萊迪思半導體 (LSCC) 2011 Q3 法說會逐字稿

Good evening.

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

At this time, I would like to welcome everyone to the Lattice Semiconductor third-quarter 2011 earnings conference call.

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

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

(Operator Instructions) Thank you.

I would now like to turn the conference over to your host, Mr.

David Pasquale of Global IR Partners.

Mr.

Pasquale, you may begin your call.

Thank you.

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

Joining us today from the Company are Mr.

Darin G.

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

Joe Bedewi, Lattice's Chief Financial Officer.

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

If you have not 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 of the Investor Relations section of f 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 Company's official guidance for the fourth quarter of fiscal 2011.

If at anytime 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 and Exchange Commission, including our fiscal year 2010 form 10K filed on March 11, 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 are presented within the requirements of SEC Regulation G., regarding Generally Accepted Accounting Principles 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 everybody for joining us on the call today.

Results for the third quarter came in within our updated guidance but below our original guidance.

The revenue shortfall was the result of weaker-than-normal demand in many of our markets.

We remain close to our customers worldwide as we continue to have open discussions throughout the quarter.

The goal was and remains to support our customers however possible.

The reality is that a prolonged concerns over the worldwide financial crisis and weakness in the telecom infrastructure buildup resulted in order push outs.

During this period of uncertainty, we continue to streamline our Company for long-term efficiency.

We are tightening spending across all operations, managing our inventory, and making further inroads on our restructuring goals.

In Q3, we established our Philippines operation and our R&D office.

In addition, we entered into an agreement to outsource our sort testing from US to an Asian subcontractor.

We also outsourced several non-core IT support functions that are no longer cost effective internally.

And finally, we will have completed the closure of our Pennsylvania R&D office by the end of this fiscal quarter.

We expect our efforts complying with the acceleration of our new products to market will help minimize the impact of any prolonged slowdown.

Lattice has remained committed to developing differentiated products that deliver low-power, low-cost, and affordable innovation.

This value proposition resonates well with our customers.

As an example, or midrange Lattice ECP3 continues to perform well with some big design wins in our communication customers.

We're also complete these to report that our low-density MachXO2 continues to make progress.

Our sales team is hard at work to accelerate the number of design wins in markets as diverse as handsets, servers, networks, and wireless.

We view MachXO2 has the right product with the right features for the broad market of applications.

We expect to attain full production release of all remaining densities, speed, and power offerings by the end of the quarter.

In terms of specific results for the third quarter, revenue of $81.7 million was down 2.6% from the $83.9 million in Q2 of 2011 and up 6% from the $77.1 million in Q3 of 2010.

The revenue mix of new, mainstream, and mature was 48%, 27%, and 25% of revenue respectively in Q3.

This compares to new at 49%, mainstream at 27%, and mature at 24% in Q2 of 2011.

New products were down 3% quarter-on-quarter following sequential growth of 11% in Q2.

Mainstream products were down 5% quarter-on-quarter following a 12% decline in Q2 primarily driven to a decline in the military segment.

Mature products were up slightly from the prior quarter.

Revenue from FPGA products represented 32% of the total revenue in Q3 as compared to 33% in Q2.

PLD products represented 67% of the total in Q3 as compared to 67% in Q2.

FPGA products and new product revenue was especially impacted by the telecom slowdown.

A bright spot was our record shipments of our midrange LatticeEPC3 which continues to gain traction, growing 9% quarter-on-quarter and 80% year-on-year.

On a geographic basis, revenue from Asia including Japan decreased to 64% of total revenue compared to last quarter's 65%.

Further strength in Japan was offset by coms related weakness in broader Asia.

Revenue from North America increased quarter-on-quarter to 16% of revenue as compared to 13% in Q2.

Europe decreased slightly to 20% of revenue as compared to 22% of revenue in Q2.

On an end market basis, communications decreased to 44% of revenue in Q3 compared to 47% in Q2.

This reflects weakness seen in the broader market as the coms infrastructure was impacted by a week macroeconomic environment.

The decline in the Pacific Rim and Europe Telecom accounts more than offset the growth in US and Japan.

Computing was unchanged at 13% of revenue in Q3 as compared to Q2.

Industrial and other came in at 31% of revenue in Q3 compared to 30% in Q2.

Consumer increased to 12% of revenue in Q3 from 10% in Q2.

This was primarily due to the strength from US and Japan.

That concludes my initial comments.

I will now turn the call over to Joe for additional color on the financials.

Joe?

Thanks, Darin.

As noted earlier, revenue for the third quarter was $81.7 million, a decrease of 2.6 million -- 2.6% excuse me, from the prior quarter and up 6% from a year-ago period.

Gross margin for Q3 was within our original guidance of 58.6% compared to 60.4% in the prior quarter and 59.1% in the year-ago period.

The decline was driven by product mix, gold, and yield related costs.

Total operating expenses for the third quarter came in at $35.6 million.

This was better than our original guidance of $36.5 million and compares to $37.8 million in the second quarter.

The reduction in operating expenses reflects our active efforts to control costs given the revenue decline we experienced in the quarter.

We also incurred approximately $1.8 million in restructuring charges in the quarter compared to $1.4 million in Q2, 2011.

We expect restructuring charges to decline in Q4 with actions a substantially completed by the end of the year.

Q3 net income was $13.3 million, or $0.11 per diluted share as compared to $13.0 million or $0.11 per diluted share in the second quarter and compared to $15.4 million or $0.13 per diluted share in the year-ago period.

Restructuring recharges of $1.8 million Q3 represent $0.01 per diluted share.

At the current share price, our expected diluted share count -- we expect our diluted share count to be approximately 120.6 million shares.

The share count reflects retirement of approximately 851,000 shares valued at a proximally $4.8 million purchased under our $20 million share repurchase program.

We have purchased approximately -- we have repurchased approximately 2.5 million shares valued at approximately $14.8 million under the program to date.

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

We generated an additional $26.4 million of cash from operations, ending the quarter with a cash, cash equivalents, and short-term marketable securities balance of $267.2 million, and we continue to have no debt.

Accounts Receivable at October 1 were $53.5 million compared to $56.4 million at the end of last quarter, and Days Sales Outstanding were 59 days compared to 61 days last quarter and 57 days in Q3 2010.

Inventory at October 1, 2011 was $35.1 million, flat to last quarter.

Months of inventory now stands at 3.1 months compared to 3.2 months at the end of Q2 2011.

We spent approximately $1.4 million on capital expenditures during the third quarter, down from $3.2 million in Q2, with quarterly depreciation and amortization expense at $4.1 million, compared to $4.4 million in Q2.

This concludes the financial review portion of the call.

I'll now turn things back over to Darin for the fourth quarter business outlook.

Darin?

Thank you, Joe.

In summary, Lattice remains in a strong competitive position with solid financials.

We continue to focus on lowering our cost structure, accelerating our new products to market, and provide great service to our customers.

The innovation and affordability of our products offer our customers a great value proposition and give us a differentiated market position.

We remain confident in our long-term growth prospects, and we will continue to drive further R&D, sales, cost, and operational efficiencies.

Let me now to turn to our fourth-quarter expectations.

We expect revenues to decline 4% to 9% as compared to Q3.

Q4 growth gross margins are expected to be approximately 59 plus or minus 2 points.

Total operating expenses are expected to be flat at approximately $35.6 million.

This includes approximately $1 million in restructuring charges.

As Joe noted earlier, we expect restructuring activities to be substantially completed by the end of this year.

This concludes our prepared remarks.

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

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

And your first question comes from the line of Ruben Roy.

Thank you.

Darin, in terms of the guidance, 4% to 9% down, how would you characterize that in terms of end markets?

Is a similar to what you saw in Q3 and continued weakness in telco being the negative outlier?

Or is that changing at all?

That's probably fair to say.

I think the majority of what we see is really in the coms infrastructure, and I think is driven by a lot of things, right?

Government spending, some of the buildouts.

It could be some of the mergers that we've seen because there's still in a little conjecture on AT&T versus the things that they're doing.

But all in all, I think that's the big softening.

And there's a little bit that's due to seasonality.

Typically, the coms market does have a little bit of seasonality in the fourth quarter for us.

So I wouldn't attribute it all to that, but I think the majority is just softness along with the seasonality.

Your next question comes from the line of Tristan Gerra.

Hi.

Good afternoon.

How much deleveraging do think there is the second half, and if so, what was the timeframe you think the (inaudible] shipped real and demand?

Are you talking about specifically -- by the way, hi, Tristan.

You're talking about the specific coms market?

Just in general, regardless of end markets?

I don't know we see a huge inventory build up out there.

The distribution channel is fairly healthy for us.

On the coms side of it, it's hard to tell, right, because there's different inventory stages at different places.

But the softness I think in the demand says there's probably inventory in that channel.

Whether it takes like last year, it burned off pretty quick because remember everyone thought it would last few quarters?

Q4 was soft, and it came back pretty strong in Q1.

So I would argue that there is not an inventory challenge.

I think more than any, there's more a demand challenge as we've gone through it, because you remember, our distribution is the sell through.

So -- And I think -- By the way, I think the other element there is one of the reasons our inventory, our own internal inventory didn't go.

We've been managing that closely since the beginning of the year, which is why you may see some different inventory challenges at some of our competitors.

Your next question is from Nathan Johnsen.

Thanks for taking my question.

Just coming back on the overall kind of comparison, you guys versus your competitors.

If I were to take the September and December quarters together, you guys seem to be outperforming your larger brethren.

Just curious what you would attribute that to, whether that's the customer mix or some sort of share gains that you guys are expecting to see?

And then secondly, you'd guys had mentioned in your prepared comments about some gold and yield related costs that have been higher than expected.

Wondering if those were expected to persist or how long we should expect those to be around?

Thanks.

So I think the first -- let me answer the first question.

I will let Joe tackled the gold and yield one.

But from a first perspective, remember we are new to the coms market.

And when I say new to the coms market with our ECP2, ECP3, M family, even though we shipped a lot of XO, 4KZ in a lot of our lower density products in there, as we began growing that business, we are probably taking some share from the competitors because we haven't played in that in a big way in a long time.

And I think that's why we were less impacted last Q4 when the inventory started turning, when the market started turning down, we were a little bit less impacted, and we came back faster, because most of our designs are new, right?

Even though we do service the coms both wired and wireless with our XO and 4KZ and some of our other PLD products.

I think that's one of the reasons why, as you see up grow, there is an impact.

I will let Joe answer the gold one.

On the gold side, so our prices, our costs, tend to fluctuate with gold.

We see changes in gold prices flow through fairly quickly to us depending on the inventory at our sub cons.

So depending on the inventory at the sub cons and whether or not they're building, that price could decline into this quarter.

We are anticipating some small drop off at the end of the quarter in pricing, just based on where gold has been heading.

And we'll see how that goes.

I mean, we're monitoring that of course.

On the yield side, we have yield impacts that we don't believe are going to continue, so one of them was an impact related to a shift in production during the Japanese earthquake that caused us a one-time yield hit.

That hit has been taken care of.

We move the production back to the original factory, and we feel that, that has flowed through the system right now.

Combined yield and gold made up about half of our decline in gross margins.

So we see one-time event with the yields, and we see potential some uplift in gold towards the end of the quarter.

Great.

And then one quick follow-up on the business model transformation.

You guys clearly exiting this year are anticipating to be by and large through that.

Should we expect the charge of special items to effectively become zero after that?

And are you expecting operating expenses to fairly flatten in the first part of next year?

Yes.

Operating expenses should be fairly flat going in the first part of the year.

You'll see some restructuring charges trickle into Q1, but we are virtually done.

We accelerated some of those charges going into Q3.

You notice we were up quarter on quarter and up over our guidance.

We pulled in IT, restructuring charges, and we did some work in Manila to optimize that site and move operations there quicker.

We did that because we saw some weakening going on, and we wanted to position ourselves to get those savings sooner.

Great.

Thank you.

Your next question comes from Sundeep Bajikar.

Hi, guys.

Nice growth in the ECP3 revenue sequentially.

Wondering if you can give us more color on that in terms of which end markets you think would grow that growth?

Clearly it doesn't reconcile with what you saw in communications, so really curious what's happening there.

Yes.

Again, remember ECP3 penetration into this market is new for us.

And even though we've been shipping it a while, those design wins take a long time.

Even though you get a design win, there's still the certification of the system and the verification, all the stuff, right?

It can take a year and a half.

Part of this is just we're starting to sell more into that wireless communication market.

And that's the primary driver for us.

And so you know, did that outperform?

Well, it's a new product for us, so as it grows, it looks like it's growing very, very quickly, and we would expect it to.

But it's still not a major part of the coms.

That's helpful.

And just to follow up on that, perhaps just give us a sense for the competitive environment you're seeing, particularly in 3G base station, which as I understand is a primary marketing for ECP3 and communications.

Are you seeing more competition from 40-nanometer FPGAs from one of your larger competitors, or are you seeing more competition from the 65- or 60-nanometer FPGAs from one of your other one of your larger competitors?

It really depends on the LUT density.

But I'll kind of spell it out a little different, that on the smaller LUT density ECP3s, that competition would come from a 65-nanometer process technology because it's difficult because the dies are fairly small.

But on the larger LUT densities, you're going to see some of the competition come from 45.

Right?

Obviously, those are the ones that we would move forward on that technology, and those are the parts that we look for as we look for our technology node.

So I think you're going to have a combination.

On the high density 150k LUT ECP3 devices, you'll see comp coming from 45 nanometer on our lower densities as you would see it coming from 65.

Great.

And then one other question on new products.

Did you book meaningful revenues from MachXO2 this quarter, and is the ECP4 still on track?

I think what you meant was MachXO2, right?

Yes --

MachXO has done well.

MachXO2, we have got some good design wins.

We're actually doing very well in the mobile handset, kind of the mobile consumer market, which is different for us.

And those will take a little bit of time to get in.

I wouldn't expect to have massive revenue on XO2 in 2012, but we would position ourselves, really, for 2013.

But let's not forget we still sell MachXO and 4KZ into the same market.

So as we penetrate those markets, we have more than one offering.

And then your other question was on ECP4, and I will say stay tuned for this quarter.

Okay.

Great.

Thanks, guys.

Your next question comes from Sanjay Devgan.

Thanks for taking my questions.

Just a -- first question is kind of a quick follow-up to the question on the gold.

You talked about, you know, as the commodity prices increase, there's obviously impact to you, but I was wondering what is the possibility or feasibility of transitioning to an alternative commodity such as copper?

And if that is feasible, how long does that take to requalify with customers?

Yes.

So yes, absolutely you want to convert as much of the product line to copper.

Copper a huge cost reduction, over gold.

We have plans on our high volume roadmap -- on all the high volume products on our roadmap to do some copper conversions.

Let's not forget that in some cases, it's easier for us to do than it is many times for our customers to accept because that can be a product or a process change notification.

So we try to do is balance our commitment to our customer's ramp rate with our ability to convert to a very low cost structure.

We've got all those plans in place.

We're executing those plans, and we expect to have a lot of that stuff done by probably the middle of next year.

Great.

And just a follow-up also to the MachXO2.

You talk about a number of interesting handset opportunities.

Was just wondering if you could talk to some of the silicon that you're displacing, some of the features or functionalities that MachXO2 is bringing to handsets, and how we should look at that opportunity evolving forward?

Yes, it's interesting because it is a new market for us, and so in some cases, it's simple stuff.

It can be small, little 18 I/O devices where they're just doing little level shifters or they're doing sensing, or they want a specific hardened IP in there that they may not have put in there ASIC.

So some cases it could be a small ASIC that we replace that they just want to have more flexibility in the system.

They do one PCB, and then if they forget a sensor or something, they have the I/O to address that.

Other cases, it's a specific functionality that XO2 has on it that we put, could be PCI, a lot of different functions we put on those, that they like, and they've found that a better approach for them than integrating that on their ASIC.

So we see a lot of different applications.

And then there's one I won't tell you about, but there's one we found is really a pretty good power management focus.

But it was really interesting.

And some of these things, our customers, as your price points get to a certain level, they become more innovative in their own approaches.

So they as we know about others, they come to us.

Very helpful.

Just last question, more of a housekeeping question.

As you look at the outlook of down 4% to 9%, was wondering if you could give us a sense of what the turns requirement is to make that, and how does that compare with historical turns levels?

So we're moving back to historical turns levels.

We've had low turns in the past couple quarters, basically because of some of the issues in Japan and so forth.

We're moving back to the more historical levels.

Okay.

Thank you very much.

Your next question comes from David Duley.

Thanks for taking my question.

Just another follow-up question on the gold.

How meaningful would be for Lattice to transition from gold to copper?

What sort of cost savings would you generate on gross margin line or however you'd like to tackle that?

Well, yes.

Interesting.

Well, so we don't look at it on a specific -- I don't look at it on a specific produce perspective.

I can tell you this, you can go look at the $1600 per ounce of gold versus the copper.

And the -- I don't know that we have figured it out on product or gross margin.

We're looking at a relative big savings from a corporate perspective.

I don't know if we have that.

Do you know what percentage of Cost Of Goods Sold is made up of gold?

It's a small percent.

I don't have the number right off the top of my head.

Okay.

Suffice to say there is meaningful savings --

There are definitely meaningful savings.

It positions us for our long-term cost reduction strategy.

Have we've modeled it into a full-blown P&L?

Not yet.

Are you starting to transition now?

Or have you already been transitioning parts to copper?

Yes, we started the copper conversion actually in January of this year, because we ha seen that for some of our lower density product and mid-density product, that offered a pretty nice cost reduction.

We started that conversion early on.

And as we moved through the year, we've put a pretty big focus on a lot of the things that we've focused on being the highest end devices which cost us the most.

So if you just take -- When Joe said we by hit by copper, you could almost say that, that mix flexibility would be removed.

Later on, if you have converted the majority of your products to product to copper, you would never come back into the P&L and says, oops, I had an adjustment in my material set.

That's how you would look at it.

Just two follow ups.

You mentioned how the communications sector I think was going to be down in Q4.

Could you just talk a little bit about the other sectors?

And then the final question is, do you have plans to extend the buyback particularly given the cash generation in the current quarter?

Thanks.

Let's talk about the buyback first.

We bring that to the board in every board meeting, and they take a look at all of the elements that have to do with that, so that will be another discussion we move through to the year.

And then of the other markets, I think that for us what was interesting is, as we mentioned, Japan and the US were very strong.

The strength in those markets had to do with a lot of different broad-based applications, a little bit of the industrial stuff, but there was different things competing consumer.

But I would argue that where we're ending up as a market, we're going to expect that everything to be deflated is the crisis continues.

I'm not really predicting any one market being up in the next quarter, but as we get through this crisis, things will recover.

I remember last Q4,we were really worried about Q1 and Q2 because of some of the inventory, and it bounced back pretty quick.

I think once they resolve some of the macro events, I think things get back on track pretty quick.

The whole SPGA market looks as though is down if I look at the overall from our competitors and ourselves, so who knows?

All we can do is manage our inventory, manage our cost structures, continue to (inaudible) for the efficiencies in all aspects of our business and then be prepared for that upside with great new products and innovations.

Are you happy with the where the inventory levels are now?

Our inventory levels, absolutely.

I think we manage our inventory levels down pretty fast, and we are comfortable with our inventory levels because we have to balance being able to ship to customers and incurring very low inventory, and I think we are reaching the threshold now where we think that we are at the right level.

The channel inventory, I think with distribution, it feels comfortable.

You really don't know with the end customers in coms, my gut says when people push orders, and I think everybody got orders pushed, it means there is inventory in the channel or there's less demand, which relates to the same thing.

I think in the coms, there's always argument, is it quarter, is it have a year?

My gut is probably shorter rather than longer because a lot of the stuff is going to work its way through.

Thanks.

Yes.

Your next question comes from the line of Bill Dezellem.

Thank you.

Would you please address the size of the MachXO2 markets that PLDs can now address, which in the press release you made reference to the fact that were previously not accessible?

Yes.

So I think that if you look at where we're headed with that product, and it could go just about every place that MachXO went, I think what it offers us because it has extremely low power to it, it offers us the ability to get into real low-power battery applications that we may not have been able to get into with MachXO.

Now, we could have done that with our 4KZE, but the cost structure on the 4KZE longer term will probably be a little bit higher than will drive MachXO2.

We look at the whole mobile consumer market that we haven't traditionally played in as a big opportunity.

A lot of people will tell you that, that market is in billions, right?

If you really think about it.

I don't know if it's quite that big because you're talking pretty low density and low prices, but it's a big opportunity.

Then you look at consumer like -- you look at the computing with these netbooks and some of the laptops and tablets and even the cell phones that operate very similar, I think you're going to see some pretty big market opportunities there.

So the ASPs are not likely coms market.

But the volumes are much higher.

And so did we hear correctly that MachXO2 family, that product in and of itself has a market that is multiples the current revenue size of Lattice?

Multiples -- One can argue -- I can argue this.

If I sell 1 billion units at $0.50, it's $500 million, which is bigger than we are today if you believe the numbers, right?

I don't think you're going to put a MachXO2 in every cell phone on the planet, so you're probably not going to be that big.

But I can argue that we are looking at market potential that are big sizes for our company.

Because we want to grow, and we want to grow faster than the market.

And so I think we're going to look at opportunities to gain share in areas like coms and other opportunities to maybe create new markets that haven't been played before with FPGAs.

That's very helpful.

Thank you.

Your next question is a follow-up from Ruben Roy.

Hey, thanks, Darin.

I didn't get to this the first time around, but in lieu of some of these changes in the customer behavior, are you seeing any changes in design activity?

Actually, were seeing a little bit.

Like some of the higher end designs seem to be pushing a little bit, but on that same sense then, there's more cost reductions going on.

Right?

So it may be that sometimes you get inflection points when the economic crisis occurs where people are really focused on reducing the cost structures of the products they have in parallel with trying to develop new products.

I think you're going to see a little of that was the LTE rollout because you've got the LTE rollout that may get slowed down because of funding, but on the other hand, you still have to connect to customers.

And 2.5 and 3G for emerging markets is still the cheapest way to do it.

Okay.

And then just a follow-up for Joe on the inventory discussion, kind of keeping it flat even with revenues kind of trending down a little bit here, are you going to continue -- I know you said you're kind of comfortable with where inventory is, but you've been actually managing that down.

Has there been any changes on the manufacturing side, or are you planning changes with the manufacturing partners or anything like that?

Not at this point.

Okay.

I mean, we're still committed to partners we have.

All right.

Great.

That's all I had.

Thanks, guys.

Your next question is a follow-up from Tristan Gerra.

Hi, again.

Could you give us some feedback on the outlook specifically in China from a demand standpoint for Q4?

How is it relative to your guidance?

And perhaps any initial thoughts into potential demand from there next year?

Yes, so if I look at China, remember, we sell into China.

We sell our products into China, and then the Chinese customers sell it everywhere, right?

So I think the Chinese -- from my personal opinion, I think China itself is still growing.

I think India is still growing.

I think you have (inaudible) growing.

It thing that Europe and US or not.

I think they're slowing because of some of the situations that are going on.

So their market potential is probably more impacted, which then again affects us.

So our quarter being down as a big impact on what we believe is what's going on because we think we're going to have less demand in the coms market this quarter because of those artifacts and the macro environment.

Right?

So I hope that was your question, right?

Were you asking --

Yes.

And if we look at -- and maybe it's not easy to be differentiate, but out of your large customer in China, which I'm assuming about half of this is local demand versus international demand.

So you mentioned that you tend to see growth in Q4, so do you expect any significant change in trend in that regard next year?

Or would you say --

Yes, you know so your numbers are about the same as ours, right?

So it's about 50% here and about 50% there, so I think that's about aligned with what we are thinking.

Again, I don't think there was a huge inventory build up that we saw before.

So you know, we're hoping, and hope is not a strategy, but we are hoping that this thing gets itself back on track after Q4.

Very useful.

Thank you.

All right, thanks.

Your next question comes from Richard Shannon.

Hey, Richard.

Hi guys, how are you?

Maybe just a couple quick questions, kind of looking at your numbers from a couple different slices.

Looking at your product age splits, you're mature products have actually held up pretty well this year, third-quarter numbers pretty good.

What the driver of that, and how do you view that going forward?

From the -- mature products?

We would -- I think we've talked about this before.

Typically, we would expect mature and some of these other ones to go down over time, right?

Because as product age, again, as we take our new product into the mature, there's a little bit of growth there, but we expect those to really be declining as far as some things are falling off and become a really older product if you will, which are some of the things that we're working on.

But I would expect that our mainstream continues to do well, which actually did I think this quarter, mainstream was fine.

Our mature products -- we've modeled on that it will decline over time on a traditional basis.

Some of that gets help because older -- like I said, newer products become older, right?

So there's a little bit of that going on.

Fair enough then.

And then also interesting looking at your split of revenues between OEMs and distribution, where distribution has actually held up also pretty well last couple of quarters and OEM has -- fairly significant decline in the third quarter.

Given that you're selling into some of your large Chinese customers directly through OEMs would make some sense.

How do you expect the fourth quarter trends for that split of the revenues to move?

I think they'll be consistent, relatively consistent what we saw this quarter.

I think, like you said, distribution held up.

We were surprised, actually, that distribution held up, but then at the end of the quarter, you typically have a pretty big ramp up because September is usually biggest month of the year, right?

September or March.

And this year, September, the last couple weeks just were kind of average.

So distribution didn't blow out the last month like it typically does, and then, like you said, the larger customers had some issues with some of the coms degradation, so right on, I think you nailed it.

Okay.

Maybe just one last quick one for me, a couple questions previously about your consumer business.

You talked about some MachXO2 opportunities maybe a few quarters out here.

Your consumer business seems to have a little bit more volatility than the rest of your business.

Maybe it's because you've got some fairly larger opportunities that move in and out pretty quickly.

How narrow are some of those opportunities there?

And when do we see a little bit more diversification there so we can see maybe a little bit less volatility in that consumer segment?

It's funny you call it volatility.

We joke because we call it lumpy.

But I think the issue is, until we had a solid broad base of customers that we're operating to in that consumer offering area, you're going to see kind of move up and down.

We've been surprised a little bit here and there because during the year we got one of the e-readers that was a pretty big pop for us.

We've been in some PCs, things like that, that really are kind of in that consumer market.

At least we call it that as we market those things.

So what was interesting, though, is as we look forward, I think you're going to see that to be a higher percentage of our overall business.

And it will still fluctuate, but because it's a higher percentage, it will seem like the fluctuation is less.

That's kind of our goal is to grow it to a point where as it moves up and down, it's not as detrimental as what we see today.

Because do you can drop a couple million dollars pretty quick in that topline revenue just by somebody pushing something out.

On the other hand, you can grow just as fast.

Okay.

And just a follow-up, one of your previous comments, Darren, was that you thought the XO2 might see some ramp up or be much more material in 2013.

Will we have to wait until that time frame to see that higher level and little less volatility in the consumer, or can we search that next year?

No, I think we'll see some interesting consumer design wins on XO2 next year.

The reason I said it's going to take longer is because there's also a kind of main broad basis this will service that those design wins take longer, because consumer design wins are very quick, and they ramp really fast, but they don't last as long.

Whereas the base, if you look at MachXO, it has a very traditional base that continues to grow.

So when I say it will take until 2013, I'm talking about that baseline stuff.

There will be some opportunities as we go through it.

Got it.

That makes sense.

Thanks a lot for your comments, thanks, Darren, and thanks, Joe.

You got it.

And your final question comes from Paul McWilliams.

Thank you for taking my question.

The last gentleman nailed two of the more important ones, so all I'm left as housekeepers.

On OpEx, you said that would be flat.

And you've got revenue going down, and your restructuring going down.

Can you help me understand why the OpEx will stay flat?

There's still a portion of costs related to restructuring that are double counts going on, so as we ramp the Manila site, as we ramp down LPA, we have double counts going on as people move out and as we shift assets at two different sites.

That's a portion of it.

Okay.

So -- go ahead, I'm sorry.

That's the main portion of it to be honest.

So as we go into Q1, will the double counts factor go away?

The double counts factor will be gone.

Substantially complete.

And we'll be evaluating our model as we go into Q1 and how much we spend on R&D as we ramp derivatives.

That kind of issue comes into play, so you may not see a decline -- a large decline going into Q1, but we will take advantage of what we can.

Okay.

In 2012, what do you expect for a tax rate there?

We haven't modeled any tax rate in 2012.

We're still operating under NOLs, so --

You're not going to have to be in a position to where you have to take those NOLs as a one-time profit and then start paying tax at a higher rate or recording tax at a higher rate?

That always is in play, and we talk with our accountants and with the auditors as we go forward in the year, evaluating that.

That gets evaluated on a yearly basis.

So that's evaluated sometime this quarter, and you just don't know?

Yes.

Okay.

One last question here on the XO2, you mentioned going into what I presume would be smart phones.

Design cycles there, as you noted, are fairly short, so would we expect to see some designs hit production in 2012 then?

Yes.

I grew up in that market.

I used to do a lot of flash business in the mobile market, and you're right.

Those designs can happen in a period of six months or less, and they ramp in a year, and they're done.

The answer would be, okay, can we get into those markets?

Yes.

Those are the target markets.

If one hits, you would expect to ship some volume in 2012 for sure.

Okay.

I don't know if there is something that you're comfortable in answering, but one last question on that subject, and then I'll be done.

What sort of applications are you going to support there?

In that, well, there's a lot of different -- to be honest with you, there's tons.

You think about smart phones, tablets, all those.

There's a lot of different sensing technology associated with those.

There's power management.

There is some screen deals that you can do.

There's a lot of applications when you create a price point and you also create a feature set that's very attractive and gives them that value proposition.

Remember, we're kind of known as the affordable innovation guys.

We're not expensive.

We try to be the best price for the applications, and we're not going to be the highest density and the highest technology.

I love the new model, and congratulations on wonderful execution.

Thank you.

Thank you.

Thank you.

Sir, you have no further questions.

Okay.

So just to close real quick, some final statements.

Rough quarter for us.

Obviously, you never like to miss your guidance or have to create new guidance, so it was a tough quarter.

I think was a tough quarter on a lot of people in the environment that we play.

What we tried to do is use the strengths and the things that we know, which is really focusing on the things that are within our control and not really focusing on the things without, so our cost structures, our R&D focus, our inventory management, I think we did a fabulous job this quarter of keeping our cost down, focusing on inventory, and making sure we don't have inventory in the channel or in our own hands.

Additionally, we continue to stay true to our R&D efficiency focus.

We've made some big strides in the ability for us to actually be able to execute on the products that we're bringing to market.

And then we're doing a good job of getting design wins on the new products that we already have out.

So we've got a really three classification of product that are out there.

Some are taking share, some are growing, and some are designing.

So it's a good balanced approach as we go through the market.

And you'll know us as the guys that are really focused on growing, but not necessarily everywhere.

Just where we can win, and that's what we're trying to do.

Thanks much for joining us on the call today.

Thank you for participating in today's conference call.

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