萊迪思半導體 (LSCC) 2010 Q1 法說會逐字稿

Good afternoon.

My name is Vinietta, and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Lattice Semiconductor first quarter 2010 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)

As a reminder, today's conference call will be available for replay.

The conference ID number is 66334776.

The number to dial in for the replay is 706-645-9291.

At this time, I would like to turn the call over to David Pasquale of Global IR Partners.

Sir, you may begin your conference.

Thank you, Operator.

Welcome everyone to Lattice Semiconductor's first quarter 2010 results conference call.

Joining us from the Company today are Bruno Guilmart, the Company's President and CEO and Mr.

Michael T.

Potter, Lattice's Corporate Vice President and Chief Financial Officer.

Both executives will be available for Q&A after the prepared comments.

If you have not yet received a copy of today's results release, please e-mail Global IR Partners using lscc@globalirpartners.com, or you can get a copy of the release off of the Investor Relations section of Lattice Semiconductor's web site.

Before we being the formal remarks, I will review the Safe Harbor statement.

It is our intention that this call will comply with the requirements of SEC regulation FD.

This call includes and constitutes the Company's official guidance for the second quarter of fiscal 2010.

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 our future financial performance and other performance expectations.

Investors are cautioned that forward-looking statements are neither promises nor guarantees.

They 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 Securities & Exchange Commission, including our fiscal year 2009 Form 10-K filed on March 10, 2010 and our quarterly reports on Form 10-Q.

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 SEC Regulation G regarding Generally Accepted Accounting Principals, or GAAP.

I will now turn the call over to Mr.

Bruno Guilmart.

Please go ahead, sir.

Thank you, David and thank you everyone for joining our call today.

Our results again exceeded our quarterly revised guidance.

We believe that these results which show evidence of the measure of that broad-based global economic recovery, also continue to validate the business model and strategy we've implemented to achieve both robust and sustainable profitability at Lattice.

Specifically, during the quarter, we achieved revenue growth of 28% compared to 4Q '09, and 63% compared to the year ago quarter.

Our order bookings remained strong throughout the quarter and we strictly manage our inventory, exceeding the quarter with lean inventory levels.

We're very pleased to have recorded our second consecutive quarter of profitability.

With that said, we think our business can achieve much more and we will continue to aggressively pursue growth opportunities, improve operational efficiencies and higher profitability.

In terms of highlights, all end markets, geographies and product lines grew sequentially.

In fact, Q1 was the strongest quarter ever for our new FPGAs, MachXO family, and our mixing of products.

The MachXO products are on track to become the Company's biggest product family this year.

All geographies and markets experienced double digit growth.

Based on our results, we believe that's we are gaining market share and we're optimistic about our business moving forward.

Our strategic focus on high value and low power solutions continues to gain traction as customers seek to optimize cost and power consumption of their designs.

We continue to build momentum with XO, ECP3, XP2 and Power Manager families with design wins in communications, computing and consumer.

In addition, as part of our on-going commitment to strengthen our distribution channels, we have recently announced the addition of Nu Horizon Electronics for our North American and European regions.

Nu Horizon was already our distributor in Asia.

We expect that Nu Horizons will allocate direct technical resources to Lattice and leverage its proven worldwide distribution network to help us generate new demand and better serve our existing customers.

We presently do not foresee any other major changes to our distribution network but that is always subject to any future opportunities arising that would permit us to further strengthen our sales channels.

We officially opened our Singapore operation center last February 2010 and already have close to 20 local employees, actively contributing to the further streamlining of our supply chain.

With over two-thirds of our shipments now to Asia, these efforts will help both lower our cost and better serve our customers.

In addition, we now ship over 90% of our products from Singapore and our operating results this quarter include the benefit of our warehouse move, [prominently] in reducing shipping expenses.

Let me now give you some color on the quarter.

As noted at the start, revenue in every sector of our business was again up in Q1 on a sequential basis.

While all life cycle categories experienced quarter on quarter growth, revenue for our new products was particularly strong.

Mainstream and mature products also posted sequential increases as our core PLD business remains very healthy.

The mix of new, mainstream, and mature was 40%, 35% and 25% of revenue respectively in Q1.

This compares to a new at 38%, mainstream at 37%, and mature at 25% in Q4.

New products were up 34% quarter on quarter and more than doubled year on year.

Growth was again driven by our non-volatile MachXO family, our mid-range ECP family, and our mixed signal family.

MachXO grew 27% quarter on quarter, and was up almost 150% year over year.

Revenue from our all ECP3 family grew 30% quarter on quarter.

Revenue for all mid-range ECP families were over 40% quarter on quarter and over 65% year over year.

Our mixed signal products continued to perform well, delivering gross of 23% quarter on quarter and 48% year-over-year and now represent greater than 5% of our revenue.

Revenue from FPGA products represented 33% of total revenue in Q1, up 40% from Q4.

Revenue growth for FPGA products was again driven by quarter on quarter growth in every new FPGA family.

PLD products represented 67% of total revenue in Q1 up 22% compared to Q4.

Our PLD families were strong across multiple end markets.

On a geographic basis, revenue from Asia including Japan was 67% of revenue in Q1 compared to 70% in Q4.

Revenue from North America was up in dollar terms remaining at 15% of revenue.

Europe was 18% of revenue, up from 15% in Q4.

Overall, on a market basis, communications was 52% of revenue in Q1 compared to 51% in Q4.

Communication growth worldwide was particularly strong.

Computing, which again grew in absolute dollars, was 15% of total revenue compared to 17% in Q4.

Primarily driven by momentum in the server markets.

Industrial and others came in at 21% of revenue in Q1 compared to 20% in Q4.

This reflects the overall market recovery we're seeing.

Consumer and automotive was up in dollar terms, remaining at 12% of revenue quarter on quarter.

I will now turn the call over to Michael for a more detailed financial review.

Michael?

Thank you, Bruno.

As noted earlier, revenue for the first quarter was $70.4 million, up 28% from the prior quarter and up 63% from the year-ago period.

From a capacity standpoint, we received and expect to continue to receive, adequate supply from our fab and assembly and test partners.

In general, we're able to maintain standard lead times and we're not allocating product and we expect that to continue for the second quarter.

As is normal, we evaluated our new, mainstream, and mature product categories and updated them to more properly reflect the current life cycles of our products.

Our press release contains a split use -- using the new characterization.

For information, if we had not changed the characterization, new, mainstream and mature would have been 49%, 32% and 19% respectively.

Gross margin for Q1 came in at 58.5%.

This was above our guidance and higher than the gross margin posted in Q4 primarily due to favorable volume and mix combined with continued strict cost controls.

As a result of higher volume, we benefited from good overhead absorption as our revenue and production ramped up over our last quarter.

Our strength in mature products contributed to a more favorable margin mix.

Total operating expenses for the first quarter came in at $30.2 million compared to $27.1 million in the fourth quarter.

The majority of the increase comes from increased R&D spending, performance bonuses based on performance against certain annual targets, and employee and representative commissions related to our higher sales volume.

Q1 GAAP net income was $11.1 million or $0.10 per share, as compared to $5.6 million, or $0.05 per share in the fourth quarter, and compared to a net loss of $5.8 million or $0.05 per share in the year ago period.

All per share amounts are on a fully diluted basis.

Moving on, our balance sheet was further strengthened in the quarter.

We generated an additional $20.9 million of cash from operations.

Ending the quarter with a cash, cash equivalents and short term marketable securities balance of $183.5 million.

We have an additional balance of approximately $5 million in advanced credits from Fujitsu which we expect to use over the next three months.

The approximately $5 million is recorded in other current assets.

Not included in the liquidity discussion, I just went through, is the remaining balance of our auction rate securities with the fair value of $12.9 million.

Due to the illiquid market for these types of investments, auction rate securities are classified as long-term marketable securities.

Accounts receivable at April 3, 2010 were $48.3 million compared to $33.6 million at the end of last quarter and Days Sales outstanding were 62 days compared to 55 days last quarter, and 53 days in Q1 2009.

Although our actual collection times have not materially changed, the DSO metric has been, and will continue to be, impacted by our transition to higher sell-through transactions which causes higher gross billings.

Inventory at April 3, 2010 was $24.7 million down from $25.9 million last quarter, and down from $30.3 million in the year ago period.

Months of inventory now stands at 2.5 months compared to 3.2 months at the end of Q4 2009, and 4.4 months in Q1 2009.

Inventory in our distribution channel slightly increased during the quarter.

We spent approximately $2 million on capital expenditures during the first quarter down from $2.7 million in Q4, with the quarterly depreciation and amortization expense at $3.5 million compared to $3.3 million in the prior quarter.

We plan on tightly controlling head count in 2010.

Both contemplated hires would be in lower cost, overseas geographies with the cost of total additions kept well below our revenue percentage increase.

As such, our fixed cost base will remain fairly constant during the year.

We'll make some selected investments in our low density and mixed signal businesses, but the only planned increase in expenses due to higher revenue is in the area of commissions.

Our shorter term target which -- was to deliver an operating income of 15%.

But we will improve on that wherever possible as we focus on growth and improve profitability.

This concludes the financial review portion of the call.

I will now turn things back over to Bruno for the second quarter business outlook.

Please go ahead, Bruno.

Thank you, Michael.

In summary, we feel very positive about our business moving forward.

We believe we have the right combination of product families to meet customer's needs, positive momentum with new design wins while operating with improved visibility given our distribution changes.

We'll continue to focus on growing revenues, improving profitability, and strategically investing in R&D while continuing to exploit opportunities to bring additional efficiencies to operations and supply chains.

We're confident we can further grow our market share and our customer base as our new product families become more widely used each quarter.

We continue to win new business with our XO, XP2, ECP3 and mixed signal families in all geographies and end markets.

We're confident we can further improve our profitability through 2010 as we drive revenue growth while keeping strict control over all operating expenses.

While maintaining a lean infrastructure and our hiring head count very selectively.

On the R&D side, we're excited about the progress we have made executing on our new product road map.

We believe that these products will further improve our current offering and provide differentiated and defendable market positions.

Let me now turn over to expectations.

In terms of specific guidance, we expect revenues to be sequentially up 6% to 10% and we're entering Q2 with a higher backlog than in Q1.

Q2 gross margins are expected to be in the range of 57% to 59%, essentially flat over Q1.

Operating expenses are expected to be approximately $31 million as we continue to tightly control costs.

The increase from Q1 2010 includes higher sales expenses associated with our higher revenue.

As noted in our earnings release, we continue -- we expect continued profitability in the second quarter.

In closing, our business continues to gain momentum and we expect further progress and look forward to updating you as we move through 2010.

This concludes our prepared remarks.

Operator, we will now be happy to take any questions.

(Operator Instructions)

Your first question comes from the line of Tristan Gerra with Robert W.

Baird.

Hi, good afternoon.

Given the supply constraints, are you seeing potential with price increases later this year?

And also, if you could talk about any potential changes in your pricing strategy near term?

Hi, Tristan, this is Bruno.

Let me just address first the supply.

We are not actually seeing any constraints in our supply chain right now.

As you know, our main -- we use, we have two main foundry suppliers, Seiko Epson for the mature technologies, and Fujitsu for the more advanced technologies.

And in a way, I would say we, we feel pretty good about having Fujitsu as a partner.

And Fujitsu, as you know, it is not a tier1 player in the foundry business.

So we have been able to basically secure all capacity that we need for obviously our current business and also to secure our growth paths going forward.

And I would say on assembly and test, we have multiple suppliers and, and we have not also seen -- we have not had an issue from a, from a capacity perspective.

So, I think we are in pretty good shape from a supply perspective.

On pricing, obviously, I mean we continue to manage pricing as we move forward.

The combination of existing business and what's necessary as well to take on new business and I guess that's where I would stop on pricing for now.

Okay.

And did you say on the call that your mature product was one of the mix reasons that helped gross margin in the quarter?

Yes.

Our mature products were strong during the quarter.

And for us, our mature products have higher average margins than the rest of our business.

Okay.

And then finally, in terms of 65 nanometer, when do you think we get to the point where we get in volume?

And maybe you want a way to quantify this, would be, when do you think you can get your first $1 million in revenues on a quarterly run rate at 65 nanometer?

Would it be next year, or is it further out?

No, no, Tristan, we're already in volume at 65 nanometer.

The ECP3 which was introduced in February of last year is a 65 nanometer product.

Okay?

So, we have two processes.

That Fujitsu qualify on 65 nanometer, the S-ram process on which we have the ECP3 which has been starting to ramp in volume in Q3 of last year.

And doing actually very well.

And we have also a [nominated] flash process, on a similar 65 nanometer process which is basically part of the new products we have on the road map.

So, no we are shipping volume at 65 nanometer.

Great.

Thank you.

your next question comes from the line of Richard Shannon with Northland Securities.

Hi, guys.

How are you?

Hi, Richard.

How are you?

I'm doing fine, thanks.

Congratulations, they're very nice numbers.

I guess, first of all on the guidance for the second quarter.

You mentioned your backlog is higher than the first quarter.

Curious what your percentage of that guidance is coming from turns, or especially relative to what the first quarter is and what's normal for you?

In terms of Q1, we were slightly above 60% in backlog and slightly below 40% in turns.

We expect a little bit less turns in Q2.

So, we expect more of our revenue to come from backlog.

That's in our forecast.

Although our supply isn't particularly constrained, people are being careful when they're placing orders right now.

So, we think that our Q2 pattern shows people putting orders in a little bit more in advance.

Okay.

Our next question comes from the line of Apurva Patel with Ticonderoga Securities.

Can you go back to 1Q?

In terms of end market, where do you see the substantial growth?

It seems like the numbers were well above your mid quarter update.

Can you just help us understand where the growth came from, or what changed between the mid quarter update to end of the quarter?

I think the only thing that happened from the mid quarter to the end of the quarter is that we had expected things to tail off a little bit at the end of the quarter.

That is a little bit more usual for us.

As people kind of look forward and adjust how much inventory they take in.

But actually demand remained extremely robust through the whole quarter.

We didn't have any one end market that was very strong.

I think our European end market in terms of geography grew a little bit in percent so there is a little bit of return of business in Europe and that helped us for the total results.

Mike, on gross margin, obviously there are multiple things going on.

You have the mix.

You have volume and also cost controls.

Which one is the highest contributor to the upside in gross margins?

Over Q4, it was volume as the primary driver.

And the mix was helped by our cost controls.

For example, moving the warehouse to Singapore significantly saved in shipping expense.

So we shipped a very high volume, and we spent close to what we would have spent last year in terms of shipping expenses.

So, that was a pretty good savings for us.

The mix did help.

I mean the fact that mature business did not decline during the quarter did help our margins overall.

So, those are the reasons why our margins were very good during Q1.

And then in your guidance for Q2 in terms of gross margin, is it still going to be a combination of favorable mix, cost controls and favorable market trends?

Or is it going to be with just one or two out of the three?

We're going to get continued volume benefit because we expect revenue to be up quarter over quarter.

We continue to control our expenses.

So we don't anticipate overhead rising significantly.

So, that will give us a benefit there.

Mix-wise, we do expect -- we don't expect to have continued mature strength throughout the year.

So, we won't get as much of a mix lift in Q2.

And there's a couple of other miscellaneous things going on.

Inventory that came back from our distributor transitioned at the end of last year in Asia.

That will slightly impact margins in a negative sense.

And we have a little bit of conservatism built in because of the transition we're making now to bring Nu Horizons online.

So, that's sort of the factors we took into account when we give the range.

As Bruno said in the expectations, we think it will be essentially flat quarter over quarter.

Good.

And then in terms of R&D, you mention new products.

Can you give us any color?

Is it new node?

Or is it more new tape-outs?

R&D expenses?

Yes.

Well, it's, it's basically, I mean, [we are public], so we, we don't invest in technology development, manufacturing process development, that much.

We do -- we do some together with Fujitsu, but pretty much everything has been done already because as I mentioned earlier, we are currently running volume at 65 nanometer processes.

So, yes, it's basically mostly tape-outs related to new products.

That's, that's what's happening for the R&D expenses going forward.

Looking out in the second half of 2010, just directionally, do you expect the trends to kind of continue?

It seems like, in general, there's a lot of strength in the cycle, if you can help us understand in terms of just end market demand?

Any color would be great.

Do you expect this type of growth to continue?

Do you expect -- there's some demand that's coming much stronger than expected?

Any color would be great.

Yes, we only guide for the second quarter.

So, we don't typically give longer term outlooks on the industry.

We always caution that we're tied to the general economy as a whole.

So, you know, economic conditions need to remain at least at this normal level right now.

When you're looking longer term out.

I also think if you look at our market positions and the customers we serve, you can make an educated guess on where things should go for the rest of the year.

I guess the last question for me -- product cycles.

Any color on there in terms of what the product cycle we should be looking out for while giving -- coming back from 4Q to 1Q?

Seems to be substantial growth.

And even for 2Q, just trying to understand what kind of product cycle we should be looking out for as we enter 2Q?

Are you talking about life cycles?

Because our new products continue to gain traction and grow rapidly and that's the main driver for our growth.

Our mainstream, as expected, are growing.

I mean, mainstream is normally growing, but fairly slow growth.

I think the difference in Q1 is that we normally model our mature products to decline over time and they actually grew a little bit in Q1.

So, balance-wise, that was what our Q1 growth was driven by.

I guess overall, I mean, you, you -- we have -- we have obviously targeted market.

The ECP family, especially the ECP3 family, is more targeted towards communication.

The XP2 is a little bit more targeted toward video, surveillance type application, and the XO, it's really a broad-based product that's, you know, really goes into a number of end markets from communications, to industrial, to consumer, and to computers.

So, I mean you can, you know -- so we -- we have given you the color on our end market mix, or you can make some projections based on that, that we basically have new products addressing all end markets.

Okay.

Great.

Thank you.

(Operator Instructions) Your next question comes from the line of Ruben Roy with Pacific Crest Securities.

Thank you.

First for Bruno.

Bruno, can you talk a little bit more about the communications business?

And just visibility given your exposure to Asia, it would seem that some of the communications strength that you've been seeing recently is coming from that geography.

And you know, as you look out to the second half and beyond, there have been some headlines around capital spending reductions, et cetera, there.

Kind of what your longer term visibility is on that business?

And then also are you seeing some stabilization recovery growth, et cetera, out of North America and Europe?

Communications?

Okay.

So let me try to address the first piece of your question about communications.

As Michael stated, we won't comment further than Q2.

But yes, Asia is definitely an area of strength.

And you know, a large market for us.

But we've also gained traction with the major suppliers in Europe as well as in Japan.

So, it is really a broad-based recovery and I want to point, one more time, that in China, the big players are not only benefiting from the, the captive deployment that are happening in China, but more so actually of their export business, which is now not only going to developing economies but even to markets such as US and Europe.

And you know, we do anticipate to continue to benefit from that.

Your next questions about the recovery in US and Europe, yes, we've also -- we started to see some recovery in the US actually in Q4 of last year.

We're a little bit cautious at the beginning of the year with Europe.

But we've seen some strengths in Europe, not only in the communication sector as just mentioned, but also in the initial market which basically tend to indicate that it is a broader type recovery.

I just want to re-emphasize the point that we measure our geographic markets by the ship-to locations.

So it is not by the headquarters of the customer, but where we ship the product to.

Obviously a lot of our customers may be headquartered outside of Asia, but their manufacturing operations are in Asia and that's where we shipped our product to.

That's how we measure it.

And again, like we've said, even the large Chinese telecom equipment makers that we sell to, they sell to all over the world.

Not just into Asia.

Now, we may ship it to them in Asia, but where they ship the product to is fairly broad-based.

Right.

Right.

Bruno, when you look at the -- and thank you, Michael, for that.

When you look at -- your design wins and you know, gaining momentum in communications, would you say that you're displacing other -- you're taking sockets that you know, typically would have been occupied by an FPGA, or CPLD, or you know, are you winning sockets where potentially, they're being ASSP, or is it a mixture?

Can you kind of describe what you're seeing in terms of design wins?

It is, you know, it is overall, I think it is a mixture.

We have really two products that are addressing communication and in communication really what we're mostly going after is what is communication, what is infrastructure.

The ECP3 is doing very well across all geographies and all of the main players.

It is one of the best solutions on the market today that offers the right level of performance at the right price with low power.

But we also have the XO which is a low density product which is doing very well, which is more generic, if you want, type product, low density to basically help improving design over time.

So, that's again across geographies and across all major suppliers.

So, it is kind of a mixed bag, if you will.

Okay.

Then just a final question for Michael.

Can you tell me what your lead times are on average and any changes versus last quarter?

The average product is about eight weeks.

So, we like to use a range, eight to ten weeks.

That's about the average.

We try and buffer anticipated demand, both in our distribution channel and with our own inventory, in case there is a spike.

But it has been pretty consistently between 8 weeks to 10 weeks for the last few years at least.

I think the difference is, is that we're getting people placing orders more in advance who are planning out a little further in advance.

And as both I and Bruno mentioned, we have not had an issue with getting capacity at our fab partners nor at our assembly and test partners.

So far, we have been pleased.

And they've been very, very good at serving Lattice.

Okay, so with bookings going further out, Michael, I assume you're booking a bit for Q3 and you know, while you're not guiding obviously for Q3, but can you just talk about, kind of, where you are this year as you look out to those out quarter bookings versus where you've been in the past?

With 8 week to 10 week lead times, our planning group, you know, if an order is coming in now that we don't have inventory in place, we'll be starting a place at -- for, for next quarter's production.

And we really prefer not to talk too much about, about next quarter.

Maybe when we do our mid quarter updates, we'll be a little closer to next quarter and, if appropriate, we'll comment a little bit on that.

But right now, our bookings, our backlog starting this quarter is stronger than our backlog starting last quarter and that's reflected in our expectations of the 6% to 10% up in revenue.

Good enough.

Thank you very much, Michael.

your next question comes from the line of [Irea Kall] with Eaton Vance.

Good afternoon.

And again, congratulations on the results from your hard work.

Two questions.

One on R&D.

One on distribution.

You made a number of changes in distribution in the middle of 2009 in Asia.

And can you just better explain how the changes in the distributors you're dealing with have been able to boost sales for Lattice?

Well, so what we've done, I think we've covered that in previous conference calls.

Right.

This is my first conference call.

Okay.

So, what we did in Asia was basically converting a network of distribution that was a selling model into a sell-through model.

As you are probably aware in the US and Europe, and also now a lot in Asia, typically, you don't recognize revenue until the distributor retails that product to the end customer.

So, we -- that provides obviously a better visibility on pricing, but also a lot more transparency on what's happening in the market.

We didn't have that visibility in Asia because we were, if you want, selling to the distributors as the same thing as an end customer is, and they were resetting that in terms to their own customers.

So, we changed that so now in Asia, except for Japan, we have a sell-through model and we have a real good transparency and visibility on what's going on.

So, that's the major change.

We've done in Asia, in 2009.

What we've done this quarter, it is really a realignment of our US and European channels where Nu Horizon was, by the way, already -- our distributor was appointed a new distributor in Asia as part of this restructuring.

We expanded their role to cover, not only Asia, but also US and Europe.

Obviously they have a lot of feet on the ground and the FPGA business is very technical, technically intensive from a design, from application engineering perspective.

That comes and complements our own resources as we have more feet in the street to sell our products.

That in terms obviously helped to grow design wins and revenue.

Okay.

Then on the R&D side, as you well know, before you joined in 2008, Lattice had spent hundreds of millions of dollars in R&D and sales just continued to decline for many years.

What have you been doing more effectively in R&D in the past 18 months with fewer dollars?

You're actually able to drive sales growth that wasn't possible five years ago.

So, it is a combination of things.

Number one, we've renewed focus on certain products that we felt were not -- have not been the primary focus of the Company such as the low density product, mixed signal, XO and we've had, we've relaunched the products and we're getting new momentum out of some existing products that have been in a little bit lost in translation.

At the same time, we've also redefined a new product road map that we can afford.

We made it clear that we can't compete heads-on with the bigger guys.

We're a smaller player and therefore, we've got to compete where we think we can win.

And where we can win is the midrange where we have a clear product road map going forward and that's basically the ECP3 product was the first, I would say, milestone delivered along that road map and we'll have more in the future targeting more specifically wireless communication, video surveillance and also displays.

And we have also a road map that addresses low density product where the XO today is the main driver for that.

But we have -- we'll have next generation products to address that.

So, if you want, we're very focused on low density and mixed signal solutions as well as midrange as opposed to try to go after the leading edge, bleeding edge type technology.

Okay.

And just lastly, in terms of hiring design engineers?

What are you doing, I guess, to retain people and also track new people that you do hire when people have heard of Altara and others clearly and Lattice less so?

So, we are -- always looking for some talent.

As Michael mentioned earlier, we're mostly adding talent in lower cost geographies.

We have a fairly large R&D center in Shanghai with about 130 people also.

We're also looking at other geographies such as India.

And it is a combination of things.

The advantage or the attraction for some engineers to come and work for a Company like Lattice is that to be in a smaller structure and be able to contribute more or see that contribution more than they would maybe in a large organization.

So, again, I think from overall, you know, the sales going up, the Company being back to profitability, these are pretty good retention tools to make sure that we keep, you know, a talented work force around.

Great.

Thank you.

You have a follow-up question from the line of Richard Shannon with Northland Securities.

Hi, guys.

I'm not sure when I got cut off on my last question, but I've got a couple of follow-ups.

First, kind of a couple of questions together are related to your expectations in the second quarter for mature products.

Is there any element of growth you're expecting there and to the extent of which that helps with the gross margin guidance for the quarter?

We expect it to be flattish to slightly declined during the second quarter.

We almost always expect our mature product to slowly decline over time just because of where they are in the life cycle.

We don't think Q2 is going to be that different than our normal expectations.

Okay.

You still think you can keep the gross margins in relatively the same level given the mature products declining slightly, as you say?

Yes, I don't think it is going to make a huge difference in the mix.

We do have the uplift of additional volume as well.

So, we factored in expected mix, expected volume and a couple of other miscellaneous things when we came up with our forecast range.

Okay, great.

Second question, probably also for you, Michael.

Inventory.

Your turns number, I thought I saw in my models about four and a half times or so.

What's the level of comfort?

Where would you like to see the turns number?

And therefore, what would you like to see your inventory finish the current quarter at?

Yes, we actually have positioned a little bit more inventory in the form of a dye bank by the end of the quarters.

That's a little bit cheaper way to hold inventory and flexible in terms of releasing it into package.

And we spent a lot of time over the last year really re-evaluating what inventory we hold, what should be held in our distribution channel; with the transition to sell-through, it has helped us a lot in.

Parts that go into the consumer market, we tend to hold a bigger buffer because revenues turns on faster and you can very quickly get a spike in orders and you need to be able to quickly respond to that.

So, we've been trying to shift a little bit more inventory into that segment.

Otherwise, the focus has been controlling our inventory levels and making sure we have enough to serve our customers.

I don't know if you have another question or not.

Yes.

Sorry, my phone just went blank there for about ten seconds.

Just want to be clear that you're comfortable where you finished here or the quarter with inventory and where you think you can be during the second quarter?

Yes, you could always find one or two part numbers that somebody's got demand for that you don't quite have everything you need.

But overall, our lead times have not been extending, we've been shipping at a very high level of shipment to customer request times.

So, I would say we have adequate inventory now.

And we have adequate response from our supply chain that we can meet the growth targets we have for ourselves.

Expand on one of the previous questions, regarding what you're doing with distribution, you know, it seems like you've been gaining some nice share in your low density CPLD products with the MachXO.

It seems like you made some strategic improvements there in terms of reference designs and more directly addressing the channel.

Kind of curious to the extent of which you think those changes have borne out in terms of revenue growth and share versus what you think can still come from those changes over the next few quarters or next couple of years or so?

We definitely think that we still have some room to grow on the low density side.

I mean where you've seen the quarter on quarter and year on year growth especially with the MachXO.

We continue to develop new reference designs, demo boards, make more IP available to customers, make also the product a lot more easier to use, and we are improving, expanding our channels.

So we definitely think there is more room to grow for our low density business going forward.

Once again, congratulations; a very nice performance, guys.

Thank you.

Your next question comes from the line of Greg Weaver with Invicta Capital.

Hi.

In terms of the surprising growth on the mature products, is that a function of units or ASPs going up?

We did do some selected ASP raises during the quarter.

But for the most part, it was driven by units.

Okay.

Great.

And how large was your biggest customer in terms of percent of revenue?

I don't think -- it is a little bit difficult to measure that because we have to kind of look through to where the final customers are.

So, some of our distributors were over 10% but if you look through to the end customer, we had nobody over 10%.

Okay.

And just in terms of the Nu Horizons transition, I think you mentioned, Michael, about baking a little conservatism into the gross margin for Q2 outlook.

I guess why gross margin versus revenue risk given the transition?

What -- Were the costs going up associated with the transition?

So, when we transitioned some distributors in Asia at the end of last year, inventory was -- came back during Q1 and essentially near the end of Q1 is when it all came back.

When we resell that inventory, it will be at slightly lower margins than if we had just made it from new.

And we're also going to get some inventory back in the channel from the US and from Europe because we're transitioning from one distributor to another distributor with the addition of Nu Horizons.

So, although we don't think it will be significant, we do have a little bit of conservatism baked in because we don't know 100% what the final mix of the inventory coming back will be.

I see.

Okay.

That's helpful.

And I guess, just lastly, in terms of you alluded to it, but on the operating margin side of things, obviously you had a great number this quarter.

Exceeding your 15% target I guess.

Do we have a new goal?

I think I characterized it as a new goal of trying to do better than where we are now, and you know, grow revenue, grow profitability and keep your operating expenses under control.

It is just very short while ago, our target was to get to profitability and that looked like a very hard slog to reach that target.

So, now that we're at a nicely profitable level, we want to continue to maintain that profitability and to grow off of that base.

Okay.

It sounds like from the way you couch it that from an OpEx perspective, we should be expecting a fair amount of flow through, right?

It sounds like you're trying to keep that pretty much in check.

We guided to about $31 million of operating expenses.

So, that is at a lower increase rate than compared to our revenue increase rate.

And if you keep doing that, you should get a flow-through.

Okay.

Great.

Nice job.

Thank you.

Your next question comes from the line of David Duley with Steelhead Securities.

Congratulations on a nice quarter.

I was wondering, could you provide us -- I notice you changed your classifications.

Could you just remind us what the biggest product line you took out of the new bucket was?

And I assume you put that into mature.

We have it in the release.

You can see what the new classification is.

There really was no large product that moved from one to another.

So, it was a couple smaller products that were a little bit later in the product cycle.

And the sales cycle indicated they're more of a mainstream product and we moved a couple of our older products that started to tail off in revenues and expectations down into mature.

So, it really wasn't that big a change.

I'll give you an example.

Out of new, we moved the SC, the first XP product, the first Power Manager and Clock product and the ECP, the original ECP product down into mainstream from mature.

Okay.

Great.

Thank you.

That's very helpful.

Do the strong business trends that you recognized throughout the quarter in the March quarter continue in the month of April?

I think that we've guided our revenue to go up quarter over quarter.

So, I would say that the strength that we saw was reflected both in the fact we had a stronger backlog entering Q2 than we did in Q1.

And the fact that we're expecting revenue to continue to increase even on top of a very strong quarter.

Okay.

And I don't recall, did you mention what your book-to-bill was during the quarter?

Or is that in a number you don't disclose?

We didn't.

I think we've talked about this a few quarters in a row.

Because we get our bookings at distributor price and you don't always quite know what the sell-through is going to be.

We don't think it is a particularly relevant statistic to focus a lot of attention on.

Our backlog is stronger entering Q2 than it was entering Q1.

So, that's the color we gave on it.

I also mentioned that our forecast includes an assumption of slightly less turns than what we had in Q1.

Great.

And final question from me is you're kind of starting to flirt with the 60% gross margin.

I'm just wondering, what is the event that would allow you to show a 60% margin?

Is it volume-driven solely, or is it mix, or yields, or what do you think is -- are the factors that get you to that magic number?

We've always said it is more of a function of size and scale than anything else.

That increased size and scale helps our margins more in the short term than any individual factor.

Size and scale allows you to purchase things for a lot less.

And it also allows you to leverage off of your established cost base and get more revenue out of the same overhead expenses.

Thanks .

Your next question comes from the line of Josh Goldberg with G2.

Hey, guys.

Just a couple of quick ones here.

First of all, on the Nu Horizon contract, that relationship starts in the third quarter?

They're actually a franchise distributor now.

But it will take them a little while to ramp up, get stocked properly and have their FAEs and other salespeople trained on our product line.

But as of today, they've actually booked a few orders.

Okay.

I guess because in March, Nu Horizon talked about how they lost Altara as a supplier.

-- It's actually Xilinx.

I'm sorry, Xilinx.

They mentioned it was around $200 million of revenue.

Just checking with some of the other people in the industry.

It seems like Nu Horizon doesn't have another FPGA PLD supplier.

Do you feel like that's a reasonable amount of revenue that you think you can generate from Nu Horizon over, call it, the next 12 months to 18 months?

That is -- we're not going to comment on Nu Horizon, but obviously on the prospect for their business.

But obviously, the attraction for us to expand Nu Horizon's role beyond Asia was the fact that they had a fully-trained work force existing.

We wanted to stay in the FPGA business.

So, we took advantage, obviously, of that opportunity.

So, it was more kind of a -- you know, a fortunate occurrence that Xilinx walked -- moved away from theirs and you were opportunistic is the best way to look at it.

Fortunate for us, maybe.

I don't know if they would characterize it as fortunate.

But it actually -- it is attractive to us because we would be the only FPGA line they carry.

So, we don't have internal competition within them for resources.

They also executed extremely well for us in Asia and we were quite pleased with the starting of the relationship we had with them.

So, when there was an opportunity both companies decided it was a good step to take.

How much revenue do you do with them right now?

We don't disclose guides that are below 10%.

They're a new distributor that just started with us in Asia toward the end of last year.

So, they're not over a 10% customer yet.

Okay.

And Arrow was $20 million last fiscal year.

And they were just US and Europe?

Or they were also Asia as well?

They did some fulfillment in Asia but their franchise was US and Europe.

Okay.

And maybe you can just comment a little bit more about what you're seeing in communications and specifically what some of the Chinese vendors that sounds like they're gaining a lot of share overall in Asia and with some of the Cap Ex numbers coming in, it looks like Cap Ex in China itself might be a little bit stronger in 2011 versus 2010.

Do you feel like that's your fastest growing end market right now?

Well, definitely.

Communication is an area of growth for us.

But as I have mentioned earlier in the call, remember that these big vendors in China are not only selling in China but also outside of China.

Sure.

Where a lot of their growth is coming from.

So, we're benefiting off that.

At the end of the day, all products end up in China but a lot of their products end up not only in emerging economies as it is used to traditionally be the space where they would win big business but also in regions such as Europe and US as well.

But is the guidance of 6% to 10% in the June quarter, is that coming from one end market in particular?

Where would you see the most strength?

It is broad-based.

It is broad-based, okay.

And the Nu Horizon relationship isn't really ramping yet so that could actually help you in the back half of the year.

In theory, they have a lot of dedicated technical resources that will help us generate more revenue.

That's one of the reasons why we're excited to have them as a new distribution partner.

But you know, we're not making any comments on revenue expectations past Q2.

Okay.

But if we look out, call it, 12 months to 18 months, do you expect them to be at least a 10% customer?

We actually don't have specific guidance in terms of what our business level is expected to be with them.

If you have questions about their business, I would recommend that you call and discuss it with their management.

Okay.

And then just in terms of your cash generation, are you expected to continue to generate cash throughout this year?

We expect even last year, when we weren't profitable, we were still generating some cash.

So, we expect with continued profitability to continue generating cash, yes.

Okay.

One last thing.

I read through some of your filings of your tax rate.

What's your total NOLs at this point?

And when do you foresee paying more full income taxes?

We don't foresee paying income taxes in quite awhile.

We have very extensive NOLs.

So, certainly not in the -- an annual time horizon.

I think I read somewhere north of $150 million, is that right?

It is quite substantial.

So, it is actually more than that.

Okay.

All right, fantastic.

Just last one for me.

In terms of your product that is gaining some traction in maybe some notebooks, where would that be in your segment?

Would that be on the computing side or the consumer side?

We keep it in the consumer side.

So, our main product that has been talked about in the past in this area of notebooks is in the consumer side.

It is sort of into a consumer field.

We do a lot of sales into computing as well.

Obviously as you can see from the end market.

Those are products that go into servers.

So, we've sort of traditionally put the server based products into computing.

Okay.

The function that the notebook -- the notebook device is using right now is in the area of video and displays.

Right.

Okay.

And is there -- are you gaining some more traction in that segment as there's been more demand for products like yours?

In the area of notebooks?

Yes.

We continue to be happy with our performance there.

But we don't comment more specifically than that.

Okay, great.

Well, continued success.

Thank you so much.

Thank you.

(Operator Instructions) At this time, there are no further questions.

Management, are there any closing remarks?

Well, we want to thank everybody for joining our call today and we're looking forward to talking to you again next quarter.

Thank you.

Thank you.

This concludes today's teleconference call.

You may now disconnect.