萊迪思半導體 (LSCC) 2008 Q2 法說會逐字稿

Good evening.

My name is Jennifer, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Lattice Semiconductor corporate second quarter 2008 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS.) Thank you, Mr.

Jan Johannessen, Chief Financial Officer, you may begin your conference.

Great.

Thank you.

Good afternoon, everyone.

Joining me on the call today is Bruno Guilmart.

He's our new President and CEO who joined the Company on July 7.

Before we begin, I would like to read a Safe Harbor Statement and then give a financial review and business review of the second quarter, followed by our third quarter outlook.

Then Bruno will make some brief comments about his initial assessment of Lattice and what his near terms plans for the Company are.

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

I will now read the Safe Harbor Statement.

It is our objective that this call will comply with the requirements of the SEC Regulations FD.

This call includes and constitutes the Company's official guidance for the third quarter of fiscal 2008.

If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call.

The matters that we discuss today other than historical information, include forward-looking statements relating to go our future financial performance and other performance expectations.

Investors are cautioned that forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

Some of those risks and uncertainties are detailed in our filings with the SEC, including our Form 10-K filed in March, 2008, and our quarterly reports on Form 10-Q.

The Company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call.

Our prepared remarks will also be presented within the requirements of the SEC Regulation G, regarding generally accepted accounting principles or GAAP.

Such financial information presented by us during the call will be provided on both a GAAP and a nonGAAP basis.

By disclosing certain nonGAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance for results and underlying trends.

Management uses nonGAAP measures to better assess operating performance and to establish operational goals.

NonGAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP.

If we use any nonGAAP financial measure during the call, you will find the required presentation of and reconciliation to the most directly comparable GAAP financial measure in the Company's earnings press release.

Let me now turn to the second quarter financial results.

Revenue for the second quarter was $58.1 million, up 3% from revenue of $56.6 million in the prior quarter, and down 2% from the $59.2 million reported in the same quarter a year ago.

Gross margin for the second quarter came in at 56% at the high-end of our guidance, and above the 55.6% we posted in the first quarter.

The sequential change in gross margin was primarily due to our ongoing cost reduction efforts and improved pricing of some of our older products.

Total operating expenses, excluding intangible assess amortization and restructuring for the second quarter, came in at $33.1 million, slightly higher than the $32.7 million posted in the first quarter, but down significantly from the $35.6 million in the same quarter a year ago.

For the R&D expense was $17.9 million which includes $0.6 million in stock-based compensation expense, and was slightly up from $17.7 million in the first quarter.

Quarterly SG&A expense was $15.2 million which includes $0.6 million in stock-based compensation expense and was up $200,000 from the first quarter.

The $0.9 million restructuring charge in the second quarter represents the balance of the prior CEO's severance costs.

$0.3million of this charge is a non-cash expense.

Intangible asset amortization was $1.4 million for the second quarter.

Intangible asset amortization for the third quarter will be flat at $1.4 million, and the total for 2008, about $5.6 million.

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

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

Other income for the second quarter was a negative $10.5 million.

We decided to do record an impairment charge of $11.3 million, primarily related to other than temporary decline in the fair value of our auction rate securities.

The fair value of auction rate securities at June 28 totaled $34.6 million, and are recorded in long-term marketable securities on our balance sheet.

We recorded tax provision for foreign taxes during the second quarter of $0.2 million, primarily related to our foreign subsidiaries.

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

Federal income taxes in the foreseeable future.

The June quarter GAAP net loss was $13.6 million or $0.12 per share, as compared to $3.3 million loss or $0.03 per share we posted in the first quarter.

The second quarter results include total charges of $14.9 million for an impairment charge for other than temporary decline in the fair value investments, the amortization of intangible assets, stock-based compensation expense, and restructuring charges.

On a nonGAAP basis, which exclude the aforementioned charge impairment charge on investments, intangible asset amortization, stock-based compensation expense and restructuring charges, and for last year a gain on sale of lands, we posted net income of $1.3 million.

This compares to nonGAAP net income of $1.4 million posted in the first quarter, and nonGAAP net income of $1 million posted in the comparable quarter last year.

Net operating cash flow for the second quarter was strong at $12.5 million.

As of June 28, we have $96.3 million in liquid cash and short-term investments, up from $87.7 million at March 29.

In addition, we have auction rate securities with a fair value of $34.6 million that would be written down as previously mentioned, and classified as a long-term asset.

In addition to the cash and short-term investments and marketable securities, we have the benefit of foundry investments and advances which total $99.4 million at the end of the second quarter.

Our liquidity position remains strong with cash and short-term investments, and foundry investments and advances, totaling $195.7 million at June 28.

The convertible debt remained at $40 million at June 28, but was paid off on July 2 as the bondholders had the option to require us to repurchase the outstanding bonds at par which they did.

Accounts receivable at June 28 was $29.3 million, compared to $28.9 million at March 29.

And days sales outstanding grew slightly to 46 days.

Inventory decreased by $0.2 million from March 29 to $39.1 million at June 28, or 4.6 months on a cost-of-sales basis, slightly higher than our target range.

We spent $3.9 million on capital expenditures during the second quarter, and the quarterly depreciation expense was $3.4 million, up slightly from the prior quarter.

Deferred income at June 28 was $7.5 million, up $0.4 million from the prior quarter.

Now this concludes the financial review portion of the call and I will now turn to the business review.

First, I think the entire Company -- I hear Lattice is excited to have background Bruno Guilmart on board as our new President and CEO.

My impression so far is that our entire organization looks forward to working with him to execute his plans and vision for Lattice.

Following my remarks, Bruno will provide you his brief assessment of the Company, and what his plans are going forward.

But first, let me turn to the business review.

We made significant progress during the last quarter despite the weakness in our North American and European distributor resale.

We were expecting the normal quarter-end pick-up, but distributor resale remained weak during the last month of the quarter, and was down 8% sequentially.

Nevertheless, we were quite encouraged by a number of positive trends during the second quarter.

We continue to see strong demand for our nonvolatile product families.

Mach XO and XP2, as well as our low cost SERDES product family, the ECP2M family.

We also experienced strong growth in the consumer-end markets.

We expect to see continued growth in this end market because the early success of our XP2 and XO product families, and launch of our new CPLD family, targeted at low power and high volume portable and hand-held application.

Also our gross margin improved for the third quarter in a row and came in at 56% in the second quarter.

As I mentioned earlier, it was mainly because of ongoing cost reduction efforts and improved pricing of some of our older products.

Lastly, strong net operating cash flow helped to grow our liquid cash position substantially to $96.3 million, which does not include the almost $100 million we have in foundry advances and investments.

In the second quarter, new products grew 10% sequentially to $12.3 million and accounted for 21% of our total revenue.

On a year-over-year basis, new product revenue grew 90%.

Both our 90-nanometer and 130-nanometer products experienced double-digit growth as more and more customer designs precision from prototyping into production.

We expect this trend to continue, in particular, revenue from our low cost ECP2M family with embedded serial experience, high double-digit sequential growth and increased more than tenfold on a year-over-year basis.

The revenue from our newest nonvolatile 90-nanometer family XP2 more than doubled during the quarter, albeit from a small base.

We're particularly encouraged to see that some major customers in the consumer end markets are going into production with our XP2 products.

The primary advances that are seen in the XP2 product are the small footprint package offering and the design security inherent in the imbedded flash memory approach.

Our other nonmolecule, XP and X MachXO, also grew during the quarter.

In particular, revenue from our MachXO product family experience double-digit growth during the quarter and more than double on a year-on-year basis.

The growth was broad-based across all end markets and geographies.

The growth rate for our new products in Q2 of 10% was lower than we had initially anticipated, primarily because one major customer pushed out its production ramp to later this year and because of flatness in the programmable mixed signals business.

We currently expect a rebound in Q3 for the new products given the healthy book-to-bill ratio and scheduled backlog we have for those products.

Despite new product revenues, slower than expected growth in Q2, we believe we are still on track to meet our growth expectations for new product revenue in 2008.

New products accounted for 21% in Q2 which is up from 11% in the same quarter a year ago.

We currently expect new products to represent between 25 to 30% as a percentage of all revenue in the third quarter.

Mainstream products grew 5% sequentially and accounted for 49% of revenue versus 48% of revenue in the previous quarter.

The strength in mainstream product revenue was mostly from Asia.

Mature products accounted for 30% of total revenue, down from 32% of total revenue in the previous quarter and down from 39% in the second quarter of last year.

On a sequential basis, mature product revenue declined 6%.

The majority of the decline came from lower demand for some of our older FPGAs in North America and older PLDs in Europe over a broad customer base.

While we expect to rebound in new product revenue base on the current book-to-bill ratio, we expect a decline in mainstream and mature product revenue in Q3 due to seasonal weakness, a slow down in mainstream product shipments to China due to the Olympics, and overall soft market conditions.

Turning now to revenue by product family.

FPGA product revenue for the quarter was $13.4 million, a decline of 2% sequentially.

Although new FPGA products grew during the quarter, the combined growth did not offset the decline in the mature FPGA products.

PLD product revenue grew 4% sequentially to $44.7 million or 77% of total revenue.

The key drivers for the strong growth were the non[molecule] MachXO and the MACH 4000 CPLD families.

Geographically during the quarter, we saw strong growth in Asia but declines in Europe and the Americas.

Asia made up 60% of total revenue, up from 56% in the first quarter and grew 9% sequentially.

Europe accounted for 21% of revenue, declining 4% sequentially.

The Americas accounted for 20% of revenue, and declined 7% sequentially.

Now within Asia, revenue from China grew very strongly at 23% sequentially while Japan declined 7%.

We anticipate China will be relatively flat in the third quarter as one major communications customer will be taking less product.

However, we expect that this anticipated decline will be offset by an increase from another major communications customer that will be going into production with some of our new FPGA products.

The softness in Europe was mostly in mature PLD product across all end markets.

We expect Europe to experience its typical seasonal weakness in the third quarter.

The decline in Americas was in the mainstream in mature product.

The softness was broad-based and further amplified by inventory correction by two large customers, as well as ending of a couple other customers' programs.

Revenue by end markets for the quarter was as follows; communications was 53% of revenue, computing 14% of revenue, consumer and automotive, 11%, and industrial and other, 23% percent of revenue.

During the quarter, communication's end market was flat sequentially.

In general, business from wireless customers was healthy while wireline and data networking were softer.

The computing end markets grew 16% sequentially, as some stores and high-end server programs ramped up production with some of our new products.

Overall, orders from storage customers were stronger than from data processing and server customers.

The consumer and automotive end market grew 17% sequentially as new programs ramped into production.

These programs include applications -- such applications as displays, high-end cameras, and set-top boxes.

We anticipate an increase in non (inaudible) FPGA revenue in the third quarter as the large consumer customer begins production.

Finally, the industrial and other end market declined 4% sequentially during the quarter, primarily due to inventory correction by certain customers.

Turning now to our product development activities, early in the quarter we launched a low power Mach 4000ZE CPLD family.

The new family is based on popular Mach 4000 architecture [which optimizes and features] builds on Lattice's success in the CPLD space by lowering the power needs, reducing costs, and shrinking the footprint with smaller packages, making it ideal for ultra-low power, high volume, portable and hand-held applications, such as GPS system portable media players, wireless appliances, smart phones and digital video recorders.

During the quarter, we completed the volume production release of our the entire nonmetal XP2 product family.

We are excited about the early traction of the XP2 family's gained so far, and as mentioned earlier, expect a large consumer customer to move into production with the XP2 product in the third quarter.

Next, I'm going to provide you with a financial outlook for the third quarter of 2008.

We enter the quarter with a slight low backlog than the previous quarter, but we continue to be optimistic about new product growth as historic design ins continue to transition into production orders from a variety of customers worldwide.

However, on the other hand, we do remain concerned about the overall macroeconomic environment and the typical summer seasonality.

Taking into account all of these factors, we currently estimate that revenue will be flat to down 3% sequentially in the third quarter.

Our turns estimate for the third quarter is slightly above 50% which is slightly below the 53% turns we experienced in the second quarter.

For the rest of the P&L, we currently have the following expectations for the third quarter of 2008.

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

We expect total operating expenses, excluding amortization of intangibles, to be approximately $33 million.

Intangible asset amortization will be $1.4 million.

We expect approximately $0.7 million in other income.

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

To conclude, I want to take this opportunity to thank everyone for their support over the years and this will be my last earnings call at Lattice.

As you all probably know, I resigned my position as Chief Financial Officer on July 11.

As I expected -- as I have accepted an exciting opportunity with a bigger company in the alternative energy field.

I wish Bruno, the Company, and all of you the best of luck going forward.

With this -- with that I would like to turn the call over to Bruno.

Thank you, Jan.

First, I'd like to thank Jan for his best service and many contributions to the Company over the years, and wish him well in his future endeavors.

We have started a search for Jan's replacement which we hope to complete as soon as possible.

In the interim, our corporate comptroller, Rob O'Brien will assume responsibility for our finance organization.

Until we have appointed a new permanent Chief Financial Officer, I will assume responsibility for all interaction with the financial community.

I have now been at Lattice two and a half weeks and my initial impression is that Lattice is a company with outstanding potential, and innovative profitable logic technologies and products that are getting strong customer momentum within the FPGA industry.

The Company has extremely talented and dedicated employees, a strong balance sheet, and I look forward to leading the Company to its next stage of growth.

In the near term, I'm focusing on product strategy and cost structure, customers and execution.

I look forward to communicating a more detailed plan to the financial community within the next few months.

I will now open the call for questions.

Operator, please go ahead.

(OPERATOR INSTRUCTIONS.) Our first question comes from James Schneider.

Your line is now open.

Good afternoon.

Thank for taking my question, and welcome, Bruno.

First of all, could you address here Q2 revenue outlook in terms of the growth or decline you're expecting by end-of-market, please?

Yes, I can do that.

We expect computing -- communications markets, we expect that to be -- we saw strength in wireless and wireline, and expect that to continue into Q3.

However, given the state of the economy and the China Olympics, we would expect that market to be lumpy, more lumpy than usual and turn dependent.

Computing, we saw strength in storage as I said earlier, and we expect to see growth -- (multiple speakers)

Hello?

Anyway, we saw strength in storage as I said earlier, and we expect to grow in data processing and service later in the year.

Consumer, we expect continued growth in Q3 as we benefit from nonmolecule ramp of a major OEM as well as other new products.

In industrial military, we really don't have enough visibility to comment, but expect industrial may be soft this quarter because of Europe's seasonal pattern.

That's basically what we are seeing right now.

Okay.

Fair enough.

Secondly, could you talk broadly about the quarter pattern you've seen from distribution across the various geographies so far in the month of July here?

Given the slow down you saw in June?

Yes.

Resale for the distribution in the beginning of the quarter looks reasonable.

We haven't seen a drop off or any major pick up.

It seems reasonable.

Book-to-bill so far this quarter, is well above one.

And the bookings for the quarter is just slightly below last quarter.

Thanks.

And then finally, could you talk a little bit about the magnitude of sales from the new consumer design wins that you mentioned that you are expecting in the back half of the year, please?

We have a number of designs in the consumer space.

We have one major one that will ramp into production in Q2 -- I mean in Q3 and continue into Q4.

That's really all we can say about it.

But it is a major design and we expect significant revenue from that design win.

I don't want to go into specific amounts.

Thanks very much.

Our next question comes from Tristan Gerra.

Your line is now open.

Hi, good afternoon.

Just going into the Q3 revenue guidance, you mentioned the push-out.

How much of the guidance flat to slightly down is due to the push-out of the Q2 just weakness at this -- and, is there any change in terms of subjects that you've won earlier this year?

Not significantly, Tristan.

We expect the designs we have to start ramping -- these consumer designs to start ramping in Q3 as I mentioned, is major customer.

There's no change there.

We also expect major designing for an Asian Chinese communications customer for our new FPGA products to start ramping in Q3 as well.

Is it fair to assume then that cautious guidance is only based on current trends and -- what they slow down you saw June, specifically on the distribution side?

If you can add any color on to that?

That is correct.

We are cautious about the overall macroeconomic conditions.

We are cautious about Europe.

We are cautious about North America and European distribution in general.

That's where we are seeing the caution.

Okay.

In terms of new product ramp in Q3, what should we be looking for, relative to your total revenue guidance?

As I mentioned on the call, we expect new product revenue to comprise about 25% to 30% of total revenue in Q3.

If do you the math, will you see that's obviously a good quarter for us in terms of new products.

Okay.

Just quick last one in terms of mature product.

Is there any new phase outs of older products that we could expect, in terms of more than a normal decline in terms of mature products as a result of product line being discontinued?

Or should we expect just a normal pace, relative to what we've seen of the past couple of quarters?

A normal place on a the mature products in terms of the mainstream products.

We expect the decline there, because a lot of the mainstream products we ship to China to serve the communications customers.

We expect a decline in that business for Q3.

And beyond that, we expect that to pick up again.

Okay.

Great.

Thank you.

Our next question comes from David Duley.

Your line is now open.

Yes, good afternoon.

Bruno, I have a question for you.

I was wondering if you could talk about -- I know it's early, but as you assess the Company, you mentioned you are focusing in on a couple different things.

One is cost structure.

Could you talk a little bit about that?

Because I think investors generally think -- we would like to see a lower cost structure.

I am just wondering what you're thinking about it.

I can't really give you any specifics as far as numbers for the time being, but it is obvious that I'm looking into great detail into our cost structure so that we can improve the performance of the Company.

In the coming months, I will come back to the financial community with a more precise plans on what the cost structure is going to be so that it can be aligned with the current revenue base of the Company basically.

Okay.

And Jan, a follow on -- as far as new product growth in the upcoming quarter, just to clarify here.

The other questions have been similar.

But basically, you said you were going to go from 20% to what, 25% to 30% on the new products?

21%, to 25% to 30%.

If the rest of the stuff was flat then obviously, you have huge growth in this segment.

It looks like it's going to be more than 20% sequentially.

Why is the growth so much stronger in Q3 on the new product front than it was in the quarter that was just reported?

It's a couple of things.

There were push-out by a customer.

There was also our programmable mixed-signals business, which is classified as new product, was flat during Q2 from Q1.

That basically kind of deflated the growth rate somewhat in Q2.

And we expect to rebound in Q3 and pretty much catch up, so we are really on track to meet our growth goal for new products in 2008.

Okay.

That's the doubling that you referred to?

That's exactly.

Okay.

New products are going to have a strong performance in this upcoming quarter.

What is it -- what you've answered and I want to clarify this, what's weak is U.S.

and European distribution.

And that's tied to, what?

The land line communications business?

Or what is the reason for weakness in those two distribution businesses?

It's a broad base -- we saw broad-based weakness.

We expect broad-based weakness in both those channels and also, because of Europe's seasonality.

The other thing is the mainstream products.

We ship a lot of the mainstream PLDs to China, and they will take less product in Q3.

Those are the main reasons for why we are expecting decline in those mainstream and mature businesses for Q3.

What's going on with the Chinese situation?

What one guy is attached to do 3G roll-out and the other one is not, so the one guy is going to take products and the other guy is not?

One customer is basically going to have a decline because of the Olympics and that's basically the mainstream PLDs.

The other guy is ramping production in a wireless application and he's going to start taking our new FPGA products.

Okay.

We expect those to offset each other during the quarter.

One final question from me is I thought you took a write-down on the auction rate securities.

I'm just confused because this looks like the marketable securities went from $37 million to like $35 million -- $34 million.

But I thought you said you took a $10 million or $12 million write down.

How did that all work?

What we did last quarter in Q1, we basically took a write-down through the balance sheet last quarter.

This time we actually took all of it through the P&L, because we now expect it to be more than a temporary impairment.

We decided to do take it through the P&L.

And I think that's the right thing to do.

Okay.

Could you give us an update on what is going on in that marketplace?

You are basically parked with all of those auction rates.

There's no auctions that are happening now or no way to redeem the money?

That is basically more or less correct.

However, we do have some auction-rate preferred.

We do expect to actually be called and clear in the third quarter.

About $5.7 million worth is our expectation.

If the market continues to be frozen up, will we have to write this whole thing down?

It's something we'll have to monitor quarter to quarter, and look at it and see what's happening in the marketplace.

I don't know what's going to happen in the financial markets.

We'll have to look at it every quarter and see what happens.

Okay.

Thank you.

Your next question comes from [Bank Nazamoonie].

Your line is now open.

Good afternoon.

This is Bank.

Thanks for taking my call.

Welcome, Bruno.

My first question is if you look at our normal seasonality for Lattice for the third quarter, it's typically down about 6% yet your guidance is for flat to down 3%.

What gives you the confidence that will you do better in the third quarter than normal seasonality, especially given the macroeconomic weakness that you already talked about?

I think the main reason for that is because we are expecting a very strong quarter for our new products.

The rest there -- a lot of weaknesses is in the marketplace, but we expect strong growth for new products in Q3.

And clearly now, that our new products -- at the end of Q3, we expect to be about the same percentage of revenue as mature product more or less.

We are very close to crossover between new product and mature products, so it helps our overall growth.

Of course Q3.

we are looking at the softness in the market than some of the businesses.

That's why we are going to have the guidance of flat to zero -- flat to down 3%.

Okay.

That's helpful.

Now is it primarily in the communications ends market that you have these new production ramps taking hold?

Really a combination of communications market as well as consumer market, as well as the computing markets.

We have a number of design in the servers and storage business.

And also, the industrial marketplace.

It's really across all end markets.

Given the condition of -- the mature products have better gross margins compared to new products.

Is that impact going to be taken into account in your guidance?

Yes.

We have taken that all into account.

It's difficult to project the gross margin, but we have taken it into account.

And we expect gross margins should be in the 55% to 56% range at this point.

Okay.

And another follow up.

You've mentioned that book-to-bill was much greater than one.

Are we talking 1.1, 1.2 or just -- ?

We don't have a policy of giving out the book-to-bill ratio.

It's well above one so far this quarter.

And consistent with what it was last quarter?

Pardon me?

Is it consistent -- ?

Book-to-bill for last quarter in Q2 was just slightly above one.

Better than it was last quarter.

Okay.

And then a bookkeeping question.

What do you expect your depreciation expense for the full year as in relates to the CapEx for the full year?

We expect depreciation expense for Q2 was about $3.4 million.

We expect the depreciation expense for Q3 and Q4 to be reasonably close to Q2.

You can --

What about CapEx?

CapEx, we expect to be down in Q3.

It was $3.9 million in Q2.

And that was because we have to add some manufacturing equipment for the ramp of some of our new products.

We expect it to be down a little bit in Q3 and Q4 for capital expenditures.

The book order down.

Okay.

Okay.

Perfect.

Thank you very much.

Your next question come from Bill Dezellem.

Your line is now open.

Thank you.

We have a group of questions.

First of all, relative to the cost reductions or cost realignment, Bruno, that you have referenced, does that in any way imply that your long-term view of the revenue growth of the Company is different than the historic long-term view has been?

Well, my long-term view of the Company has yet -- again, I've been only two and a half week in the job.

But I think there is something which is fairly urgent to do is to make sure that we have a cost structure which is aligned to our current revenue base.

And obviously, that's one of the bigger priorities.

Then as part of the product strategy -- when we are going to refine the product strategy we are looking at areas where we can get some growth, capitalizing on the strengths that we have.

But I know these are generic comments, but for the time being that's really all I can say.

Okay?

That's fair.

And then not to be argumentative at all, but what is your view on retaining the remaining senior people that are there?

It appears as though the Board has lost touch with that issue.

I'm curious what your perspective is.

I want to make sure that we have the right people in the right seats.

Okay?

That's my first priority.

I'm going through this assessment currently.

And then second question in that same vein is -- the Board of Directors historically has not appeared to be thinking very seriously about shareholder value when it comes to the share buy-back program.

What are your thoughts relative to buy back?

And in light of the fact that the share price is low, but also in light of the fact that you do hold the auction- rate securities -- which you certainly are not going to buy any shares back with those -- minus stock.

We will explore.

As you know, CEO is measured by the value it creates to shareholders.

That's maybe not the only thing, but it's something that is obviously a very important measurement of performance.

Okay?

We will look at that issue on a regular basis.

But at the same time, I think also it's important that we keep a strong balance sheet to have the flexibility to look at other opportunities.

That would create shareholder value.

I would say, yes, share buy-back is an option, but it's not the only option.

There are other ways to create shareholder value than adding a strong balance sheet that will give us the flexibility.

Great.

Thank you.

Well, welcome, Bruno.

And, Jan, best of luck in your next chapter.

Thanks, Bill.

Our next question comes from Dan Burkey.

Your line is now open.

I have three questions.

The first one, you talked about the auction rates.

I assume that that five or am I correct to assume that that 5.7 that you think might be called is not being carried at a full 100?

So you might eventually have a gain on that?

No.

That's actually not correct.

We carry that at 100% and we expect to be able to liquidate that.

It is being carried there.

Okay.

Perfect.

Is there any -- when is that supposed to happen?

I expect it to happen some time in the next month or two, based on the information I have today.

Will you disclose if and when or it won't hit the materiality threshold?

I will have to check with our legal guys to see if it's material or not.

The second, you talked about the CapEx and depreciation.

And some -- Jan, we are looking at what you've guided us to for operating income.

It looks like the cash flows, from an operating cash flow standpoint and free cash flow standpoint, could be in comparable in the September quarter.

Are we looking at things the right way there?

I think the cash flow -- operating cash flow has been good for the last few quarters.

It was stronger in Q2 than in Q1.

Q1 was $6.9 million.

This was $12.5 million.

Part of the reason we have good cash flow is we are getting the money back from -- we don't have to pay for wafers and (inaudible) from our foundry partner, Figitsu.

That contributes to the strong cash flow.

I expect the cash flow going forward to show the similar positive pattern.

Okay.

If we put that cash flow together with the 5.7, the existing cash on the balance sheet.

Take out the $40 million of converts, you're looking at somewhere between $60 million and $70 million of cash as were exit the September quarter.

One, is that about right?

And then my question to Bruno, is could you prioritize the uses of cash there?

On the share buy-back question, you talked to the other guy about acquisitions.

Maybe if you could prioritize the uses of that $60 million to $70 million in cash.

Maybe I should just comment on the first part of that question.

In terms of your -- your math is reasonably correct on what the Q3 numbers look like.

Let me answer the second part of your answer.

I think it's too premature for me to give an idea of how this cash is going to be utilized.

But as I've said, we are looking at -- we are going to look at all the options to maximize shareholder value.

That's really all I can say really at this stage.

What are those options?

As I've said, share buy-back is an option.

There are potential acquisitions also, would be other options.

Investments in certain maybe intellectual property areas.

Again right now, I have not really formulated product strategy going forward, so we will do that.

Obviously, this is not something that can be done in a couple of weeks.

Even if we had some acquisitions that we were thinking about as you will note, this is taking time.

As I've said, I think it's also a positive thing to have the flexibility on the balance sheet to be able to keep the options open.

Okay?

Okay.

Great.

Thank you very much and good luck.

Thank you.

Our next question comes from David Duley, your line is now open.

Yes.

Just a couple clarification questions.

You mentioned that the book-to-bill was positive throughout -- or was slightly positive last quarter and has been nicely positive this quarter.

That's a little confusing versus your guidance of being down.

Could you help me understand those two pieces of information?

You have to remember that the book-to-bill is -- there are two numbers of bookings and billings.

If one number is a lot lower then you have a positive thing.

Right?

You have to look at both things.

I think if -- we are entering the back quarter with slightly lower backlog than last quarter.

We are seeing good book-to-bill so far this quarter.

Are you seeing good book-to-bill quarter because orders are good?

Yes.

Obviously, the book-to-bill ratio -- but it is a ratio.

Remember, you can't just look at the ratio, You have to look at actual numbers themselves.

Based on all the numbers that we have -- what we think the guidance -- what we think the numbers is going to be for Q3 in terms of revenue.

Okay.

And if your new products are going to grow as strongly as you anticipate in this upcoming quarter, and the new products are the ones that are using the prepayments from Figitsu to build the products, wouldn't you think on a normalized basis that the cash flow would go up?

I'm not going to comment on what the actual cash flow will be.

We expect to have good cash flow in Q3, like we had in Q1 and Q2.

And just to clarify one point, not all the new products are using Figitsu.

We do have new products that do not use Figitsu, okay?

And they not an insignificant portion by the way.

What is the current balance of the prepaid wafers?

$99.4 million at June 28.

How much?

$99.4 million.

That's the overall?

Isn't there a current portion of that?

Yes.

The current portion is $25 million and change.

The balance is the long-term portion.

Okay.

Thank you.

Your next question comes from Brad Evans.

Your line is now open.

Yes, thank you for taking the question.

I just want to -- Bruno, you are in the hot seat here.

It's your first call and we aren't being fair to you.

I think you have to -- I'm sure you recognize that Lattice's stock is near a record low.

You look at the enterprise value of the Company today, based on just the color that Jan just provided.

The stock is going to open a little lower tomorrow, But our enterprise value, about $125 million.

If you look at this year, you might do about $130 million $140 million -- $230 million to $240 million in sales.

Being valued about half of sales.

I would urge you to -- Bill's comment about the Board resonates.

I think the stock price is a reflection of the market's confidence in management as well as the Board in terms of delivering and creating shareholder value.

It's a real issue for you that you've inherited.

All I ask of you is to -- at the the direction of the Board, obviously but I would appreciate you meeting with shareholders and getting a vein, or a sense of what shareholders would like to see happen.

Because clearly, the market is not really valuing the business for much at all of anything.

It's really the balance sheet that's supporting what's left of your equity price.

I would just urge you to consider the voice of shareholders here.

Look at the value of the Company and the balance sheet as a fairly significant safety net.

The prospect of making large acquisitions or buying IP when in reality the market right now is not placing much of a value at all on our business.

It seems somewhat counter intuitive.

That's really not a question, but a comment.

I guess if you would like to respond to it, I would appreciate it.

Okay.

Let me just repeat one more time what I said earlier.

My number one goal is to create shareholder value.

Okay?

And I believe that there are a number of options that can create shareholder value.

Okay?

Obviously if you want to see the stock price at $10 by the ends of the quarter, I doubt this is going to happen because it's going to take -- this Company needs a business transformation.

Okay?

So that it can deliver consistent numbers for profitability perspective.

There are a number of things that needs to be addressed in the Company.

There is a good foundation, but there are a number of things that need to be addressed.

As I said, yes, we will look at all the options, including a share buy-back, including other things that will deliver.

Always the first priority whenever we look at potential I would say option is going to be, is this going to deliver return for the shareholder.

This I can guarantee you that this will be the process we will go through.

Well, history is an important aspect here in that the Board -- the management prior to your arrival at the direction of the Board, the message that shareholders were supposed to -- growth and profitability of the Company was supposed to be delivered through new product development.

Clearly, that seems to be that that has maybe not met expectations, based on the fact that management is unchanged.

Call me skeptical -- but the very prospect now that we need to make large acquisitions or many acquisitions or any acquisitions -- One has to be somewhat skeptical of that so that's the history that you inherit obviously.

Right, of course.

History is great, but I'm focusing on the future.

Okay?

That's why I'm here is to focus on the future for this Company.

I have never said that we are going to make large-scale acquisitions or whatever.

I said that's my third week in the job, please bare with me.

I'm doing an assessment of the Company with its strengths and weaknesses.

My number one priority is to raise shareholder value.

Okay?

As I said there are different ways in my view of raising shareholder value, but that will be my top priority.

We will look at all the options and what's the best way to get there.

Okay?

That's all I can say for the time being.

Good luck.

Okay.

Thanks.

Your next question comes from Bill Dezellem.

Your line is now open.

Thank you.

We had a couple of questions.

And the first one is relative to the return on capital.

Bruno, would you please share with us how a return on capital, when it comes to new investments, enters into your decision making?

Again, the assessment in the first few weeks that I have made within Lattice is that there is little return on investment calculation that is being made when we deliver new products.

Okay?

As you've read my background, I'm coming from a capital intensive business.

Therefore, we don't have much CapEx in our business, but R&D is basically our CapEx.

I am going to make sure that we do have a culture which is going to be [driven].

When we decide to develop a product, we go through the right process of looking at -- is this going to get the right return.

As opposed to spending a large amount of money without having done the proper study first.

That's really something, yes, that I'm going to change in the way we look at things internally.

Thank you.

And then the next question, circling back to the production ramps that you've describe.

There are a number of different ones that were referenced.

We are curious to what degree are those production ramps that you referred to throughout the call in the backlog versus not being in the backlog?

Simply trying to understand how the dollars are counted in this case, please.

Typically, the backlog that I refer to when I talk about backlog is the 90y-day backlog.

The basic backlog for the quarter.

We have -- so that's what I talk about -- that's the number I refer to.

And that would include the ramp of, say, the new consumer application or some of the other -- ?

Yes.

It includes that backlog.

as well as backlog for some of the other new products that we expect to sell in Q3.

That's helpful.

Thank you both.

Thank you.

There are no further questions in queue.

Great.

Thank you everybody.

Thank you.

This concludes today's conference call.

You may now disconnect.