable quarter last year.

Turning now to the balance sheet: total cash, short-term investments and marketable securities at December 29 were $130 million, up $1.6 million from September 2007 while cash and short-term investments in total were at $107.6 million.

At December 29, 2007, marketable securities included $22.3 million of auction rate securities that were reclassified from cash and short-term investments to long term because recent auctions have been unsuccessful and as a result, such securities are presently considered to be liquid.

Amounts are carried at their par value and these auction rate securities are backed by commercial paper and we do not have any of them that include any mortgage-backed securities.

There are six different auction rate securities totaling $22.3 million with a credit rating of either AA or AAA.

The company has the intent and ability to hold these investments until the anticipated resumption of orderly auctions occur.

Please call me directly if you would like more detail information about these auction rate securities.

The current and long-term for dips are prepaid assets at the end of the fourth quarter was $107.1 million down $4.6 million from September 30th.

Our liquidity position remains strong with cash and dips for prepaid assets, excluding the $22.3 million of liquid auction rate securities totaling $214.8 million.

The convertible debt remained at $40 million unchanged from September 30th.

Accounts receivable at December 29 was $29.3 million compared to $31.1 million at September 30th and base sales were outstanding at 50 days.

Inventory increased by $3.3 million from September 30th to $40 million at December 29th and remains at approximately [five months] on a cost of sales basis which is slightly higher than our target range.

The increase in inventory was a result of lower than planned shipments in the fourth quarter.

We spent $2.1 million on capital expenditures during the fourth quarter and a quarterly depreciation expense was $3.3 million slightly down from $3.4 million of the prior quarter.

Deferred income at December 29th was $8 million, up slightly from the prior quarter.

This concludes the financial review portion of the call.

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

Thanks, Jan.

First, regarding our goodwill impairment charge.

I want to emphasize that the goodwill mainly related to two historic acquisitions: One executed six years ago and one executed over eight years ago.

Both obviously in very different business environments.

Personally speaking, I would have preferred to take this charge in 2005 when I first became CEO.

However, as Jan explained the accounting behind our goodwill impairment test is very mechanical and leaves very little room for management judgement.

Despite its large size, I want to emphasize that the impairment charge is not a cash charge and therefore in my opinion, has no impact on our business or financial stability.

The one positive aspect of getting this behind us from an accounting standpoint is that it now allows our balance sheet to better match our tangible book value, which at present on a per share basis is roughly equivalent to the current price of our stock.

Turning now to our business operations and results.

Let me just say at the beginning of the last quarter results were a disappointment to us and as a result, we will redouble our efforts to increase revenue and control our cost.

During the fourth quarter, we experienced unanticipated weakness in our Mainstream products and in particular, our PLD business as customers, particularly in Asia, reduced inventory positions.

In addition, European and domestic distribution resell rates were lower than originally forecast.

Consequently, we experienced lower turns than anticipated and revenue declined to 9% sequentially.

Despite this decline in total revenue, we did continue to make progress on our important objectives of growing our new products and improving our revenue mix.

In the fourth quarter, new products accounted for $9.3 million or 18% of total revenue, up from 14% of revenue last quarter.

During the quarter, new product revenue grew 12% sequentially and 127% on a year-over-year basis.

During the full year, 2007, new products accounted for $28.9 million and doubled over the prior year.

Based on our past design ends, we believe we will continue to sustain strong growth in the new product category throughout 2008.

Mainstream products declined 15% sequentially last quarter and now account for 49% of revenue, down from the 52% in the prior quarter.

This decline in Mainstream products was primarily driven by our MACH 4000 CPLD family, which in turn was due to a sharp fall in consumption from the two major Chinese communication OEMs and to a lesser extent, our Asian distributors.

We have been informed that these declines from the Chinese communication OEMs were inventory related and we expect shipments to these customers to increase substantially sequentially in Q1 and by extension we expect our MACH 4000 product family to grow sequentially during the first quarter 2008.

In addition, in the Mainstream product category, we also experienced a decline in our FPSC products which is a FPGA family whose consumption is concentrated within a European communication OEM.

Also during 2007, Mainstream products declined 3% over 2006.

Unfortunately, for the reasons I've described, over 100% of the decline occurred in the fourth quarter alone.

Mature products, which account for 33% of revenue were down 9% sequentially and 30% on a year-over-year basis.

This was actually a substantial improvement when compared to the 16% sequential decline we experienced in this product category during the third quarter.

Last quarter the decline in Mature products was predominantly due to our Mature CPLD products although mature ORCA FPGA products also declined somewhat.

The rate of decline of the ORCA products was much less severe than we experienced in the third quarter.

During the full year 2007, Mature products declined 24% when compared to 2006 although the bulk of that decline occurred in the second half of 2007.

Moving forward, we do believe Mature products will continue to decline, however, I believe the rate of decline will moderate and more importantly, as we continue to decrease the percent of revenue made up of Mature products, the impact of this decline will decrease.

Turning now to our revenue performance by product family.

FPGA product revenue was $13.0 million or 25% of total revenue and declined 4% on a sequential basis while growing 10% on a year-over-year basis.

Declines in our Mature ORCA products and Mainstream FPSC products that I already described, more than offset double digit sequential growth in our new FPGA products.

For the full year 2007, FPGA revenue was a record $52.0 million and grew 6% versus 2006.

This growth rate was well above what we estimate the FPGA market will grow -- will actually shrink low single-digit range during 2007.

So for the second year in a row, our FPGA products have outgrown the market despite being a very tough year for the market this year.

PLD product revenue accounted for $40.1 million or 75% of revenue and declined 10% sequentially and 20% on a year-over-year basis.

As I mentioned earlier, this decline was primarily driven by our Mainstream MACH 400 CPLD product family and to a lesser extent our mature PLD product families.

For the full year 2007, PLD revenue amounted to $176.7 million and declined 10% slightly above our estimate of the general rate of decline in the PLD market during 2007.

Geographically, during the quarter, Asia made up 59% of revenue and declined 9% sequentially.

This weakness, as I mentioned, was concentrated in China and aggregates the rest of Asia was essentially flat.

The America has accounted for 21% of revenue and declined 8% sequentially.

Europe made up 20% of revenue and also declined 9% sequentially.

Revenue by end market for the quarter was as follows: communication 54% of revenue, computing 11%, consumer 11% and industrial other 24%.

There were really no material changes in revenue mix by end market during the quarter as all reports in end market segments declined by approximately the same amount.

Turning now to our product development activities.

We remain on track for the volume production release of our final 90 nanometer product family, the Lattice XP2 non-volatile FPGA products family during the current quarter and we are actively now turning our attention to next generation product families, which we believe will continue to build upon the successful differentiated products we have introduced over the past two years and allow us the continued ability to grow our new FPGA product revenue and overall new product revenue.

I want to close my remarks with our 2008 first quarter financial outlook.

During the first quarter, we expect to see continued new product revenue growth as our historic design ends continue to transition to production orders from a variety of customers worldwide.

We also expect to see a rebound in our Mainstream products as our Chinese customers increase consumption levels and replenish inventory.

As I mentioned, we also expect to see a continued moderation in the rate of decline for our mature products.

Additionally, we expect to benefit from what is traditionally is a seasonally strong first quarter for the programmable logic industry.

Of course, this generally positive outlook should be tempered by the increasingly negative macroeconomic picture which we're cognizant of.

Therefore, consequently on an overall basis, we currently estimate our 2008 first quarter revenue will grow sequentially by 1 to 5%.

Our turns estimate for the first quarter is 59%, which represents a slight increase from the 56% we experienced in the fourth quarter of 2007.

For the rest of the P&L, we currently have the following expectations for the first quarter of 2008: We expect the gross margin as a percent of revenue to be approximately flat.

We expect total operating expenses, excluding amortization of intangibles to be approximately $32.5 million, which represents a decrease of over $1.5 million from the fourth quarter.

As Jan mentioned, intangible asset amortization will be $1.5 million and we plan to take a further restructuring charge of $1.3 million that relates to activities that were begun at end of Q3 and represents the finishing of those activities.

We expect approximately $1.5 million in other income and finally, we expect the share count to be relatively flat.

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

Ladies and gentlemen, the question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) From J.P.

Morgan, we hear from Chris Danely.

This is Larissa Palosheck calling for Chris Danely.

I was just hoping that you could give us some more color and market outlook for '08.

Do you see it better or worse than '07?

Our end markets are varied.

In the communication market, we are positive on the wireless market, particularly outside the U.S.

The wire line markets have improved in 2007.

I think I'm a little bit more cautious on that market.

It's somewhat macroeconomic dependent, which could be clearly a depressant to that market.

On the other hand, there are a number of studies that indicate that with all the new applications and the focus on the internet, particularly video communications, that there is a need for increased bandwidth in that arena.

So I do think longer term, there will be an increase in the demand for wire line equipment.

Really, when that kicks in, it could be somewhat dependent upon the macroeconomic environment.

It's a little bit hard for me to be more granular than that.

But nonetheless, over the medium term we are positive on the communication market.

In the computing market, there's really been no notable trends in our revenue base over the last year or so.

But, I do believe that with our new generation of products, we'll be increasingly able to garner some designs in that area and I do see that as a source of growth, particularly as we enter the second half of the year.

The consumer market is something where we've been a little bit less able to participate or successful in participating in than some of our competition, so the trends in the market are going to be less impactful for us.

Driving that market has been the display market and high definition TVs.

Again, I think I'm going to be a little bit more cautious on that market because it's dependent upon consumer demands, so I would tend to think that would be a weaker market, but, again, the good news for us is we haven't been that successful in penetrating that market.

The industrial market, last quarter, if you break it out of other, it was actually flat for us, so that was a relative bright spot.

I do see that as a continued area of growth and the military market has been strong and I think will continue to be strong next year.

So that's kind a little deeper insight into our viewpoint on the end markets.

And ladies and gentlemen, we ask that you please ask one question at a time and time permit it, we'll come back to you for additional questions.

Next we'll hear from Bill Dezellem with Tieton Capital Management.

Thank you.

We actually had a couple of questions so I hope you'll be able to indulge them.

First of all, you mentioned in the release that you're seeing increased level of business activity.

Would you please discuss what it is that led you to make that comment and then the second question was relative to share buyback and the current price.

Let me just take those in order.

If you look last quarter, the book to bill was actually up last quarter.

It was over one and we did increase backlog during the last quarter.

The challenge we had was we had some pushouts, some cancellations at the end of the quarter primarily from the customers that are identified in the contract manufacturers so that clearly impacted our revenue last quarter.

As we've gone along this quarter, the activity so far for the first several weeks has supported the forecast that we've given.

In addition, I mentioned the two Chinese OEM customers whose business was very compressed last quarter.

We do have indications from them that their business will rebound strongly this quarter and the order rate from those customers so far this quarter has supported that.

Really, those two things, Bill, caused the statement to be made that we issued.

Is that enough on that topic or can I address your second question?

Second will be just fine.

With regards to the share buyback, management and the board regularly discuss the topic.

I have no announcement to make on the subject this time and we will continue to discuss that subject, but it's something that we look at on a regular basis.

And Steve, I don't intend to be argumentative but it seems as though at a point here with the share price being no longer $5 or even $4 or $3 that the board is doing the remaining shareholders a real disservice by not putting some of the excess cash to use.

We appreciate that perspective and I'll make sure that that's part of our next discussion, that perspective.

There are alternative perspective.

All I can say that it is something that we discuss regularly and I have no announcement to make at this time.

Great.

Thank you.

From Goldman Sachs we'll hear from Jim Schneider.

Hi, guys.

Thank you.

This is [Peter Patel] on behalf of Jim Schneider.

You mentioned early in your remarks that in your distribution inventory in Europe seems to be lower than expected.

Can you clarify, if you can, which specific end markets or where do you think the demand from?

Do you replenish that -- just the inventory?

I don't think we've said that so, distribution inventory is relatively healthy.

Tends to be about four to five weeks and that's something the distributor managed tightly.

If you heard that, I should correct that.

I don't believe I said and we don't mean to lead people to believe that inventory levels have changed dramatically at our distributors.

I did say that we'd suffered decline in demand from two Chinese OEM customers, which we attributed to inventory compression and to a lesser extent, we had lower demand from our Asian distributors generally and that weakness was concentrated in China.

Okay.

Thank you.

That's all.

From Merriman Curhan Ford, we'll hear from David Duley.

A couple of questions from me, first of all, (inaudible) question, I guess now you have $40 million in debt left.

Is there a chance that you buy that back, is that something we can expect or is it not financially prudent to do that yet?

Dave, I don't think we're going to probably not buyback the remaining.

We will pay it out in July of this year anyway when it can be put to a --

Okay.

And then just one commentary, I guess I would echo what the previous shareholders said with the stock trading at book value, kind of wondering what the board is waiting for as far as the buyback goes but that's a topic for another day.

Could you talk a little bit about potential cash flow expectations for 2008 given we've prepaid for our wafers, what kind of cash flow generation do you think is possible with that prepaid wafer account and whatever income that you might generate during 2008?

Dave, obviously, we expect to have positive cash flow 2008 primarily because of our prepaid wafers.

Of course, the cash flow will also depend on how we do on the revenue side but in a decent revenue scenario and lower expenses, we should also generate significant cash in addition to the prepaid asset benefit that we have.

I can't give you a number at this point but we should have both positive cash flow from operations as well as -- because we have the prepaid wafer assets.

What is the current balance of the prepaid wafer asset coming into the new year?

It's $107 million roughly.

No, the current portion.

Oh, the current portion.

It's about $25 million.

Okay.

And I'll just ask one more and get back in the queue.

We -- you had a couple of different reasons why you had a difficult revenue quarter last quarter and I would like to talk about the two ones that I remember, which is first of all the two Chinese customers that are inventory correcting.

They had orders on the books they did not take delivery of last quarter.

Now they are taking deliveries of those previously-placed orders or have they come in and said "Yes, we will." I'm just trying to figure out how they've started to take down what they were supposed to last quarter.

Let me just answer that, Dave.

We alluded to potential weakness in these customers at our last quarterly conference call and the weakness was worse than we anticipated and that's because we didn't get as many orders as we thought we would for the fourth quarter and in addition, we had some cancellations from those customers.

Okay, so I think the problem that we telecasted was worse in the fourth quarter than we had originally -- with regard to the current quarter, we have seen a resumption in order activity from these accounts that if continued through the first quarter, and I have no reason to believe that it won't, will mean that their business will substantially improve in the first quarter.

So, I hope that answered your question.

Yes, and so really the answer to the question is what you did confirm is those customers are now taking down product at a greater rate than they were last quarter which gives you confidence that they will return to whatever levels that your forecasting.

Yes, I would go further than that.

They are taking on product and booking at a rate that is much higher than they consume in the fourth quarter and in addition, we have a forecast from those customers, which is substantially higher than their consumption in the fourth quarter.

Okay.

And then the other kind of reason you had a difficult quarter was the U.S.

enterprise business, which is through distribution.

Could you just give us maybe your thoughts of what's going on there or do you expect that to see continued weakness, which is something I would imagine everyone would see?

Or is that something that's also getting better.

I don't know if I said that.

I said that domestic and European reseller rates were lower than forecast.

But if you take apart our quarter, more specifically last quarter, we saw weakness in seven major customers, two Chinese OEMs, three international COM OEM, and two kind of older military programs that related to very Mature products.

If you aggregate the sequential decline in those seven customers, it was around $4 million.

So, then we had another million dollar decline which I would just attribute to general market conditions.

So that's a different look at the last quarter's performance.

This quarter, we expect a substantial rebound in the Chinese customers and no downdraft in kind of the Mature products to the extent of last quarter and then, I would say the general market -- it's kind of a two-edge sword.

First quarter is a much healthier seasonal time for Europe and historically, for North America that's tempered by what clearly is a cloudy macroeconomic picture and people are cautious.

So, probably assuming that we have a similar general quarter to the last quarter, which would be negative versus traditionally, what we see the first quarter as the best planning assumption and that's what we've used to formulate our guidance.

Okay, let me just -- I'll come back.

Thank you.

And moving on, we'll hear from Mark Edelstone from Morgan Stanley.

Hi, this is [John Aaron] for Mark.

Let's see, like I always ask this question about the design activity on your new products.

I know last quarter, it started getting to be such a big number that it was hard to track.

Could you just kind of give us a little bit more of -- maybe a high level look at what design activity looks like.

Is it still resuming at the same kind of pace?

We've stopped giving out the specific number.

Again, and I've said this many times that we think it's more appropriate for us all to focus on revenue than new products so that's the numbers we're giving out.

That being said, we had another good quarter in design activity for our new products.

As we expect, the design activity is shifting from 130-nanometer products to 90-nanometer products.

In particular, the ECP2M product which is our low cost SERDES product has very good design activity and a high quality design activity and I think that product hit the spot in the market that is not being addressed today.

The other thing I gave out last quarter, which I'll give out again is the percent of the historic designs -- kind of where they are in customers' cycle.

So the majority of the designs remain in prototyping stage.

At present, 22% of our historic designs have entered production while 50% are in prototyping.

The remaining 28% of designs have been lost for one reason or another.

Those numbers aren't moving a lot.

That's because every quarter we generate new designs.

Ultimately, I would expect the study [phase] production yield of historic designs to top out around 50%.

If we were to stop getting new designs at any point in time, which we won't if we can keep introducing new products as we are.

Really, we continue to be pleased by the progress of our design activity and feel that our 90-nanometer products are more competitive than our 130-nanometer products in general.

Okay.

Very good.

Thank you.

From Tieton Capital Management, we'll hear from Bill Dezellem.

Thank you, a couple follow on questions.

Relative to the prototypes moving to production, do you have a particular quarter whether it be this year or next year that you would expect to see a volume spike and I'm not even sure if you have that level of clarity on the business or would you anticipate -- it's just more of a steady, continued strong growth in new products as they move from prototyping to production.

A spike is always possible but it's not what I think is reasonable from an expectation standpoint, Bill.

So, if that's possible, but probably not probable.

The new product is doubled on a year-over-year basis.

In the fourth quarter, the rate of growth was 127%.

So it was higher.

We'd would expect, as I said, couple of times now that the rate of growth of new products in 2008 will be consistent or above that in 2007 as we move designs into production.

So, I would expect a steady rate of growth around a certain band of new products.

That's helpful, and then you did reference in response to an earlier question, the general economic weakness or challenges.

Are you seeing any direct indications on your business here in the Q1 of being impacted by general economic weakness?

No, I'm not.

And I'm not an economist and I'm not going to pretend to be but I read the newspapers and watch the stock market and I'm concerned as everybody else is, but our business is 80% export.

I am cognizant that some of those exports get put into product that's get manufactured and sold back into the U.S.

and obviously, U.S.

economy drives a lot of other economies but some percent of our business, say call it 40 to 50% is directly dependent upon the U.S.

economy.

Not very much is dependent upon the U.S.

consumer directly.

Indirectly, maybe.

Everything is just dependent but I guess to answer your question, no, I'm not seeing any direct impact, but I think it would be foolish to assume that if the U.S.

economy goes through a prolonged recession that it wouldn't have any impact.

On the other side, if the U.S.

economy is growing strongly, that's very beneficial for our business.

We try to incorporate in at least our near term guidance somewhat of a more cost to posture on the general market outside the specific customer dynamics that are described would generally, we believe will be positive in the first quarter because they relate to kind of an opposite effect of what we described in Q4.

And relative to 80% of the business being exports, I don't think I've ever really focused on this before.

Given that you have that much at export and then such a high percentage of the business that goes to the communications market, to what degree do you believe or maybe what is your guess -- to what percentage of your revenues are going to build out telecom infrastructure in the developing countries.

And basically including anything that is not Europe, Japan, or the U.S.

as a developing country.

And this would just be an educated guess, so please construe it that way but 54% of our revenues in the communication market, most of that is for equipment that builds up the communication infrastructure.

The majority of that is for kind of the developing country.

So I would say 50 to 60%, outside of the U.S.

and Japan and mainstream Europe.

Great.

Thank you.

And we'll go to Dave Duley with Merriman Curhan Ford.

Just a quick follow on.

I think I understand what I should expect for the new product bucket but when you think of these free buckets in the March quarter, how should we be -- I think you've kind of gave it to us, but let's make it pretty clear as to what the movements are of the three buckets to get to the midpoint of the guidance range.

We would expect a continued decline in the mature product.

Perhaps slightly less than we experienced last quarter, 9% say in the 5 to 10% range and then a relatively flat single digits up in the mainstream products.

Okay.

Thank you.

From J.P.

Morgan we'll hear from Chris Danely.

Just a follow-up question regarding your operating expenses.

Sure.

They're trending down next quarter.

Do you see continued cuts and do you expect this to trend down throughout the quarter?

I mean throughout the year?

We have no current plans to cut operating expenses any further.

So as a percentage of revenue we should still expect about 30 --

That would depend on the revenue so in terms of in absolute dollars of expenses, they will fluctuate on mass charges, but we gave specific guidance for Q1.

We're not giving guidance for Q2 or Q3 or Q4 but we don't see any absolute dollar downward movement.

There maybe modest, I emphasize very modest upward movement from Ascott in the latter half of the year.

Thank you.

(OPERATOR INSTRUCTIONS) And there appears to be no further questions at this time.

Thank you, everyone.

Ladies and gentlemen, that does conclude today's presentation.

We do thank everyone for your participation.

Have a wonderful day.