萊迪思半導體 (LSCC) 2012 Q3 法說會逐字稿

Good evening.

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

At this time I would like to welcome everyone to the Lattice Semiconductor third-quarter 2012 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'll now turn the call over to our host, Mr. David Pasquale, Global IR Partners.

Sir, you may begin.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's third-quarter 2012 results conference call.

Joining us from the Company today are Mr. Darin Billerbeck, the Company's President and CEO; and Mr. Joe Bedewi, 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 requirement of SEC regulation FD.

This call includes and constitutes the Company's official guidance for the fourth quarter of fiscal 2012.

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

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

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

They involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our fiscal year 2011 Form 10-K and our quarterly reports on Form 10-Q.

The Company disclaims any obligation to publicly update or provide 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 principles or GAAP.

I would 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 our call today.

In terms of Q3, revenue was $70.9 million.

This is in line with our guidance and reflects the impact of macro weakness on our COM's business.

The COM's softness is muting the positive impact of our continued success of our new products in both consumer and non-consumer segments.

From an operational perspective, we are finally beginning to see the benefit of our prior cost-reduction actions.

Those actions positively impacted Q3 and helped us deliver a 54.4% gross margin.

We do not expect the business environment to change significantly over the near-term.

We expect continued pressure on our COM's business and continued weakness in Europe.

Given our outlook, we are proactively taking additional restructuring action to further streamline our organization and to focus our strategy of pursuing the low-density FPGA markets.

The restructuring is primarily focused on consolidating sales and marketing in both the US and in Europe.

This includes the elimination of several subscale sites and middle management positions in sales and marketing.

We are focusing our team on having the right people with the right experience in the right locations to give Lattice the best chance of winning.

This is essential to our future success.

We expect our latest actions to result in a 13% workforce reduction.

This is on top of the 5% headcount reduction announced in Q2.

I want to be clear that while we are working to better align our operating costs to the current business environment, we remain fully committed to executing on our product roadmap, and as always, will continue to provide excellent customer support.

In terms of added color for the third quarter, the revenue mix of new, mainstream and mature was 26%, 54% and 20% of revenue, respectively, in Q3.

Revenue from our new products was up 34% quarter-on-quarter, reflecting the strength in our ECP3 and iCE40 product family shipments.

Revenue from new products was up 95% in Q3 2012, versus Q2 of 2011.

New product growth from ECP3, MachXO, iCE40 and our power management devices is the key to our future growth.

Q3 new product growth reflects our momentum in both consumer and non-consumer areas, and includes several non-handset opportunities.

Mainstream products were down about 10% quarter-on-quarter.

This was due to a specific customer placing higher MachXO orders in Q2 that did not repeat in Q3.

Revenue from our mature products was down about 3% when compared to prior quarter, due to softness in the industrial market.

The revenue mix between FPGA and PLD products was 37% and 63%, respectively.

Our ECP3 family continued to perform well and is driving growth in our FPGA segment.

On the PLD side, we benefited from growth in our iCE family.

iCE40 is now the fastest ramping product in Lattice's history.

On a geographic basis, revenue from Asia, including Japan, was about 69% of the total revenue, slightly lower on an absolute dollar basis compared to Q2.

Revenue from North America was about 13% of the total revenue, up about 3% compared to last quarter.

Europe was 18% of the total revenue, up about 3% compared to Q2.

On an end-market basis, communications represented 47% of revenue in Q3, compared to 51% in Q2.

This reflects ongoing macro weakness in the COM segment.

We do anticipate our COM's business to be slightly lower over time as we increase the Company's penetration into other markets, including industrial, consumer, auto and medical.

Computing was relatively flat at 12% of the revenue in Q3, as compared to 12% in Q2.

The slight decline on an absolute dollar basis was due to a decline in the server market.

Industrial and other was flat at 27% of revenue in Q3 and in Q2.

Consumer increase to 14% of revenue in Q3 from 10% in Q2, primarily reflecting the continued ramp of our iCE family.

As we have previously stated, this segment will be highly variable based on consumer product life cycles.

That concludes my initial comments.

I will now turn the call over to Joe.

Joe?

Thanks, Darin.

As noted earlier, revenue for the third quarter was $70.9 million, level with the $70.8 million we experienced in Q2 and a decrease of 13.2% from the year ago period.

Gross margin for Q3 was 54.4% compared to 52.3% in the prior quarter, and 58.6% in the year-ago period.

The improvement is due primarily to manufacturing cost-reduction actions.

Total operating expenses for the third quarter came in at $38.9 million.

Expenses were higher than guidance due to a one-time event and some spend timing.

We accelerated mass charges to enable a stronger ramp for our consumer products, and we experienced unforecasted severance charges.

As Darin noted earlier, we are taking steps to restructure our sales and marketing functions.

We anticipate the cost of this restructuring to be approximately $6 million, which will include severance and facilities closure-related expenses.

We expect $5.5 million of this cost to be recognized in the fourth quarter, with the remainder to be recognized in Q1.

The impact of this restructure will be a reduction in operational spending of approximately $12 million annually.

Looking back to Q3, we experienced a net loss of $2.2 million, or $0.02 per basic and diluted share, as compared to a net loss of $12.5 million or $0.11 per basic and diluted share in the second quarter.

And compared to net income of $13.3 million or $0.11 per diluted share in the year-ago period.

The second quarter of 2012 included a tax provision of $10.5 million, or $0.09 per basic and diluted share, related to the implementation of our new global tax structure.

Our tax provision declined to $1.9 million in Q3.

Our cash tax impact is minimal due to our continuing utilization of NOLs.

We expect diluted share count to be approximately 116.8 million shares.

The share count reflects the retirement of approximately 1.391 million shares purchased at a cost of $5.4 million in the third quarter.

Our year-to-date total shares repurchased is now at 2.73 million shares purchased at a cost of $12.4 million under our previously announced 2012 stock buy-back program.

We ended the quarter with a cash and cash equivalence in short-term and long-term securities balance of $190.9 million, an increase of $1.7 million over the prior June quarter.

And we continue to have no debt.

Accounts receivable at October 1st was $56 million compared to $60.4 million at the end of Q2.

Day Sales Outstanding were 71 days compared to 77 days last quarter.

Inventory at September 29th, 2012, was $37.4 million compared to $37.1 million last quarter.

Months of inventory now stands at 3.5 months compared to 3.3 months at the end of Q2 2012.

We spent approximately $3.2 million on capital expenditures and $5.9 million on depreciation and amortization expense during the third quarter, compared to $4.6 million and $5.2 million, respectively, in Q2.

I will now turn things back over to Darin for the fourth-quarter business outlook.

Thank you, Joe.

While we remain in a challenging environment, we acted this quarter to streamline the Company for long-term success.

Our goal is to be number one in the low-density FPGA market.

We continue to focus on reducing our costs while improving our efficiencies of the Company.

Let me now turn to our fourth-quarter 2012 expectations.

We expect revenues to be approximately flat, plus or minus 2%, compared to Q3.

Q4 gross margins are expected to be approximately 53%, plus or minus two points.

Total operating expenses are expected to be approximately $43 million, including approximately $5.5 million in restructuring charges.

This concludes our prepared remarks.

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

(Operator Instructions)

Tristan Gerra with Baird.

Hey, this is actually Nick calling in for Tristan.

Can you guys hear me okay?

Yes.

Okay, great.

So, I guess first, can you quantify, how 65-nanometer products did during the quarter?

Well, all of our products shipping today are 65-nanometer except for iCE.

Right?

So iCE40 is the only one.

If you exclude that one, everything was 65 or older.

Okay, alright.

Well then if you look at, I guess, the 90-nanometer node, is that still growing for you?

I'm trying to -- okay, that's -- hold on a second, I've got to go back and look at that.

Mostly our mainstream --

Yes, that's mainstream.

It continues to grow, we continue to get a lot of quotes and orders for that, so I don't expect that to decline significantly.

Some of the older products beyond that will.

You would expect them to naturally decline over time.

But on 90-nanometer, probably not.

90 and 60 are kind of peaking today, and they will stay kind of flat to that level for quite some time if they follow traditional FPGA.

Okay.

How would you -- or I guess, when would you expect Lattice to participate with LTE deployments?

Okay, so let's not forget that people think of us as these high-end ECP3, ECP4 products that fit into that market being 6-gig [series], but a lot of our shipments are still XO and XO2, which are control plane for those.

So we do ship in those today, we just don't ship in the high-end with 3-plus gig series devices.

Okay.

Given you just announced another, you know, restructuring effort to further cut costs, it's clear now that the prior is paying off.

Should revenue growth or the macro remain muted again next year?

How much more room is there, to cut expenses further beyond what you're guiding now for 4Q?

Yes, there's always room to cut if business conditions change.

I think what we've tried to do is balance the resources that we have today with the ability to grow and then leverage that from where we are at today, leverage that outward.

We believe that what we've done today gives us a great balance between what we do for the US core competencies sites and then our higher-value, lower-cost sites over in Shanghai and also in the Philippines.

And so we are really focused on that balance.

Over time I would expect a majority of our growth to occur overseas, but we will still be showing up some capabilities in our San Jose site and also in our Oregon site in the US.

The biggest change that we had was really bringing in the satellite sites that we had into either LSV or LHQ.

That was the primary focus of this reduction.

There were other smaller things that happened world-wide, but that was our primary focus, was really for streamlining, and then we'll rebuild some of that back in the US and also some offshore.

Okay.

Kind of looking at the SiliconBlue part of the business, Zilex tried entering kind of the mobile phone market a few years ago with its coolrunner chip and really didn't gain much traction.

I'm just kind of curious, what leads you to believe that the SiliconBlue stuff -- what leads it to be successful in an area where a peer could not be?

Well, you have to be committed and you have to be focused.

That's the first thing.

I think Zilex spends a lot of their effort, as I would if I were them, on the higher-end FPGAs.

For us, it's about smartphones and it's about the evolution of tablets and other things that are evolving at a very rapid rate.

So what you're starting to see is, in a smartphone, for instance, you might have multiple different sensors on that phone and you have to keep up to speed with all that.

When you see a platform that gets driven once every year and a half or two years from the high-end platform for smartphones or for some of the tablets, it's hard for them to keep up with the -- let's say the sensor hubs and some of the other features innovations.

We provide a very unique low-cost FPJ that is both fast and it also provides the I/O count they need at the cost structure.

And so I believe that we'll be more successful than everyone else because we understand it, and it also takes a lot of rigor to do a lot of the design service help.

You can't just hand it like you do through distribution to a smartphone manufacturer.

So it takes a lot of energy and effort and focus, plus you have to have some expertise in that market.

Okay.

Then lastly I guess, can you speak to any update on SiliconBlue design wins for the quarter?

Any type of contribution it gave to your 4Q rev guidance?

Yes, in fact the salesforce.com data that we have, the SiliconBlue is now close to the second-highest product that we are starting to see design win momentum for.

It was difficult for us at first because we didn't have all the collateral and we didn't have everything aligned to be able to take SiliconBlue devices being the iCE family and drive them through distribution.

We now have that and we're starting to see the benefit of both focusing on consumer, but also focusing on the broader market.

A lot of people think iCE40 can only play in a smartphone or a tablet, and that's not true.

iCE40 can play in just about every market segment that we play in today.

Okay, great, thanks guys.

That was it for me.

Ruben Roy with Mizuho Securities.

Hey, Darin.

Hi, Joe.

I had a question on the iCE40 stuff that you were just discussing.

In Q2 you had a bit of a fall-off in the consumer revenue, mostly related to non-iCE revenues, and obviously a nice jump-back here in Q3.

Was that all driven by iCE40, the growth in the consumer business?

It is primarily driven by iCE40 today and we do have some shipments still on 65, but they're minimal.

And most of those are in some of the older design wins.

But we are beginning to get some traction on the iCE40 and some of the larger design wins that we have been working on for about the last six to nine months.

Okay.

And so as you start to see the design activity, pick up with iCE40, do you have a sense -- I think when you look at kind of the mature stuff obviously, not great growth there.

And I think the PLD, the larger PLD companies talk about sort of mid- to high-single digit growth for the industry over the next several years.

Have you taken a stab at where your consumer business could end up looking, just from CAGR perspective, given the design activity that you're looking at?

Yes, a lot bigger than all of that, that's for sure.

(laughter) So when we look at it, again, this is a new market, so when you penetrate a new market with a TAM that's a billion units, we don't have to get much to make a pretty big [neo] movement for our Company, which is why we're focused on it.

But the key for us is to get more than one substantial win that can balance this and then you can grow.

Because if you just have one, it's very variable.

So what we're trying to do at this point is really build the base for consumer.

And what we're finding is actually outside of consumer there may be a pretty large base for this also, including servers, including some of the networks and including some places where they may not need the features of MachXO2 or even XO.

They just need some Simple Logic or I/O expanders, So we're starting to find some other homes.

Our challenge is going to be able to grow that base and then have consumer just pile on top.

So we're building the Company structure as if this consumer up -- the very bit of consumer doesn't exist.

When it happens, it is an upside.

When it doesn't happen, it's part of our POR.

Great, okay.

Thanks for that.

And then just finally, for Joe, on the gross margin, a nice uptick here based on some of the efforts that you were working on over the course of the year.

Still kind of a wide range of guidance if you look at the mid-point and then add, I guess it was plus or minus 200 basis points.

So what's driving the uncertainty at this point in the visibility in the gross margins -- ?

It is still the same story we've said before.

It's product and customer mix.

Okay.

Highly volatile, still.

We've got our handle around the cost reductions and those are starting to flow through nicely.

But we still have variability there.

Okay, alright, I got it.

That's all I had.

Richard Shannon with Craig-Hallum.

Hey Darin, Joe, how are you guys doing?

Darin, I think maybe I'd like to parse one of your statements in your prepared remarks regarding commentary on the communications business.

If I caught your phrase correctly, you said you expect the communications business to be lower over time as you focus on other markets.

Can you help us understand exactly what you mean by that?

Are you focusing less investment in that vertical?

What does that mean about the product roadmaps in the COM space?

Yes.

We're not abandoning COMs in any way.

That is our largest market, so we're going to continue to service that market as we always have.

The difference -- the reason I'm bringing that comment to everyone is the fact that there's other markets around it that have a higher growth rate.

And when those things start to kick in, you're going to start to see COMs as a percentage begin to decrease.

And people shouldn't take that as we're not successful in COMs, it just means that COMs may not grow as fast as some of the other markets we're going into.

Okay.

So that wasn't lower on dollars, that was on percent of sales then.

Yes, that's exactly correct.

And we have a lot of different products that fit within the COMs market.

So we're not trying to establish a record that we're getting out of that.

Okay.

So we should still expect to see an ECP4, or whatever you want to call that, at some point down the road then.

Absolutely.

Okay, good, I wanted to make sure I got that one right.

Let's see here.

Second of all, I'm not sure if you got asked this earlier, I had to jump off just briefly there.

But looking at the OpEx trajectory as you get through these restructuring charges, I saw your filing that said you expect reduction in OpEx of about $12.3 million.

How should we think about a starting point in OpEx, including that $0.5 million charge you expect, starting in the first quarter?

So we're going to hit the restructuring, you saw that in Q4.

And there will be some small restructuring go through in Q1.

We'll start to see the bulk of that $12 million coming in the second quarter going forward.

So we still have some lingering transitions happening in Q1.

Okay.

So to try to put numbers to that commentary, if I take out the $5.5 million of charges in the fourth quarter here, you getting about, what, a $36.5 million --

$37.5 million --

$37.5 million run rate.

Do we think about a number that eventually gets maybe $3 million per quarter lower than that?

Correct.

Okay, alright, fair enough then.

Darin, maybe a question for you on the iCE products.

I think your press release said you did about 3 million units of iCE40 nanometer.

Did I gather from your previous comments that that largely came from a single large-volume win?

It's primarily one win, but there's a lot of other smaller wins within there.

So there's different ramp rates depending on where they are in the maturation of their ramps and their product launches.

So yes, it's primarily driven by one specific, but there are a lot of other design wins and early involvement in that number.

Okay.

Darin, care to take a guess on where you -- where we could be hearing from you in the middle of next year about the number of designs and number of units you might be selling with iCE40 or iCE products in general?

How should we think about the potential there?

Well we have a lot of irons in the fire, for sure.

Right?

And we have a lot of focus on that market, for sure.

We don't give out forward-looking guidance on that.

But I think at the beginning, we want to be looking at some pretty high growth rates until we get to a stable unit shipment.

But this thing is shipping at volumes that the Company hasn't seen.

So when you think about that 3 million units in the end of the quarter very, very quickly, those are pretty big run rates.

So when we look at it from that perspective, we have to prepare ourselves with both the upside potentials of that, but also the variability.

Because one of the challenges in this market is people start up really, really fast, and then they get into the market and then they shut it down really fast.

So we've got to be prepared with inventory positions to be able to ramp quickly and also be able to be prepared not to put stuff into the packages so we have the [die] available for any other opportunities that are out there.

So that's the challenge as we move forward.

But iCE will be our fastest growth product, I believe, next year.

Okay, alright, fair enough.

And then just lastly on your guidance for the fourth quarter, can you give us your expectations on relative growth by end-markets, specifically COMs, please?

Yes, I think COMs -- from what I can see, COMs looks relatively flat to us.

I think we're continuing to ship into the existing marketplace that we've seen.

When I look at everybody else, you look at the ZTE and you look at the various press releases that we've seen, we don't see a massive decline in any way.

But we don't see it also as recovering back to some of the levels that it was at before.

Consumer we think will grow because I think there is more opportunity.

In a down environment, consumer seems to always do well.

I would expect us to continue to grow in consumer.

¶ COMs will be relatively flat, and then the rest of the market recovers as the macro recovers.

I think industrial was down a little bit.

But again, Europe was down so far since last year that even at flat, it's still down a lot, right?

I think it came up for us maybe 3%, but that doesn't move the needle compared to where it was before.

So we're still kind of anxious to see when Europe actually recovers.

It seems as though China distribution -- if you haven't heard that from other calls -- China distribution seems to be relatively flat also.

Okay, fair enough.

Appreciate the thoughts, guys.

I'll jump out of line, thanks.

(Operator Instructions)

Ian Ing with Lazard Capital Markets.

Hey, Darin.

Hey, Joe.

So the gross margin guidance, I mean, wide range but a little bit down sequentially at the mid-point.

Is this largely mix-shift or are there some other factors contributing?

There's cost reductions baked in there still.

It is largely mix-shift, and we had a couple of one-time events that hit COGS this quarter that will not repeat.

They're less than a point, but we're being conservative.

I see.

And in the past, Joe, you've talked about sort of a 2.5 point gross margin tailwind through several factors in coming quarters.

I mean, how much of that are we through and how much of that still lies ahead, would you say?

We still have some cost reductions that are flowing through.

We expect to see some of that in Q4 and potentially in Q1 as inventory runs through.

So we still believe there is some left.

Okay.

And then, shifting over to the consumer win here, you said one particular customer.

Would you say that all the regional platforms for that customer have wrapped at this point, or still some that kind of have to come to the market still and get to play out?

Very few have ramped to a significant level, right?

We do have to focus our design win opportunities not only on the one customer, but also on the platforms of many others, right?

Because there's a lot of platform opportunities out there.

So the key is getting into a platform and then goes all over the place regional.

And so that is what we're focused on today.

But the answer is no, we haven't ramped in a large way the platforms that we're in today.

Okay, sure.

And with the restructure, do you have sort of a sense of the new operating break-even with revenue run rates?

The new operating break-even is in the 272, 280 range.

Okay, great.

And my last question for now is, this head count reduction and low-density alignment.

Perhaps you can talk about, is there any sort of end-markets or applications being de-emphasized at this point?

No markets being de-emphasized, but the approach to markets is.

So, for instance, in some cases what we're finding is that it's better for us to offer mid- to low-density communication devices that are very low-power and very low-cost, versus trying to go up and provide the higher densities at some of the higher frequencies and higher certes.

So what we're trying to do is really find the areas within the markets that we can dominate, versus just kind of, sort of play.

And so XO, XO2 and iCE are all capable of doing things within the COMs market, albeit in a smaller level than you would with ECP3.

But ECP3 is still very successful in those markets for more of a control plane application.

So expect us to be relevant in that particular application, probably not so relevant in a 12-gig to 20-gig series environment.

Okay.

So it sounds like you'll still go after 6-gig applications and lower-end.

You have ACP3 out in the market now.

Do you have everything in place to continue that roadmap and get that in front of customers, et cetera?

Do you have the process and the manufacturing partnerships, et cetera?

Yes.

We don't have any issues.

That product's been out for a long time.

I think for us, like you said, we really want to be looking at 3-gig and then less than 6-gig over time, and then finding the areas where the HetNet gives us opportunities.

There is a huge opportunity today outside of the big, fast, remote radio heads in both the HetNet opportunities from Femto to Pico to all of the different alternatives that are being offered.

So we're primarily focused on more the areas that align to the LUT densities and the performance that we can offer.

How do you see small sales playing out the next few years?

Maybe I'm different than others.

I don't see that dominating in the next few years.

I think that's a potential that everybody has to get into.

And I think there are so many players out there.

But it has to be aligned and it has to be complimentary to the remote radio heads.

And you'll hear different opinions from different people.

But I think that will grow moderately over time.

And then at some point in time you're going to have a mixture of high-end remote radio heads with the HetNet-type of complimentary items that, again, add bandwidth.

But I haven't seen as much growth in that.

And that's not to be, you know, too far off.

I think that's expected with where they are in the maturation phase of those devices.

But I would expect that makes logical sense.

And I don't know if you guys-- I actually have a device in my house that enables me to get higher bandwidth.

And so, some of them are very well done.

I hear others that are not so well done.

So we'll see how that emerges.

But I think it's a great opportunity for us with a low-density, low-power, affordable innovation and maybe not as high of the expenses as some of the big expenses of FPGA devices today.

Okay, that's it for me.

Thanks a lot, Darin.

Thanks, Joe.

Bill Dezellem with Tieton Capital.

Good afternoon, couple of questions here.

First of all, the low-density PLD decline that you're seeing.

Do you attribute that specifically to the economy or do you believe there is some market share phenomenon or loss taking place?

Or is there something else coming into play that is relevant in the discussion?

I think there is a number of factors that caused the PLD to decrease, and it actually goes back to tsunami days, right?

So when we had the tsunami in Japan a year ago, I think there was a lot of people that bought product not only from the newer product areas, but also for some of the old TLDs.

And I believe that what ended up happening was we -- and I had mentioned this many times on the call, where I said -- we weren't seeing a decline in some of the PLD products that we would naturally model in.

Because we naturally model a 5% to 7% or so decline.

And we weren't seeing that last year, and also this year is double that.

And so people are concerned.

So I think some of that was buy-aheads in 2011 that I think affected everybody.

The other thing is some of these products are very old, and that basis is running out.

And there's also things like iCE today that can actually be PLD-like.

So you've got an iCE product that's very simplistic in nature, the cost structure is very similar.

You're going to start to see some of the transition from the older PLDs to newer devices today.

So I don't know that it's an unnatural phenomenon, but I think for us there was a couple of things that happened.

Macro event and also tsunami that I'm sure accelerated the normal decline.

Thank you.

And I guess if we take that forward, do you anticipate that rate of decline, then, to start to normalize to that 5% to 7% that you would model in?

Or do we continue for a period of time at a higher rate?

Well, I would say, no.

I think it models at a natural rate that it's been at before.

I would argue it will probably slow down if we accelerate it that late.

If the macro is driving people not to use PLDs, they didn't resign it, it's demand issues, then it comes back when their demand comes back.

So there is an artifact of macro that's in there.

But we're going to go ahead and model it the way we always have.

And I think that's the only way we can, based on run-rates over the history of those products.

I don't expect an acceleration of that.

I expect what we have today is what we're going to get.

And if the macro increases, you could see the PLD market flatten for a year-on-year similar to what it did in 2011.

I think in 2010, also, it accelerated upward, too.

Thanks.

And -- I'm sorry?

Go ahead.

And then, shifting to an entirely different question.

There is a history where the Chinese telecom equipment companies have cut their orders way back in the fourth quarter.

What's the risk that that happens this Q4?

And do you already have that modeled in and it's being offset by some other positives?

Or does this year appear different?

No, I think what you just said is accurate.

I think that's what we're modeling in.

We're going to believe that the last two years is going to be the same as this year.

And we have to have growth from other segments.

And we're expecting that.

And so if we have an abnormality and history does not repeat itself this year, that actually would be upside for you, then?

Yes, that's correct.

Great.

So we're trying to be proactive here.

I'm laughing because a lot of people say -- okay, what's the trend?

And the trend, two of three years it's been down.

And so, is it going to be another one out of three, or is it two out of three?

And so we're going to model in the two out of the three years being accurate.

That's very helpful.

Thank you and good luck with the quarter.

(Operator Instructions)

David Duley with Steelhead Securities.

Thanks, just a couple quick questions.

Will all the $12 million savings that you plan from this restructuring come in the SG&A line, or where will it be disbursed?

There is some within the R&D line also.

The majority will be SG&A.

Okay.

Now, is there a chance with the -- once you get a lot of these new products out the door, that you'll be able to lower the R&D expense from this $19 million-, $20 million-level, or should we just get used to that level?

You probably want to get used to that level because, again, remember we had to go through a streamlining of R&D about a year and a half ago.

And we're still rebuilding that.

That will be leverageable as we move up, but we will continue to invest in R&D to get more and more products out in the market segments we serve.

And our plan today is not to back off of our R&D spending, and to continue to try to develop as many products that we can in the markets we serve.

Okay.

And there was something about mass costs, those hit the COGS line?

No, they're in operational spending.

Okay.

So as far as operational spending, is there a percentage that you can help us understand how big the mass costs are and how they variable around?

Any sort of color in that area would be helpful.

Yes, well on 40-nanometer, the mass costs are about $1 million, right?

So every time we turn a product, about $1 million.

And we accelerated one of those into Q2 that we originally had forecasted for Q3.

And -- I'm sorry, Q3 that we originally forecasted for Q4.

And that's a good thing.

Because that means we're going to get that product out faster than we had.

But we're constantly looking at that and we're not going to be penny-wise and pound-foolish about getting products to market and not spending.

The absolute level of mass costs in a given quarter, is that $5 million or a $10 million?

I'm just trying to figure out how much that is of your cost structure.

It's highly variable, depending on when we tape out.

So that's a tough one to call --

But it's not $5 million.

It's not $5 million.

That would be five products.

Okay.

Is there -- I was just curious about the industrial business.

Was it -- I can't remember in your comments if it was up this quarter.

I thought my little chart showed it was up a little bit.

But are there any signs of life in that business coming back at this point for you?

Or is there any pre-order activity that you can point to?

Yes, I think industrial comes back.

I mean, it is a big focus for us but it's also design win-oriented.

There is a lot of industrial business that we've had over the years with some of the PLD products, and even some of the FPGA products.

Where we can serve industrial in a big way is with the same product that we service with COMs, being ECP3.

When you start doing surveillance and video and some of the switching and some of the other applications that we have, those are huge.

Remember, we have been working on those for years.

So that's not a new initiative for us.

We had a plan, maybe a year and a half ago, called the ECP Surge, which was selling ECP outside of COMs.

And the reason we did that was because we felt like our collateral, to be able to push that particular product into a broader base, was mature enough.

Because it's a very resource-intensive sell.

So we had to make sure that we were mature enough in the product and mature enough in the collateral and sales force so we could spring that out into the industrial market.

We expect to be bigger in the industrial market over time as more of our products are industrial-qualified and also designed over time.

And is does flat quarter-on-quarter, by the way.

Okay, flat quarter.

And you expect it to be flat or down a little bit next quarter?

Yes, that's what's been modeled.

And is there -- is that the sector where you typically have inventory in the channel?

Or maybe you can comment about what channel inventory you do have and what you can see there.

That's the sector that's typically served by Disde, for the most part.

And we have not seen an inordinate growth of inventory in the channel for Disde.

Okay, thank you.

(Operator Instructions)

Richard Shannon with Craig-Hallum.

Just have a quick follow-up.

Darin, asking you to look into your crystal ball out past this current quarter.

If you can give us a sense of how you view seasonality, especially given your higher consumer exposure than in the past.

What would you typically expect -- I'm not asking you for specific guidance -- but what would you typically expect in the first quarter?

Actually, here's what is really interesting.

So consumer is not seasonal.

It's not like we used to think it.

In the old days at other companies that I've been at, there was two things that triggered a lot of what we called consumer-back.

It was actually more computing.

Which was back to school and Lunar New Year, and then they added Christmas in there.

Consumer doesn't do that at all.

At least the consumer if you are looking at the handset business.

It launches when they're ready, and in some cases people wait for other people to launch and they launch right after it.

I don't see this as a Christmas or Lunar New Year phenomenon.

It just happens on a regular basis.

And we're seeing that with some of the customers we serve today, where they'll ramp in November for Lunar New Year, but they're also ramping next January and February because they have a new market and a new product that they want to go ahead and go after.

So we're not seeing seasonality in consumer but there still is, it looks like, seasonality in COMs.

Okay, alright, fair enough.

And then, Joe, a quick question for you.

I think a previous caller asked you about break-even levels and I did some quick math here based on the OpEx numbers you had mentioned to me earlier.

And I was coming up with a gross margin that fits into that model of 52%, which seemed kind of low.

What would the whole break-even model look like at that 270, 280 annual revenue level?

What do you mean by the whole model?

I'm sorry.

You big on that number, by the way.

That is a conservative number.

Okay.

52 seemed low.

But are you telling me that's about right, then, 52?

No.

I'm telling you that's what we modeled the break-even at for going forward, depending upon mix, of course.

That would imply a pretty healthy consumer mix, and a pretty healthy mix of our new products.

Got it.

Okay, that's great.

Thanks a lot, guys, appreciate it.

There appear to be no further questions at this time.

I'll now turn the call back over to CEO Mr. Darin Billerbeck.

Please go ahead, sir.

Okay, I just want to thank everybody for joining us on the call today.

Obviously, it's a difficult environment for any of us to call.

I think the things that we have been focused on are the right things.

Being streamlining the Company for future success and then focusing on the things that we control, which are specifically design-wins and then servicing the customers that we have today.

So thanks again.

Ladies and gentlemen, this does conclude today's Lattice Semiconductor third-quarter 2012 conference call.

You may now disconnect.