萊迪思半導體 (LSCC) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

I will be your conference operator.

At this time, I would like to welcome everyone to the Lattice Semiconductor second quarter 2010 earnings call.

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

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

(Operator Instructions) Thank you.

I would now like to turn the conference over to David Pasquale.

Sir, you may begin.

Thank you, operator.

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

Joining us from the Company today are the Mr.

Bruno Guilmart, the Company's President and CEO, Mr.

Michael J.

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 email 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 website.

Before we begin 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 the Company's official guidance for the third quarter of fiscal 2010.

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

The matters that we discussed today other than historical information include forward-looking statements relating to the future financial performance and other performance metrics and 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 and Exchange Commission, including our fiscal year 2009 Form 10-K filed on March 10 and our quarterly reports on Form 10-Q.

The Company disclaims any obligations to publicly update or revise any such forward-looking statements to reflect events or to 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.

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.

This was another strong quarter for us with growth across all geographies, end markets and product categories.

Asia and Europe showed particularly solid growth while the computing, industrial and consumer markets were all strong.

Our New, Mainstream and Mature product categories all delivered sequential growth.

Of note, the second quarter was the strongest quarter ever for our new FPGA business and our new MachXO product family.

LatticeECP3 revenue more than doubled from the prior quarter, and it continues to be the best launch of an FPGA product in the Company's history.

We remain very confident in our business given existing customer demand, growth from our new product families, and the successful transition to the improved distributor network over the last year.

We are focused on expanding our business with existing customers and broadening our customer base by moving into new areas.

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 expect to see a further acceleration of opportunities related to the overall expansion of wireless bandwidth requirements, as companies try to meet the increased pressure on their networks due to data-intensive smartphones, cloud computing, and the video-intensive applications.

Based on market forecasts, these are likely to be multi-year, prolonged global opportunities.

Importantly, we are not seeing any significant supply constraints, lead time issues, or inventory issues that would impact our impact our pursuit of these growth opportunities.

Our mid-range SRAM FPGA's continue their feature, and low power leadership and remain particularly attractive in the wireless communications market.

Our non-volatile FPGA's continue their design win momentum in the consumer and industrial markets.

We are well positioned with our comprehensive roadmap in the low density space and we are working on capturing new business in high end portable consumer applications such as smartphone, advanced digital cameras, and other products.

This new attractive growth segment was not traditionally served by programmable logic and we are aggressively working to win sockets.

We are already seeing new opportunities from our successful transition to our improved distribution network over the last year.

As one example, in Q2 Nu Horizons became a 10% customer for the first time.

We attribute this to growth in Asia where they have been working with us for a year, as their efforts in the U.S.

and Europe started in Q2.

In terms of strategic results during the second quarter, we achieved revenue growth of 10% compared to the first quarter and 64% compared to the year ago quarter.

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

We are very pleased with our expanded gross margin and net income.

Based on our results, we believe that we are continuing to get market share in our targeted markets and we are opportunistic about our business moving forward.

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

Let me now give you some color on the quarter.

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 41%, 35%, and 24% of revenue, respectively in Q2.

This compares to a New at 40%, Mainstream at 35%, and Mature at 25% in Q1.

New products were up 14% quarter-on-quarter and almost doubled year-on-year.

Growth was again driven by our non-volatile MachXO and LatticeXP2 families, our mid-range LatticeECP3 families, and our Mixed Signal families.

Our non-volatile MachXO grew 10% quarter-on-quarter and almost doubled year-on-year while the non-volatile XP2 grew a 30% quarter-on-quarter and nearly 80% year-on-year.

Revenue from our ECP3 family grew over 135% quarter-on-quarter marking sequential growth in each of its six quarters since launch.

Revenue growth from FPGA products represented 32% of total revenue in Q2, up 6% from Q1.

Revenue growth for FPGA products was again driven by the quarter-on-quarter growth from our new FPGAs.

PLD products represented a 68% of total revenue in Q2, up 12% compared to Q1.

Our PLD families remain strong across multiple end markets.

Within PLD, our Mixed Signal products continue to perform well, delivering growth of 24% quarter-on-quarter and almost 80% year-over-year, representing 6% of revenue.

On a geographic basis, revenue from Asia and Japan was 11% and increased to 68% of the total revenue, compared to last quarters 67%.

Revenue from North America was up very slightly in dollar terms, but fell from 15% to 14% of revenue.

Europe grew 15% quarter-on-quarter on a dollar basis and was 18% for both Q2 and Q1.

Every market was up in dollar terms.

Overall, communication was 49% of revenue in Q2, compared to 52% in Q1.

As expected, we saw some cooling off in sales to Asian telecom gear makers as a number of delays and deployments resulted in push out being announced by service providers.

We expect a resumption of growth in this sector as deployments commence in various markets.

Q2 softness in sales to Asian telecom gear makers was offset by increases in Europe and North America.

Computing, which again, grew in absolute dollars was flat quarter-on-quarter with 15% of total revenue.

Industrial and other came at 25% of revenue in Q2 compared to 22% in Q1.

The category showed particularly strong growth, up 28% quarter-on-quarter, with contributions from all geographies.

Consumer was up in dollar terms but remained at 11% of revenue quarter-on-quarter.

This quarter we further refined our end market definitions to make the consumer number more visible as we focus on this market segment.

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

Michael?

Thank you, Bruno.

As noted earlier, revenue for the second quarter was $77.1 million, up 10% from the prior quarter and up 64% from the year ago period.

Gross margin for Q2 improved further to 61.2%.

This was above our guidance and higher than the gross margin posted in prior and year ago periods.

We continue to see the benefits of favorable volume and mix combined with continued strict cost controls.

Similar to Q1, we benefited from good overhead absorption as our revenue and production ramped up over the last quarter.

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

Gross margin in Q2 also benefited from the strength in revenue from the Industrial and other end markets.

We will continue to work to control the cost side in an effort to maintain the higher margin levels we achieved in the first half of this year.

As noted in our press release, in Q2, we enjoyed a one-time benefit of some sales of older fully reserved products.

Total operating expenses for the second quarter came in at $31.4 million compared to $30.2 million in the first quarter.

Reflected in the total opex number is approximately $600,000 of one-time, non-executive level incentive compensation.

Although we have added some additional R&D and marketing headcount, we continue to closely monitor our spending.

Q2 net income was $16.7 million or $0.14 per share as compared to $11.1 million or $0.10 per share in the first quarter, and compared to a net loss of $2.7 million or $0.02 per share in the year ago period.

All per share amounts are on a fully diluted basis.

At the current share price, we expect diluted share count to be approximately 120 million shares.

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

We generated an additional $28.1 million of cash from operations, ending the quarter with a cash, cash equivalents, and short-term marketable securities balance of $212 million.

As expected, our remaining balance of advanced credits with Fujitsu was used up in the second quarter.

Not included in the liquidity discussion I just went through is a remaining balance of our auction rate securities with a fair value of $12.7 million.

For the second quarter in a row, we actually experienced a small gain on redemptions, however, due to the illiquid market for these types of investments, auction rate securities continue to be classified as long-term marketable securities.

Accounts receivable at July 3 were $47.3 million compared to $48.3 million at the end of last quarter.

and days sales outstanding were 55 days compared to 62 days last quarter and 51 days in Q2 2009.

As those in prior calls, 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 July 3, 2010, was $26.8 million up from $24.7 million last quarter and down from $28.1 million in the year ago period.

Month of inventory now stands at 2.7 months compared to 2.5 months at the end of Q1 2010 and 3.8 months in Q2 2009.

The increase was planned and is mainly due to initial stocking of our broader ECP3 family.

Inventory in our distribution channel slightly increased during the quarter.

We spent approximately $2.6 million on capital expenditures during the second quarter, up from $2 million in Q1 with the quarterly depreciation and amortization expense of $3.5 million as it was in Q1.

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 continue to feel very positive about our business moving forward.

We believe we have the right combination of product families to meet customers' needs, as reflected in our design win momentum.

We are confident we can sustain our profitability in the second half of 2010 as we continue to drive revenue growth while keeping strict control over all operating expenses.

We are maintaining a lean infrastructure and adding headcount very selectively.

We will at the same time, continue to watch and adjust as needed to global economic changes.

On the R&D side, we are excited about the progress we have made executing on our new product roadmap.

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

Let me turn now to our expectations.

In terms of specific guidance, we expect revenue to be flat to up 5% compared to Q2.

Q3 gross margins are expected to be in the range of 59% to 61%.

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

As noted in our earnings release, we expect continued profitability in the third quarter.

In closing, our business continues to gain momentum.

We expect further progress and we look forward to updating you as we move through the remainder of 2010.

This concludes our prepared remarks.

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

Operator, please?

Ladies and gentlemen (Operator Instructions) We will pause for just a moment to compile a Q&A roster.

Your first question comes from Tristan Gerra from Robert W.

Baird & Company.

Hi.

Good afternoon.

It looks like your 90 nanometer FPGA revenue potentially decline sequentially.

Is this an indication that we may need to past the peak 90 nanometer, or is it more of a one quarter trend?

Maybe a comment around that would be useful.

Hi, Tristan.

This is Bruno.

I am not sure how you have been able to make that assumption.

I would say The main 90 nanometer products we have are ECP2 --

ECP2 and ECPM -- these are still growing products.

And our xp2 is also a 90 nanometer --

As we mentioned, we have seen also pretty significant growth year-over-year and quarter-on-quarter on these projects.

I am not sure where you get these impressions that 90 nanometer products now is at its peak.

So on the FPGA side, I am looking about $1.2 million incremental quarter-on-quarter.

And given your comment about 65 nanometer trends, that is how I got the assumption --

The mature FPGA products, which are much larger than 90 nanometer.

Those were the missing part of your formula, Tristan.

Okay.

What is your expectation than in terms of slowdown or peak of 90 nanometer in terms of timeline?

They continue to be classified as new products.

Our XP2 in particular has been winning a lot of video surveillance and other related video-type wins.

It continues to do quite well and grow for us.

I do not think we have peaked out in any of our other 90 nanometer FPGA products.

They will continue to grow maybe not as fast as our ECP3 family is growing in terms of percentage, but they certainly will be growing for a little while to come.

Okay.

And then we are seeing in the (inaudible) space a historical high in gross margin.

I am just trying to see what could be a common denominator.

I know that you've provided some color on what was the reason for the gross margin trends.

Is pricing also a factor?

We did selectively raise a few prices on some older products at the beginning of the year.

I would say that there has not been maybe as much pressure on pricing because they are more robust demand right now.

Certainly, we don't model or expect price increases in the space.

I think most of our gross margin increases have been related to volume.

Our continued executions on our cost and infrastructure developments we have made.

I also think our distribution channel has been helping us there.

Okay.

A last quick one in terms of the space for the what type of timing are you are seeing in terms of ramp?

Also, how does that compare in terms of spending versus Phase 3 in China?

You mean the 3G Spending?

Yes.

So, I think there is a published number of about 98,000 base stations or something like that, that are supposed to roll out.

We certainly expect to participate in the rollout of that.

We never modeled the full number that people talk about to be on the conservative side for internal planning.

But if we look at our customer positioning, we believe we are well positioned to benefit from it when the service providers start buying the equipment.

Thank you.

Your next question comes from Richard Shannon with Northland Securities.

Hi, guys.

A couple questions on communications.

First of all, let me take a quick look at the second quarter.

You had a reasonable amount of growth by my calculations, a few percentage points.

Obviously, communications has been a very nice driver for you but it doesn't look that great in the second quarter.

Can you split out your performance between wireless and wireline?

Could you have some maybe fall-off on some older products in that area?

Can you help us understand the trends there?

Most of our business is now in the wireless business.

That has what -- that is what has been growing the fastest for us given the products that we have in (inaudible) FPGA which are really well-suited for repetition in the wireless place.

As we said in our remarks, we have seen a slowdown, I would say, especially in China due again to no further -- I would say no more deployment in China at least until the later part of this year and also delayed in the announced deployment in India.

That was somehow offset by more business in Europe and US.

So I would say opposed in Q2, but we do expect that as new deployments will resume in large numbers in China and also in India, or will start in India, we expect those to resume in the second half of this year.

Okay.

Maybe looking at the forward business in wireless, specifically, do you think the next 12 months of your business in wireless will be better than the last 12 months, or flattish, or how do you view that generally speaking, Bruno?

This will be forecast over the next 12 months.

We usually provide guidance for the next quarter, but I would say generally speaking, as I said, we expect that in Q3 to see an improvement of our communication business, especially we get more and more traction.

The ECP3, I would say, is a good proxy for you to track the progress we are making there.

We say we have double the revenue from Q2 to Q1.

That has been the fastest-growing product we have ever had in the Company.

That I would say is probably about 95% of the ECP3 design wins in the wireless area.

Bruno, in your prepared comments come did you mention what the percentage sales for the two large telecom OEMs you split up in the past?

No, we did not.

It's just below 10%.

They're not our 10% customers yet but they're our large customers.

Okay.

Another topic on CPLDs, you've given us a split outs of those and the growth you are seeing is very, very nice.

Obviously, you are getting some benefit from chain of distribution.

Also it seems like you are perforating some very nice reference designs and things like that.

Obviously, this growth rate cannot continue.

Some of these dynamics that are helping you improve in the near term, how far away are we through from seeing the benefits from that?

Are we going to start to see those comparisons become more difficult?

Can you give us a sense of how long more we can see this outsized growth in CPLDs?

So I think that inside the CPLD category are two very important products for us.

The first is the XO.

The XO continues to grow and do well for us.

It is gaining greater and wider market acceptance and it's being used in a lot of different devices that people haven't thought about using it before.

We are excited about our roadmap in the low-density area, which really does help us win business.

We have a robust roadmap compared to our competition.

The other area with mixed signals particularly power management, which is growing very well for us, and we see quite good opportunities for growth there as well into the future.

I would say that, that is an area of particular strength for Lattice and we expect it to continue in the time to come.

We will continue to devote a lot of effort to drive our revenue and our growth in that space.

One thing I would like to add is if you look at our product roadmap, we do have in the low-density area, a product roadmap that is actually very attractive to customers.

Also, as I mentioned in the opening remarks, we are actively looking at new consumer applications such as smart phones, digital cameras, and other products and mobile types of applications.

These are new customers coming to the PLD space.

These are areas of applications that have not been served traditionally by the suppliers.

That market is not really captured in the overall programmable logic markets.

It is unknown, I would say, how much you can capture outside of the traditional programmable logic market probably to the detriment of ASSPs and (inaudible) so, that is really what we are putting a lot of effort into actually

I'm sorry.

I didn't mean to interrupt.

No, no.

Go ahead.

That was a very good segue for my last question.

I'll jump on the line, Bruno.

Can you talk a little bit more about what you are seeing there with smartphones, digital cameras, and other sorts of mobile consumer device either in terms of number design wins you've had and also when we might start to see revenues start to become material?

We are just in the early stage of getting design in this mobile type of application.

We have been testing it into the market.

If you look at our product roadmap today, we do not have products that are really targeted except for the 4KZE which is a low power, almost commodity like CPLD device.

We do not have a more complex CPLD product yet to address this market specifically -- especially in terms of performance and power consumption, which is very important for (inaudible) applications.

But, it is in our roadmap.

Okay?

I would say we are seeing a lot of encouraging signs that customers have never used programmable logic in the past and are now open and actually are very interested in using that because they can have some number of function in one device.

They can reduce their (inaudible) size, discuss setting opportunities.

So, this is just the tip of the iceberg.

Okay?

I would say probably a few quarters down the road, you should ask these questions every quarter as we go along as we have new products coming to the market that will be really targeted to these specific applications.

Great.

Appreciate the detail.

Congratulation on the nice numbers, guys.

Thank you.

(Operator Instructions) Your next question comes from [Diep Vatraka] from Morgan Stanley.

Hi.

Thanks for taking my question.

Nice quarter.

Can you just remind us where you are in your ECP3 revenue ramp?

It seems like it has been about a year and a half since it was introduced.

In what timeframe do you expect it to reach some type of peak revenue run rate?

And then if you could just compare that with your previous generation product, ECP2, and just point out any major differences there.

So, the ECP3 was the first product in family was launched in February of 2009.

I believe that we did disclose last quarter that we had about $1 million revenue in the first quarter, so less than a year after the launch and then we disclosed again that we doubled that revenue.So it's not a complicated multiplication to make to find out the revenue for Q2.

We are seeing, actually, continued momentum in terms of gross.

Typically, the product will ramp after three to five years after launch, okay?

Compared to ECP2M, which is a comparable product, a generation behind, we have seen a much faster ramp from start to volume.

I was not around at that time of ECP2M so I don't have the data in my head, but I know based on some analysis we have done in the past, this is by far the fastest launch in terms of the initial product launch to revenue ramp that we have ever had in the Company.

Okay.

Just to follow up on that, so roughly, what portion of your communications revenue growth do you think is coming from high density devices versus low density devices?

That would be your ECP, particularly, ECP3 versus MachXO going into base stations.

We have three really Main besides the power management.

I would say if you look at the power management on the XO products, these are very broad-based products that go in a number of applications.

They go in application, they go in computing, they go in a certain extent to some consumer applications when there is no strict power consumption requirements.

That is really how you look at it.

In the high density, what we classify as mid-range or high density, we do have two products.

The XP2 and the ECP3 family products.

The ECP family of products mostly go into the communication business while the XP2 family goes into some industrial applications, video application.

And I would say to a certain extent also consumer type application.

Again, that non- portable type or non- battery operated, only battery operated-type applications.

I am not sure I answered your question properly, but that is how much granularity I can give you.

That's fine.

I appreciate it.

Just to clarify the question a little bit more.

So when you think about a wireless base station, you may have multiple sockets within the base station.

You may have sockets with your MachXO, with competitive devices or you may have sockets with your ECP3 and MachXO.

I am trying to get a sense for how much of your growth in that market is roughly coming from MachXO versus ECP3.

We don't really track it this way.

Yes, in a wireless base station, we may have an ECP3, we may have multiple XO.

We may have some power management products.

Basically, we don't really track from an XP perspective or content perspective what is happening.

I can tell you just to give you a little additional information, traditionally, we have a lot of our communication revenue come from the lower density products.

The ECP2M, a lot of our mid-range products to move very strongly into the marketplace.

Our penetration with the ECP2M was very focused.

There were several customers that we had very deep and big relationships with.

With the ECP3 ramp is actually very broad.

In terms of customers that have not used our mid-range products before, we have added quite a few new customers.

They are in the design in and getting ready for launch dates for most of those products.

We feel quite confident about the growth prospects of the ECP3 coming forward.

We think it's going to greatly contribute into our growth in communication.

Thanks so much.

Just one last question, if I may.

I noticed your announcement with Affarii.

I was very interested to understand how that type of collaboration helps your market position, especially when you compare it with competitive offerings.

So Affarii is really an IP provider for us.

Basically, we -- they offer to help us to complete our offering and have a low-power solution for (inaudible).

That is one of our partners.

We are doing actually some pretty good work especially in China with them.

So it's really focused on (inaudible) wireless and low-power applications.

Great.

Thank you very much.

Your next question comes from Apurva Patel with Ticonderoga Securities.

Hi, guys.

In terms of guidance, can you elaborate as to where the growth is going to come in terms of end markets?

And relative to that, industry and other market has been gone for the last three quarters, do you expect for that to continue?

Can you lever in design wins in that market?

I think in terms of Q3 growth, we expect communications to start coming back and contribute more to the growth in Q3.

Industrial and others is the catch phrase in that.

It is a very broad category.

It tends to be a little bit more aside to the general economy.

While the economy has been recovering over the last year, our revenue there have certainly been growing.

It is a very global product category as well, we have wins all over the place in that category.

It is a broad range of products anywhere from just about our oldest products, some of the first products we have ever made are still selling for some applications in that market.

In terms of your gross margin, Michael, you mentioned about ongoing improvement costs, cost downs.

Is that going to continue?

If you can help us elaborate on that too.

I think if you look over the press releases for the last year, I've been moving up the range on gross margin every quarter.

This quarter I brought it from 59% to 61%.

So I would say that we are certainly going to maintain the gains we have made.

We are working as hard as we can to continue to grow our gross margin.

Some of the key things for us there are to control our operations -- not opex, S&GA, and such but the operating group's expenses.

As our volume goes up, our purchasing power for both wafers and assembly in (inaudible) services improves.

We are able to get better pricing there.

Finally, some of our newer products like the ECP3 are early enough in the ramp that our yields and such are not where they are going to be once the process is better understood.

So we certainly expect to get some progress there as well.

Thank you.

The last question for you, Michael.

In terms of -- you mentioned earlier about the coms business coming up, but you talk about it in the second half you may have your two top customers come into the market again.

You're going to see growth, especially for the China's 4G buildout.

Can you elaborate on that?

Is that starting in 3Q or is that still going to be more of the back half in terms of 4Q 2010?

I think it is going to be the deployment in the back half of this year and into next year.

It is going to be dependent on the willingness of the actual telecom carriers to invest in the equipment and how quickly they want to take it in.

In terms of positioning, when that demand comes, we believe that our low-power, low cost solutions are very suitable to that type of market.

Thank you.

(Operator Instructions) Your next question comes from Bill Dezellem from Titan Capital Management.

Thank you.

Relative to the success you are having with Nu Horizon, would you describe, number one, the ramp and number two, to what degree that you feel Xilinx dropping in as a distributor has contributed to your strength and have you have been able to capture some of those potential business wins?

This is really a question that you should ask Nu Horizon.

Obviously, we saw a window of opportunities.

Nu Horizon was already a partner in Asia for quite some time.

We had a window of opportunity after Xilinx made the decision not to use Nu Horizon anymore that we've captured on.

I think it is too early to say what the benefits will be to us because we have just started working with them in Q2.

There are obvious benefits obviously.

We have already a partner that we knew well that has a well-trained workforce that understands our business.

We have compared to, I would say, some of the larger distributors we have used and we continue to use now.

There is a dedicated team of both salespeople and SAEs working with us who knew customers we didn't know.

I would say is too early to say what are the benefits.

There are some immediate, that we saw that as a window of opportunity, and we wanted to capture that.

We certainly are excited about the opportunity, but when the opportunity will turn into actual design wins and revenue, it takes between six and 18 months from when they win a design for it to actually turn into revenue for us.

In the area of Asia, we are certainly getting some of that from them already.

They have been a distributor for a year now, and we are quite pleased with our progress there.

In the US and Europe, really, the relationship is brand new so it will be another quarter or two before we start seeing some of the initial design revenue that they win when they bring us a design.

In terms of ramping up as a distributor to take over the fulfillment and the general duties, they've done quite well.

We are very pleased with our partnership.

I would say in general we are pleased with all of our main distributor partners.

They have all done extremely well for us.

We certainly have seen increased effort from all of them in terms of focusing on getting us designs.

They see the improvement in our results as well as anybody else does.

They hear directly from our customers, which are also their customers about the growing acceptance of Lattice products, and that spurs even more efforts from them to capture more business.

And then specifically relative to the US and Europe, after Xilinx dropped them, did they lay off some of their employees, or did they retain all of those employees that now are potentially working on Lattice's behalf?

Again, that is really a question that you should address directly to Nu Horizon during their quarterly call.

They had a commitment to us as to how many SAEs and direct salespeople would be assigned to us.

And they've more than met that commitment to us and continued to execute on it.

In terms of their total headcount and such, that's something that they would be better addressed to them.

Thank you both.

Your next question comes from David Duley with Steelhead Securities.

Congratulations on a nice quarter.

Just a couple questions on gross margins.

I think the drop rate onto gross margin line this quarter on incremental revenue was about 90%.

In past quarters, it was between 65% and 70%.

I was just wondering the key reason for that was the inventory that was sold -- was already reserved, or --

That contributed to it, but I left the range still around where it was this quarter.

I would say it is a combination of mix.

As with stepped up in volume and maintaining that volume, we are getting a bigger drop through rate.

Those would be the main items I think that have helped us.

So going forward, the drop rate is going to look more like 90% or more like 70%?

I don't really look at it that way.

It is really dependent on a specific mix of the products and what customers it's being sold to during the quarter.

So I give a range in my release, and that is what my expectations are based on different mixed scenarios and volume scenarios we have in our guidance.

Okay.

And the gross margin is going from what the midpoint of the guidance range is of 60%, so it's going to go down 1.2 percentage points and the key reason for this sequential decline in gross margin is what again?

So, if it is at 60%, that is just the point in the range.

That's the midpoint though, right?

That would be at the mix and volume that would give you the 60%.

That is the number that would fall out forward.

It is complicated to calculate the exact mix.

That is why we give the range when we give our margins.

Okay.

Basically, you are saying because gross margin is going to be down sequentially as a percentage and revenue is probably going to be up, it is going to be mixed, right?

So I gave a range of gross margins.

I didn't say gross margins was going to be down.

I said it was an approximate range.

So I'm not sure I can answer your question.

Okay.

In the press release, you talk about the size of the new attractive market in the consumer space.

I was wondering if you might have a total available market there for some of these portable mobile applications that you are talking about.

A [TAM] for that and maybe your goals as far as your share goes.

David, as I've mentioned, I guess in a previous question asked, this is just looking at the tip of the iceberg right now.

The opportunities we're seeing are not part of the traditional programmable logic trends, okay?

This is I would say a fairly new concept for real consumer-type companies.

Again, when I refer to consumer, I am talking about mobile -- high end mobile consumer type applications.

They have not used, traditionally programmable logic devices in their products, okay?

So they are just looking at it and it is very difficult to size that market.

All I can tell you is that it is not in the current programmable logic (inaudible) because it is currently served by ASSPs and ASICs.

The size of ASSPs and ASICs is pretty large.

Obviously, you can make your calculations, but we do hope that with the products that we have on the roadmap for our low density offering is going to be able to capture a portion of that.

But it is very hard to put a number on it at this stage.

That seems like a really attractive opportunity.

One final thing from me.

You generated I think $80 million in cash year-over-year.

I know some of that's probably from the returns in particular but you're generating significant amounts of cash.

Any thoughts on what you might want to do with that?

I mean, we continue to look to see if there is a merger and acquisition opportunity that would make sense and that would be a good strategic fit for us.

That remains our primary plan of strategic use of cash.

Obviously, we have not done anything there yet.

That is mainly a function of our caution and desire to make sure we do not overpay for something.

If we do something of that nature, it is a good fit.

Thank you.

Again, ladies and gentlemen (Operator Instructions) Your next question is a follow-up from Apurva Patel with Ticonderoga Securities.

Thank you.

If I can just ask a question about a high-level.

The whole debate about the PLD market about PLD displacing ASICs and ASSPs.

Granted, you are one or two notes behind your competitors, but are you seeing that trend in your market, if you are, can you elaborate which specific market you are seeing that trend?

Well, yes, again.

We are seeing some of that.

That is the reason why we have targeted consumer as an attractive potential new market for us.

Because this is not, again, a market that has been served by programmable logic suppliers in the past.

While we operate our strategy, it is very different from the two larger players.

We do not compete at the higher end, very complex ASICs-type products.

We are more in the mid-range in the low density space, but we do see the same thing happening in these markets as well.

Communications is the same thing.

ECP3 is a product that we have that can be a replacement, because it is at the right price point.

It is a low powered product with the right amount of specifications or performance that can replace in some cases, or at least -- make and ask questions to engineers about 3D using an ASICs for a particular application, okay?

Again, the price point is becoming quite attractive to use the FPGA.

Great.

I just wanted to get a clarification.

Thanks, Bruno.

I would now like to turn the conference back to Management for any closing comments.

That will complete our call for today.

Thank you, everyone, for joining.

We look forward to updating you at our next call in the third quarter.

Thank you.

Ladies and gentlemen, this does conclude today's Lattice Semiconductor second quarter 2010 conference call.

You may now all disconnect.