萊迪思半導體 (LSCC) 2011 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Lattice Semiconductor first quarter 2011 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)

I would now like to turn the call over to David Pasquale with Global IR Partners.

You may begin.

Welcome everyone to Lattice Semiconductor's first quarter 2011 results conference call.

Joining us from the Company today are Mr.

Darin Billerbeck, the Company 's President and CEO, Mr.

Joe Bedewi, Lattice's CFO.

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

It 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 Relation section of Lattice'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 requirement of SEC Regulation FD.

This call includes and constitutes the Company's official guidance for the second quarter of fiscal 2011.

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 the 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 and Exchange Commission, including our fiscal 2011 10-K 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 also will be presented within the requirements of SEC Regulation G, regarding generally accepted accounting principals or GAAP.

I'd like to now turn the call over to Mr.

Darin Billerbeck.

Please go ahead, sir.

Thank you, David, and thanks to everyone for joining us on the call today.

The first quarter was a strong one for us across the board.

Results came in at the high end of our prior guidance as we benefited from our competitive product lineup and market growth.

While revenue came in well above the high end of our prior guidance, we did not see all of the upside as pull-and-driven.

Based on our customer feedback, we believe that only $1 million to $2 million of the upside came in from unexpected, Japan related, safety stock buying.

The rest of the upside reflects the continued strength in our business, along with the higher than anticipated demand from our mainstream products.

In terms of specific results for the quarter, revenue of $82.6 million was up 13% from the $73.1 million in Q4 of 2010, and up 17% from the $70.4 million in Q1 of 2010.

Gross margins came in at 60%, compared to the 62.7% in Q4 of 2010, and, the 58.5% in Q1 of 2010.

Positive demand trends in the consumer, industrial, and other end markets were bolstered by a pickup in the communications market.

Additionally, we are pleased with the design win momentum for our recently launched MachXO2.

PLD designers have praised MachXO2 for its unprecedented mix of low-power, low-cost, and high system integration.

Let me now give you some additional color on the quarter.

The revenue mix of new, mainstream, and mature was 44%, 32%, and 24% of revenue, respectively in Q1.

This compares to new at 43%, mainstream at 30%, and mature at 27% in Q4 of 2010.

New products were up 16%, quarter-on-quarter, outpacing the Company's overall growth of 13%.

Of particular note in the new category, was our Lattice ECP3 family which grew 32% quarter-on-quarter, and our programmable mixed signal family which grew 28% quarter-on-quarter.

The mixed signal family now accounts for 6% of our total revenue.

Mainstream products were up 20% quarter-on-quarter, with growth in all but one product family.

Revenue from FPGA products represented 38% of the total revenue in Q1, compared to 33% in Q4.

PLD products represented 62% of the total revenue in Q1, compared to 67% in Q4.

On a geographic basis, revenue from Asia including Japan, decreased to 61% of the total revenue, compared to last quarter's 66%.

This decline was primarily due to Japan.

Revenue from North America increased quarter-on-quarter to 18% of revenue, compared to 15% in Q4.

Europe also increased, coming in at 21% of revenue compared to 19% of revenue in Q4.

On an end market basis, all markets increased on an absolute dollar basis.

Communications was 44% of revenue in Q1, compared to 46% in Q4.

Computing was unchanged at 13% of revenue in Q1, compared to 13% in Q4.

Industrial and other came in at 31% of revenue in Q1, compared to 29% in Q4.

The increase reflects the sequential increase in sales of our mainstream products.

Consumer was unchanged 12% in Q1, from 12% of revenue in Q4.

We see the consumer market as a growth segment especially for MachXO and MachXO2 product families, along with 4000ZE CPLD family, which is ideal for ultra low power, high volume, portable applications.

Finally, let me take a minute to comment on the situation in Japan, and the restructuring noted in our Q1 release.

In terms of Japan's severe earthquake and tsunami, we express our deep concern for the people of Japan and the difficult situation surrounding the affected nuclear power plants.

We continue to prioritize the safety of our partners and our employees.

Despite the severity of the post-earthquake and tsunami conditions, we've not experienced any material impact on customer deliveries and our lead times.

With regard to the restructuring noted in our Q1 release, the actions we are taking will better position Lattice for short and long-term success.

The steps we are taking follow a very deliberate, strategic planning and review process, conducted over the past few months.

As a result of the output of the strategic review, we are taking the opportunity to refocus our research and development side competencies to accelerate our product road map.

Our model is simple.

For each core competency, we need to have a single US site aligned to a single low-cost site.

In short-term, we are well-positioned for continued growth with our current product line-up.

Our restructuring actions will make us even more competitive, long term.

There have been several other positive outcomes of our strategic planning process.

During the quarter we completed the restructuring of our executive team.

In that regard, we now have a single business group, led by Sean Riley, to better prioritize our corporate strategy to our sales force.

One key note, we have not made any changes to our sales force, or our outward facing customer engagement processes.

In addition, Joe Bedewi has joined us as our CFO.

Joe's extensive operations in supply chain expertise will help us obtain our aggressive manufacturing and operational goals.

Focusing on the bottom line will help us both expand our top line business into new markets, along with creating a clear focus on maximizing margins.

Importantly, all employees at Lattice understand the Company strategy and what they need to do to make our Company successful.

That concludes my initial comments; I will now turn the call over to Joe for additional color on the financials.

Joe?

Hey, thanks, Darin.

As noted earlier, revenue for the first quarter was $82.6 million, an increase of 13% from the prior quarter and up 17% from a year ago period.

This is above the high end prior guidance for revenue to increase 2% to 7% sequentially.

Gross margin for Q1 was 60% compared to 62.7% in the prior quarter.

This was at the low end of our guidance reflecting product mix.

Total operating expenses for the first quarter came in at $39.1 million compared to $32.4 million in the fourth quarter.

As the Company discussed on the Q4 call, the increase reflects the shift in timing to Q1 '11 from Q4 '10 of engineering mass cost, which taped out in early January.

The balance of the increase is related to restructuring charges in Q1 of approximately $1.8 million and labor related charges.

We do not expect the level of tape out expenses to reoccur in any other quarter in 2011, although, we are working on several new products that will have R&D tape outs during the year.

Our Q1 net income was $10.9 million or $0.09 per diluted share, as compared to $13.9 million or $0.11 per diluted share in the fourth quarter, and compared to $11.1 million or 10%(Sic-see press release) per diluted share in the year ago period.

Q1 2011 financial results include approximately $1.8 million or $0.02 per diluted share of restructuring charges related to the actions taken in Shanghai and Pennsylvania, noted earlier by Darin.

Based on the current plan, we expect to have restructuring charges of approximately $900,000 to $1.4 million in Q2.

Restructuring charges will decline as we move forward and are expected to be substantially completed by the end of the year.

At the current share price, we expect diluted share count to be approximately 122 million shares.

The share count reflects our purchase of approximately 709,000 shares valued at approximately $4.3 million, under our $20 million, one year share repurchase program.

This follows our purchase of 371,000 shares in Q4, valued at approximately $2 million.

The program continues to be active.

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

We generated an additional $1.2 million of cash from operations ending the quarter with cash, and cash equivalents, and short-term, marketable securities balance of $235.7 million, and we continue to have no debt.

Accounts receivable at April 2, were $49.9 million, compared to $41.2 million at the end of last quarter, and days sales outstanding were 54 days compared to 51 days last quarter, and 62 days in Q1, 2010.

Inventory at April 2, 2011, was $38.1 million, up from $37.3 million last quarter, and up from $24.7 million the year ago period.

Months of inventory now stands at 3.5 months compared to 4.1 months at the end of Q4 2010.

The majority of the increase is in new products needed to meet expected future demand.

We spent approximately $4.1 million on capital expenditures during the first quarter, down from $5.3 million in Q4, with quarterly depreciation and amortization expense at $4.2 million(Sic-see press release) compared to $3.8 million in Q4.

This concludes the financial review portion of the call, and I will now turn things back over to Darin for the first quarter business outlook.

Thanks, Joe.

In summary, Lattice remains on track for continued success in market segment share gains.

We continue to leverage our competitive product portfolio into gains at existing customers and new customers.

We also continue to actively pursue new market opportunities.

We have a great team in place and look forward to another strong year.

Let me now turn to our second-quarter expectations.

We expect revenues to be flat to up 5% as compared to Q1.

Q2 gross margins are expected to be in the range of 60% to 62%.

Total operating expenses are expected to be approximately $38 million including approximately $900,000 to $1.4 million in restructuring charges.

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 Richard Shannon with Northland Capital.

Congratulations on some very nice numbers here in the first quarter.

I guess I've got a couple of financial related questions.

I guess first on the gross margins, it seems like if we compare the fourth quarter to the first, both quarters had some pretty strong benefit from mainstream kind of products.

We had a very divergent pattern in gross margins.

I am curious, what gives you the confidence to you, still staying in that range, and maybe understand a little bit about the mix that is driving it in each direction in those two quarters.

It be great you know, thanks.

Yes.

So, let's talk about that a little bit.

As you know, mix affects our gross margin significantly.

This quarter, we had a very large percentage going to consumer, which is one of the markets we are going into, plus our ECP3 product line, which is again, our FPGA new entrant products are usually lower margin than our mature products, as you know that very well Richard.

The bottom line is, that we are going to expect that we wont ship as much in consumer.

We got a pretty good pop this quarter, we won't be shipping as much next quarter.

But all-in-all, it's really going to come down to us controlling really the cost structure so that the new products, and also some of the consumer products, have lower cost structure than we have, to be able to keep the margins up in those high 50's% and 60% range.

We felt confident about the product mix that we have next quarter associated with that, and then the associated gross margins that we are forecasting.

Okay.

Fair enough.

Next question, also on the financial side on OpEx.

I've got a number for the second quarter, which I'm looking at it, stripping out the restructuring, and still a number certainly elevated from the levels we saw in 2010.

I mentioned you don't expect any major mass costs.

How should we think about this going beyond the second quarter?

Are we going to see numbers that get at least into the mid $30 millions, low $30 millions?

Or how should we think about this?

From the operational?

Yes.

OpEx.

Yes.

That's a good question.

As we go forward, we are thinking in the mid $30 million range is about where we expect it to be through the end year.

There's some transitional elements going on this year, as we do the restructuring.

So, you're going to see some lumpiness in those numbers, as we transition.

But, it's going to be in that range.

You won't see any good savings this year, the restructuring really wasn't designed to do a cost savings exercise, it was more of a strengthen our operational capabilities and efficiencies exercise.

But, we do expect to see benefits of that as we move into 2012.

Okay.

Can you describe in any more detail these transitions in improvements, in any way to help us understand that?

I'm assuming you're thinking that you're spending a little bit of money this year and hopefully you will be able leverage that to a greater extent in 2012, then.

Are you talk about the restructuring?

Is that where you are headed?

Yes.

More on the R&D side.

It seems like more of the OpEx is related to the R&D side, so I am curious.

If we can understand some of those transitions.

Yes.

The transitions are pretty simple.

We are trying to go to more single US [Inaudible] to the low cost geography, and to do that means we are going to have to double up a little bit on the competencies as you move forward.

Because you have certain competencies that exist at one site that don't exist at another, and so what we are having to do is build those competencies and get the center of excellence aligned to that strategy.

So, we are really doing a lot of that, and so this year is really that transition year.

We have to spend a little bit more money to put in place, but then we are very efficient later on because we don't have the structural issues that we have today.

Okay.

That makes sense.

Maybe two quick questions remaining for me.

Darin, what's your view on, generally, the communications market in 2011?

Obviously you had a good start to the year with a nice sequential growth rate.

Any thoughts in terms of the spending plan that might drive improved results throughout the rest of the year, fiscally, on wireless?

Yes.

I've seen a lot of different dialog out there on the web about China crashing and everybody crashing.

We haven't seen that today as far as our demand.

The India build out still seems to be solid, and I really think there's probably a couple of different market dynamics going on.

You have the midstream market like the 3G market, I would call today.

And, those are the markets where people have RPU's of $4.00, $8.00, $10.00, that are not going to go to 4G anytime soon.

And then you have this high end 4G market which, what I could see, Verizon and others already marketing that in the US.

So, I think you have to really look at those markets separately.

As I said, our products are more in that midstream 3G, moving to 4G, long-term.

So, we may not be seeing the impact others do as they build out some of the, I want to call it, merging economies.

So, the emerging countries that are coming up with 3G, I think we're seeing more of that.

But, we'll see.

Again, I think it is anybody's call, on that second half of the year, if things continue to roll.

Okay.

Fair enough.

Appreciate those thoughts and I will jump on line.

Thanks, guys.

Thanks, Rich.

Your next question is from the line of Sanjay Devgan, with Morgan Stanley.

Thank you so much for taking my question.

Just a quick question on your FPGA, the EPC3 product.

You talked about the midstream, 3G kind of, you give us a price range there.

I was wondering, as we transition to LTE-based solutions, can you talk about the content opportunity per box that you have there?

Going forward relative to what you have today?

Yes, let's talk a little bit about it.

The fact that our ECP3 product fits within 3G doesn't excluded from the 4G LTE market.

Right?

Because there's a lot of opportunity.

Remember, we play in that last mile of the infrastructure.

Right?

So, we're not in the back hall [anywhere around] us.

We play with quite a few different products.

We play with our ECP3 product, we play with our X02 product, and XO, and we also play with our power manager product.

And, in the new pizza box approach, where they have more of the distributive wireless network, there's multiple of those products for pizza box.

There's a lot of opportunity for us to grow, and even within the 4G stuff, there is different versions of 4G.

Some use very high end products we don't play in, and others use more of a moderate product mix that we do play in.

So, we have three to four different product types that play in that.

It is not ECP3 only, it's X0 and XO2 within all of those different architectures.

We feel comfortable about the product mix we have in that area, and we feel confident that we're well positioned from that mid-density on down.

And, I guess, just as a follow-up, speaking along with the LTE theme, there's been a lot of discussion.

One of the benefits and the reason why FPGA seemed to be taking share from ASIC's is, just a programmability it allows, in a hardware solution.

But, I was wondering if you could talk to -- the guys with multi core solutions, they have also talked about going after this LTE market.

And if you'd just had a high-level talk about the trade-offs between FPGA versus a multi core solution, and your thoughts.

Anything that you can share with us there would be appreciated.

Yes.

Remember that we're not the processing part, a lot of these applications.

Right?

There's a lot of applications that do have, like back hall and other things, have monster microprocessors in that are driving a lot of the data and the infrastructure.

And, we're playing more in that extension of that out to the wireless network, or the wire line network.

Both of those, right?

I think in our particular area, it's probably not these monster microprocessors that we're competing against, it is more really the functionality, and let's call it reliability and [reason].

Where if they haven't upgraded and they want to do something with FPGA, you're giving the ability to reprogram on the fly, and there's a lot of things you can do in the field.

Some of these other systems, I think, there will be a complementary system within each part of the design.

There will be high performance processing that happens, and you will have people like us that do the 30s, transceiver/receiver stuff that will still be in those systems.

So, there could be a shift over time, if it gets very high end, but I think you're always going to see the extensions of that being FPGA.

Thank you very much.

Yes.

Your next question is from the line of Ruben Roy with Pacific Crest Securities.

Darin, I was wondering if you could comment a bit more on the customer feedback that you got around safety stock buying?

Can you iron that out into, or flush that out, in terms of that is related to any specific end market, or how that's working out, and do you see that carrying on?

Safety stock buying into Q2?

Yes, it's a hard one to call, because I think what happened was, we saw a couple of customers that were very concerned.

It's usually the larger customers that are very concerned about their supply, and so, some of the buying patterns that we saw were huge orders all the way.

If you ask me turns versus backlog to date, turns are probably going to go down because everybody is ordering way ahead of time to ensure they have their -- they get what they need for their supply.

We've talked to a couple of our larger customers and had those discussions.

Said -- don't worry.

We have plenty of supply.

And, let's not forget that we came out of Q4 with inventory with a slight softening in some of the markets, so we were buffered because of that.

But, what we don't want to see is that somebody come in and do this rash buy, and then you end up with a giant quarter and the next quarter is really small, because they don't know what inventory they really need.

So, what we were trying to do is work with the run rates that people have, work with the linearity that we have, and then make judgments based on what they really need, what demand they have from an end customer.

We're not trying to manage anything; we are just trying to manage to ensure that we don't get an over demand in certain situations versus other situations.

So, we're working closely with the big guys, and that is most of the difficulty we have today.

I think the moderate and small players are not being as irrational, I would say, as some of the bigger customers.

And the irrational stuff is normal.

Right?

Because some of the products that they have in their end products are constrained.

We know that, so we're trying to balance that, and also see who else is in the systems that we are in.

So, thank you for that.

Is there an assumption for some safety stock in your guidance that you provided for Q2?

Yes.

Q2, we will see a little bit, I would argue that we will see a little bit of that, but who knows?

Because we saw a little bit of it in Q1, which we called out, right?

We said we saw $1 million to $2 million that maybe should have been in Q2, that is in Q1.

I think that after you have all the discussions and people recognize that maybe the situation for some suppliers isn't as bad, I think some of that will pull back.

So, I think this quarter, probably in the first half, you will start seeing people say -- okay, these guys are shipping linear to us, I am not going to worry about them as a supplier.

We might see a little bit, but I don't think it's going be material.

Thank you.

And, in terms of lead times, your comment in the prepared remarks around no impact on customer deliveries or lead times, was that specific to Japan or the broader, Lattice portfolio products?

You've not seen any changes to lead times Q1 versus Q4?

That's correct.

The entire Company.

It's not just specific product [type].

Right.

And, then, finally, in terms of the restructuring and kind of the acceleration of some of your products' road map, over the past, I would say, 5, 6 years.

Lattice has carved out more of a focus on not so much competing against the larger, parental logic device manufacturers, and maybe aiming more at kind of lower end, and mid-end applications, which in some cases come at the expense of application-specific products, et cetera.

In terms of the accelerated road map, has that thinking changed at all?

Or, if you can give us some incremental detail on how you expect to accelerate the road map, that'd be great.

Yes, I think the first way that you do is use some of the innovations that are out there today.

We haven't traditionally been as good on a beat rate or a cadence rate of how we deliver our products to market, right?

And, a lot of the times, it's taken us multiple stepping.

There are things we can do there that are just some basic things that you want to do.

But, I want to be very clear that our market segment that we focus on is still the same market segment.

We want to be excellent at the midrange and below.

Which means in, in any one of the market segments, the more products you have, the better.

Our plan is really accelerating a lot of the derivatives that we had on the road map, such that we can expand our market segment share in those markets we're playing at.

We don't want to try to accelerate up, on a rocket pace, to be one of the big guys.

That's still not the intention.

We've made that clear to everybody.

It's really within the portfolio products we have, we want to spend more derivatives to expand our market segment share in the market that we play in, and we think that will help us grow a lot.

Great.

That is all I had.

Thanks, Darin.

Yes.

(Operator Instructions).

The next question is from the line of Nick Claire with Robert Baird.

Hello, guys this is Nick [Claire] calling for Tristan Gerra..

I was just wondering if you could comment at all on the [while winds] ETE's inventory deleveraging.

I know you had mentioned that you guys had not seen it in some of the markets just because you are a little bit more of a niche market provider, but I guess if you could -- any color you saw there, if it did have any impact on your 1Q results, or moving forward, would be helpful.

I don't know that we want to specifically comment on any one customer, but I can tell you this.

I think that there is customers out there that may be using the opportunity of some of the constraints, to gain market segment share.

I think there are people out there that are trying to do that.

I didn't see -- we didn't see, anything that was really out of the norm from our suppliers, although we are starting to see people that are actually going back.

People came in and ordered a bunch of stuff up, and in many cases, everyone got a lot of backlog which I think is normal in these situations, and I think now, people are saying -- all right.

That's pretty good.

I think it's smoothed out in the last, probably 2 weeks to 3 weeks, where as the first 2 weeks to 3 weeks of the situation people were just calling everyone -- what's the situation?

And, some of it was the big microcontroller and microprocessor groups that got hit.

And, you guys know who those guys are.

We are looking more at that.

Do we get constrained by somebody else on the system?

On the bill of material on their system versus is somebody trying to really do something different here?

But, I think there might be a few people out there trying to gain share at this time.

We don't see that as being significant in Q1 and we don't see it being significant in Q2.

Okay.

And, then, the other thing was, I guess beyond 2011 then, just because you had mentioned the restructuring charges weren't necessarily implemented as a cost reduction opportunity, but as those kind of taper off here in 2011, do you see further cost reduction opportunities for the Company going forward as a result?

Or in other ways?

Yes.

Absolute.

I think the plan that we have right now -- again, when you try to shore things up, your spending goes up a little bit as you try to take a site down, or take a situation down, or you're trying to bring one up in a different competency.

And so, what we're trying to do, is as you align those competencies to the center of excellence, we really got to focus on being able to then, take the R&D model and switch it over time.

We won't get there probably this year and next year to drive R&D, but as our revenue grows, you would expect us to be a lot more scalable so we're not spending as much from that perspective.

You'll get more out of R&D than you did in the past.

So I would expect our models on percentage of R&D, as we grow revenue, to go down.

This year and probably part of next year, we're going to be still going through that transition.

Okay.

Great.

That was it.

Thanks, guys.

And nice job on the quarter.

Your next question is from the line of Suji De Silva with ThinkEquity.

Question.

On the restructuring, is there any opportunity for benefit for the gross margin on a secular basis?

I know it moves around with mix, but is there anything that you can do that would help that trend upward over time?

Through the restructuring?

Yes.

Or any efforts in general, to help the gross margin, not just move around with mix?

Well, I think -- let's talk about that a little bit.

I think at the front end of this, no.

The front is really focused on research and development, because I think that is what we are trying to focus on right now.

Is just get more products out.

I think bringing Joe in is going to be huge for us, because then we are going to focus on the bottom line and also on the ability for us to get more out of the operational side.

Right, so, right now, what you want to do first and foremost, which is in a priority order, you want to get more out of R&D, and then as you're growing this thing, you could be taking stuff out of the Ops, right?

And, we see opportunities in both of these areas as we move forward.

We don't have a solid plans at this point to restructure anything beyond what we've said so far.

That clarification helped.

And, then, competitively, in the market you are focusing on, the mid-and low-end, are you seeing any changes competitively from your larger competitors?

Oh yes, I think, by the way, competition's great.

I love the fact that you create a market in certain areas.

I think we created a market with ECP3 which was a mid-range comms part with 30s and a lot of people went, "Wow.

That's a pretty interesting way to approach it.

" So I think -- I would expect them to respond.

The question is really, can they execute?

Who can execute?

And can people ramp and get the design wins, because these things, they don't happen overnight.

Design wins don't.

So, we've got to be prepared for the next wave of design wins that we are looking at, and again it is 3G extensions, and then eventually we have to be looking at that 4G market.

Great, and the last question I am going to ask, is the XO2.

What markets are those, end markets that, that product is focused on, or is it broad base?

It's pretty broad-based.

I want to make -- one of the corrections is that XO2 is ship released, not launched.

Sure.

We launched that last year.

We ship released it this past quarter, which is huge for us.

That thing goes everywhere.

It's a great -- we market it as a Swiss Army knife, it does a ton of things.

It's very, very low power so it can find its way into anything from smart phones, to office automation, to hard disk drives, you name it.

That thing can go everywhere.

So, we're really comfortable with that as a product that will open new markets for us and also help us to expand our reach with the low power applications.

Great, thanks.

Your next question is from the line of David Duley with Phil Head.

Congratulations on a nice quarter and thanks for letting me ask a question.

I was wondering, I noticed that your sales in the United States were up, I think 36% sequentially, could you talk a little bit about what the driver was there?

One big consumer application that we had, along with -- we had one of our military upsides that we didn't expect.

So, yes, we've got some stuff that went in there, but a big consumer pop and the military pop.

And, I'll argue this.

It probably wouldn't have been up that high, had Japan not been down so low.

Right?

Because Japan, again, got hit.

There was a lot of issues there.

All-in-all, I think we fared pretty well on that, and we expect Japan to do quite a bit better next quarter.

Okay.

And, I'm sorry if I missed this, but did you talk about, have you seen any sort of supply constraints from either -- any of your custom assembly partners?

Particularly with either the BT Resin or anything like that?

Were you having trouble getting substrates during the quarter, or do you see any troubles going forward?

Yes, first off, I think there was lots of constraints from thin copper substrates, to BT laminate, to you name it.

We call those organic laminate substrates.

But ,the bottom line is that yes, there were all sorts of things out there.

But the key is, it's being on industry standard product lines, so that when something like this happens, you just shift over to another supplier.

Because these things aren't -- I think that when people had customized solutions that got nailed, then you have a problem.

But, a lot of these -- and you've seen by the way, you've seen other companies go out with these big PCM's --it is just take it or leave it.

If you don't convert, here's what I got -- because it got to be pretty bad.

Right?

So I think there is mix of that.

There's so many different types of laminates out today that are industry standard, that you just have to make sure when you build your manufacturing flow that you qualify quite a few different ones up front, so if the situation happens, you just move to the next supplier.

Right, so --

So, you can switch off between Mitsubishi and Hitachi without any problems, or your substrates [Inaudible]?

Right.

And, then the other thing is, as people haven't alluded to a lot, is that you've got things like molding compounds, right, they got hit, right?

Yes.

And, that's another one.

If you really qualify, you cross qualify, early up, then those things just become simple PCM's that aren't a big deal.

So, I think what happened is that there were probably a lot of people that were single sourced in certain areas, and they are like -- oh my gosh, what do I do?

We have experience with a lot of different -- the older the company, the more experience you have with the more different assembly test suppliers.

So, you kind of have an advantage there, where you know what the molding compounds are, who built them, and all that other stuff.

Okay.

That's good news.

Yes.

We'll see -- I mean we will have to do some simple things as backups just in case something doesn't come up, but more of our qualifications are just backups to things -- in case.

Because we feel comfortable with supply, plus a lot of these things, people have to build these things for you 6 months in advance.

Right?

They have to keep 6 months of inventory.

So, we feel comfortable with where we're at, that is why we said we are not going to have any real impact.

Great.

One final question from me, and you touched upon a little bit, but I'm just a little confused about the operating expense guidance.

Essentially, you did like $39 million in operating expenses without the restructuring it was $37 million, and you're guiding to $38 million in this upcoming quarter and there's about $1 million of restructuring; so it looks like the operating expense levels are flat, net of the restructuring.

And, since there was $3 million less mass cost in this upcoming quarter than last quarter, I'm wondering what the incremental $3 million of spend is actually on?

Hold on one sec.

Yes, I think some of that $3 million was clear mass.

That's right, because we had a bunch of [those] assets that went out last quarter.

This time, here is what is interesting.

We have a lot of wafers that we are loading up for some of the new products which are classified there.

Plus -- okay.

So, bottom line is, we're going to get some spending from new products which is good, we have some restructuring in there which is good, and the rest of it is all labor and things like that, that we're using, plus some additional contractors that we have.

Because what we did, in order to do a shore up as we are doing some of the restructuring and building the competencies, we had to actually use outside services.

Right?

So, we had to go to other places to go in there and say -- okay, we are contracting stuff out as a backup and accelerator to our product road map.

And, so, that ended up kind of showing up in Q2; which is what we are going to have to do.

That's why I was talking about -- there is an interim kind of process we're going to go through.

What I can tell you this.

The basic run rate that we're seeing as we move through is not going up a lot.

We are keeping that in check, but we are putting variable on top of it to shore up some of our gaps.

So, products --

It will be more like the September quarter when we see a more normalized level of operating expenses then?

Well, yes, I would expect it to get better, but remember, these new products, our new product that's coming out, the next product after ECP3, comes out in that end, so we may have one more quarter or so and then we should start seeing it come back to normality.

Okay.

Right.

Again, we're spending a lot of time doing that right now, because again, there are certain competencies that, as you redeploy in one area and you're moving them to build up the next area, you've got to suffer that, and that's how we are doing it.

We're doing it with outside contractors.

Thank you very much.

Yes.

(Operator Instructions).

Your next question is from the line of Richard Shannon with Northland Capital.

Richard, you're back.

I am.

Just one last question on your second quarter guidance.

I'm curious, kind of the puts and takes in terms of the end markets, and also on the product age?

Whether there is any large divergence in any of the categories relative to the mid-point of guidance?

Yes.

I don't see a lot.

Today, if you're talking about is comps.

going up or down or things like that?

Exactly.

Right.

Yes, I think it's going to be pretty consistent with what we saw this quarter, minus some of the little pops herein that we talked a little bit about, the military and some other things that we had.

Right.

I think it's going to be relatively -- if there's anything that would be hard to call, it probably would be variability and comps, right?

Okay.

Fair enough.

All right.

And, then the product age?

Were you expecting to see a good quarter in the mainstream like we have the past couple?

We don't really see anything that would tell us anything different.

Okay.

All right, great; that's all for me, guys.

Thank you.

All right.

Thanks, Richard.

(Operator Instructions).

There are no further questions.

I would now like to turn the call back over to Mr.

Darin Billerbeck.

Okay.

I just want to thank everybody.

Great quarter.

We feel real comfortable with the strategy.

We spent a lot of time on it, and we have some restructuring that might be a little -- create a little angst, but it is all for good, especially in the short term and long-term.

Again, thanks for the call, thanks for everybody asking really good questions, and onward to next quarter.

And, this concludes today's conference call.

You may now disconnect at this time.