萊迪思半導體 (LSCC) 2012 Q4 法說會逐字稿

Good afternoon, my name is Jamaria, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Lattice Semiconductor fourth-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)

I will now turn the call over to Mr. David Pasquale of Global IR Partners.

Sir, the floor is yours.

Thank you, Operator.

Welcome, everyone, to Lattice Semiconductor's fourth-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, Lattice's Chief Financial Officer.

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

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

Before we begin the formal remarks, I will review the Safe Harbor Statement.

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

This call includes and constitutes the Company's official guidance for the first quarter of fiscal 2013.

If at any time after this call we communicate any material change to this guidance, we intend that such updates will be done using a public forum, such as a press release or a 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 revise any such forward-looking statements to reflect events or circumstances that occur after this call.

Our prepared remarks will also be presented within the requirements of SEC Regulation G regarding generally accepted accounting 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 the call today.

In terms of Q4, revenue was $65.9 million.

This was in line with our revised guidance for revenue to decline 6% to 8% compared to Q3.

Our results reflect the continued challenging macro environment with broad-based weakness across nearly all market segments, geographies, except for consumer.

While we do not expect positive macro-economic improvements in the short term, we are seeing some encouraging signs in the first half of 2013.

We are cautiously optimistic based on channel feedback, inventory reports, and forecasts from the comms market segment.

As we move through 2013, we expect to benefit from traction in the consumer market segment.

With the iCE40 family, we were successful in our efforts to penetrate the consumer market in 2012.

We shipped more that 15 million iCE40 devices over the past year, making iCE40 one of our fastest-ramping product families ever.

We see more room for growth given the size of the consumer mobile market.

Low cost, low density, and affordable innovation from our OTP technology makes the iCE40 family a winner for us.

We are also benefiting from aggressively and targeted sales and marketing efforts.

As part of our corporate restructuring, we took the opportunity to add several new senior managers with highly proven industry backgrounds.

They are excited by our market position, our market strategy, and the strength of our product lineup.

We continue to up-level Lattice talent to better align our capabilities with our market growth opportunities.

In terms of added color for the fourth quarter, the revenue mix of new, mainstream, and mature was 29%, 53%, and 18% of revenue, respectively, in Q4.

On a full-year basis, the revenue mix was new, 22%; main, 56%; and mature, 22%.

Revenues from our new products was up 1.7% quarter on quarter.

For the full-year 2012 compared to 2011, new product revenue increased approximately 80%, reflecting strength in our ECP3 and iCE40 product shipment.

This is in line with our comments on prior calls and continues to reflect our momentum in both consumer and non-consumer areas.

2012 was clearly a transition year for Lattice.

We expect to see continued growth in our new product segments, with a focus on accelerating both low density and ultra-low density design wins.

Mainstream products were down approximately 9% quarter on quarter.

On a full-year basis, mainstream products were down about 18%.

This reflects general macro-economic weakness that has impacted 2012.

Revenue from our mature products was down about 14% when compared to the prior quarter.

Revenue from our mature products was down about 35% on a full-year basis.

While we anticipate declining revenues in the mature market segment as products move through the lifecycles, in 2012, the decline was further impacted by overall market conditions and weakness in the comms segment.

On a geographic basis, revenue from Asia, including Japan, was about 69% of the total revenue, which is consistent with Q3.

On an absolute-dollar basis, revenue from Asia declined quarter on quarter due to inventory corrections at major OEMs.

Revenue from North America was roughly flat Q4 to Q3 in absolute dollars, which translates into a slight uptick to 15% of total revenue.

Europe declined to 16% of revenue from 18% in Q3.

The decline in Europe was caused by continued softness in the [dist] channel.

In an end-market basis, communications represented 41% of revenue in Q4, compared to 47% in Q3.

This reflects ongoing macro weakness in the comms market segment and inventory corrections at major OEMs in Asia.

Computing was down slightly to 11% of revenue in Q4, as compared to 12% in Q3, due to slow market conditions in the data processing infrastructure market.

Industrial and other was slightly up to 28% of revenue in Q4, from 27% in Q3, reflecting increased penetration into non-comms revenue opportunity, including automotive.

Consumer increased to 20% of revenue in Q4 from 14% in Q3, primarily reflecting the continued ramp of our iCE40 family.

That concludes my initial comments.

I will now turn the call over to Joe.

Joe?

Thanks, Darin.

As noted earlier, revenue for the fourth quarter was $65.9 million, a decline of 7.1% from the third quarter and a decline of 6.1% as compared to Q4 2011.

Gross margin for Q4 was 54.2%, compared to 54.4% in the prior quarter and 57.7% in the year-ago period.

This is in line with our original guidance.

We continue to drive additional cost reductions in operations and direct materials, which should deliver benefits as we move forward.

Total operating expenses for the third quarter came in at $42.1 million.

This includes $5.4 million in restructuring charges.

The total $42.1 million is about $900,000 below our original guidance.

Net loss for the quarter was $7.2 million, or $0.06 per basic and diluted share, as compared to a net loss of $2.2 million, or $0.02 per basic and diluted share in the third quarter, and compared to net income of $40.9 million, or $0.34 per diluted share in the year-ago period.

There was a tax benefit in Q4 2011 of about $35 million, or $0.29 per diluted share.

Our Q4 2012 tax provision declined to $0.4 million.

Our cash tax impact remains minimal.

For the quarter, diluted share count was approximately 115.9 million shares.

The share count reflects the retirement of approximately 1.3 million shares, purchased at a cost of $5.2 million in the fourth quarter.

Our year-to-date total shares repurchased is now at approximately 4.1 million shares acquired at a cost of approximately $17.5 million under our previously announced 2012 stock buyback program.

We ended the quarter with a cash, cash equivalents, short-term and long-term marketable securities balance of [$188.1 million], a decrease of $2.8 million over the September quarter, and we continue to have no debt.

Accounts receivable at December 31 were $46.9 million, compared to $56 million at the end of last quarter.

Day sales outstanding were 64 days, compared to 71 days last quarter.

Inventory at December 31, 2012 was $44.2 million, compared to $37.4 million last quarter.

Months of inventory now stands at 4.4 months, compared to 3.5 months at the end of Q3 2012.

Inventory growth is driven by selective inventory positioning for future opportunities and opportunistic increases in wafer starts.

We spent approximately $2.4 million on capital expenditures and incurred $6 million in depreciation and amortization expense during the fourth quarter, compared to $3.2 million and $5.9 million, respectively, in Q3.

This concludes the financial review portion of the call.

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

Darin?

Thank you, Joe.

In summary, we accomplished a lot in 2012.

We integrated SiliconBlue into the Lattice family, and we made our iCE40 products accretive before the end of the year.

Our results reflect continued progress in the consumer segment and penetration into worldwide smartphones.

Revenue for consumer helped us to offset some of the continued macro weakness in other market segments.

We also continued to grow ECP3 into the comms market while continuing to create momentum in our MachXO2 product line.

We made the difficult decisions last year to streamline and restructure Lattice in the face of a weak market and lower revenue base.

This was difficult on all involved, but was the right course of action given the fragile market environment.

Our goal is to return to growth and sustain profitability in 2013.

We have a talented team in place, the right products, and an exciting roadmap.

We also remain fully committed to further reducing our costs while improving our efficiencies at the Company.

Let me now turn to our first-quarter 2013 expectations.

We expect revenues to decline approximately 2% to 4%, as compared to Q4.

Q1 gross margins are expected to be approximately 54%, plus or minus 2%.

Our operating expenses are expected to be approximately $35.5 million, including approximately $0.5 million related to the 2012 restructuring plan.

This concludes our prepared remarks.

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

(Operator Instructions)

Tristan Gerra, Baird.

You talked about additional opportunities in terms of operating expense reductions.

Are we still on track for an additional $1 million in OpEx reductions in Q2?

And, is there any potential for additional reductions in the second half, or should we be looking at that level as kind of an ongoing rate.

The $35.5 million has about $0.5 million of restructuring charges in it, so that will be gone in Q2.

I would expect it to be close to $35 million, possibly lower.

Okay, so is it fair to assume that this will be, then, kind of the ongoing run rate for OpEx, or are there additional potential opportunities beyond that?

Right now, I would hold it at this.

There are some opportunities, but it fluctuates and varies based on mass charges.

Consistent with where we are forecasting, $35 million is probably a good number.

Okay.

Based on that number, how much revenue growth does this OpEx level support before you need to ramp OpEx again?

Can you withhold 30% or 20% in revenue growth before you need to spend additional amounts in OpEx?

What we will spend in OpEx will be variable, going forward, until we get to roughly the $80 million-plus range per quarter.

Then, you will just see variable spending related to commissions, basically.

That will be the only growth.

Okay.

Then, just quick last one, if you could talk about what you see as the key revenue driver for this year?

You mentioned a few products, but if you could provide more color, and also by geography what you think could lead to a rebound, notably in communication?

I would look at it this way, so we still have momentum with ECP3 into the comms, right?

If you look at our ECP3 product -- really being the 3-gig SERDES up to 150K LUTs, that's one product line that will continue to grow, primarily in Asia, as Asia recovers.

Also, we have the MachXO2 family, which we introduced about 1.5, 2 years ago, which is gaining quite a bit of traction.

So I am expecting that to grow this year.

ICE40 is going to grow, probably faster than those -- both of those, which is good.

Then, we also have a power manager product line that we expect to grow modestly this year.

Our primary growth will be ECP3, comms; iCE, consumer; MachXO2, broad distribution and broad play, primarily in comms, but also can play in other areas.

Then, you're going to have power manager that plays industrial automotive and other areas.

Great.

Thanks a lot

Ian Ing, Lazard Capital Markets.

As you look at 2013, perhaps these consumer PLD applications, which are you most excited about, whether it's like barcode scanning, antenna tuning, sensor bridging, maybe there's something that I missed there, but --?

Yes, there are some other ones that we can't talk about; but yes, those are some we're excited about.

There are some other ones out there that are proprietary, that's good.

Yes, we are excited in that particular market.

From a geography standpoint, I think that Asia will probably be the primary driver of a lot of the growth that we see.

I don't expect -- obviously, there is no consumer growth anywhere else than that, right?

There may be some in the United States, as we talked about, but most of it is built out there.

Now, for sensor bridging, it seems like there are some wins out there, and they went to MCU Solutions.

Perhaps, you can layout the pluses and minuses of your solution versus MCU's?

The first one is flexibility to do multiple configurations on the fly because the cost structures are pretty close.

In general terms, our form factors are smaller, the cost structure is about equivalent, the flexibility is way higher, and the fact that we can also do design service for people also makes a big deal.

Okay, great.

Then, big FPGA competitor, Altera -- it feels like ages ago, but they talked about refreshing their CPLD line, getting more into your space.

Perhaps you could talk about that?

I don't know how much of the product you've seen, but how you would, potentially, defend against some refresh products here?

It's always easier to defend when it's a real product.

XO2 has been in the market for at least two years.

That competes against some of the lower density products, I think, on 180 nanometer.

So, as those products roll out, yes, for sure, they are going to be in, I would anticipate, the MachXO and the MachXO2 space, so we would be competitive with that.

We already compete with that today, so that's nothing new.

And, if they refresh those models on 45 nanometer for those technologies, then it's fair game for everyone.

Today, we run 65 nanometer on XO2, which is a pretty small buy, and I think they are on 180 nanometer, so that's the comparison today.

If they move to 40 nanometer, that will be an interesting -- I haven't seen that product out today, but I've heard about it.

How about the thought of cross selling, like Altera has a very broad product line -- would that be any of an issue, or how have you managed that so far?

The way look at it is you break the market segment into a couple pieces.

There is really the high density, there is the mid density, and then there's the low density, right?

And, iCE actually is ultra-low because, iCE, you are talking about sub-1K devices.

Whereas on some of these other devices, you can go up to 8K, 16K; and then, when you get into that mid density, it's even higher from a LUT perspective.

So, yes, there's a bunch of different product lineups for everything.

Our plan is to really fill out the entire roadmap from the ultra-low density all the way up to about 100K to 150K LUT.

So, that's the plan that we have, and we are executing on various technologies to find the best cost points for performance per form factor.

But we want to -- our primary focus is to lead the LD and the ultra-low density space.

Great.

My last question -- in your prepared commentary, you talked about some better signs in the comms and other markets in the first half of this year based on forecasts and order patterns.

Is that tied to any particular deployments, or are things getting better from a macro scale?

Perhaps a little more detail there?

Thanks.

I don't know that it's tied to any deployments, it is more tied to the fact that we saw some upsurge in the middle of last year, and then Q4 was almost like a retrenching for everybody, so a lot of the suppliers dropped off in Q4.

And then, what they are starting to forecast is some of the backlogs for the first half of the year, so that's really where it comes from.

We don't see as much in Q1 because it still kind of bottoming out, but we see more of the traction in Q2 and beyond.

Okay, so some of it is inventory replenishment at this point, it sounds like?

I think most of it is.

I think a lot of it is they just built too much last year.

They really put a stop in Q4, which I think hurt everybody.

And then, Q1, they are really just starting to rebuild as they are flowing through all the materials that they had from last year.

That's not any different than the last two years, by the way.

The last two years I've been here, Q4 was always down compared to Q3.

Then, Q1 was kind of a lull; and then, Q2 and Q3 started raising up.

Okay, thanks a lot.

(Operator Instructions)

Sundeep Bajikar, Jefferies.

Just a couple of questions from me.

First of all, how should we think about revenue growth for the year, 2013?

If you could give us some sort of a framework to think about how to model that?

We can't really give anything past Q1 because that's really what we give.

But I would say that the second half for us, at least, if we look at it looks better than the first half -- at least, if we look out in that timeframe.

Okay.

If I look at your segments -- communications, computing, and industrials are each down about 30% from their peak levels in 2011, while consumer is up almost 90% just over the last six months.

Going forward, for each of the segments, can you talk about seasonality estimates for us to think about as we model revenue growth?

And, if you expect any specific positive or negative seasonality to be more pronounced in any of those segments this year?

Let's talk seasonality in comms because we've seen that one, right?

Comms, at least the last two to three years, comms kind of starts slowly, ramps up Q2, Q3; and then, from what I've seen in probably three of the four years, Q4 is down.

That's what it seems like, and that's what it seems to have played out like.

Consumer is different.

Consumer -- there's two things that drive consumer.

One thing it used to be Lunar New Year, and the other was back to school, right?

But, what we are starting to see in the smartphone industry is it's launch based.

So, some people try to launch at CES -- or, not CES, but at the world -- it used to be the old 3GSM Forum in Barcelona.

Some people like to launch there, and then there's other people that have their finite launches.

Consumer tends to be model oriented and launch oriented, and some of those launches aren't always tied to a specific time.

So, you can't say that -- oh, it's always going to be down in Q4.

We actually saw some growth in Q4.

So consumer, I think, is dependent on the launch states of our end customers, which does not seem to follow a trend.

Okay, and what about computing and industrials?

Computing would follow a lot of the rollouts of the cloud, right, which is really an IT build, which I think follows a lot of comms deals.

So, computing and comms seem to follow that.

Industrial doesn't typically follow a trend.

It is usually a modest growth rate because you are building out equipment and manufacturing.

So industrial, typically, from what we've seen, isn't that cyclical.

Just to follow-up on computing being down that much over that period, my understanding is you shipment primarily into the server market for the cloud, like you mentioned.

That market -- it doesn't sound to me like that market is down that much.

So, if you could give us any sort of color on what might be having there?

What specific patterns you are seeing?

That would be helpful.

We are starting to see a couple key OEMs that are down, so it's not an indication of over market.

We have a couple big OEMs that are down.

Okay, and then --

They are down just overall because of their performance in the market.

Okay, that's fair.

Then, last one for me -- you had positive growth from Americas in the last quarter, while I guess the other two geos were down sequentially.

Should we assume the growth from Americas was driven primarily by consumer, and more specifically, iCE40?

Or, is there a different way to look at that?

It's not driven by those two things.

Okay.

Thanks so much.

Richard Shannon, Craig Hallum.

I guess just a few questions for me on your guidance for the first quarter -- if you can help us understand the relative puts and takes, both by vertical market and as well as FPGA versus PLD?

Okay.

Vertical markets to start with -- comms is probably down slightly in Q1.

That's what I would anticipate.

Consumer is probably flattish to slightly up from what we saw.

Industrial and automotive I think will be kind of where they were in Q4.

So, I think Q4 and Q1 are probably consistent, if that's a muddling word.

And then, what was your other question?

I'm trying to --

It was just by FPGA versus PLD?

This is going to be interesting, so the PLD stuff, it depends on where you categorize iCE, as a PLD or an FPGA, right?

Where do you categorize it?

I think different people will put it in different places.

I think it would be categorized more under the PLD.

So, if I look at that, PLD should grow.

FPGAs will grow dependent on ECP3, which is a comms product, because ECP3 has been the big growth driver for FPGAs.

I don't anticipate XO2, being our newer product in the FPGA market, I don't anticipate XO2 to grow significantly.

It will start growing this year.

A lot of the design wins that we had last year should start coming to fruition this year.

The comms stuff for a lot of the control plane and GLU Logic stuff for XO2, that should grow as we move through the quarters.

And, that would be (multiple speakers) versus CPLD.

Okay, that's fair enough.

A couple more questions for me.

I guess in the consumer and the mobile space, here, what does your customer concentration look like; specifically, within that sector?

And, how do you expect that to change in the form of revenues throughout this year?

Today, it's -- our customer profile is digital still cameras and smartphones.

The customer profile in digital still cameras is actually quite a few people, and smartphones -- it's really dominant by one specific customer.

As we move through it, there's three or four dominant people, not customers, that we are working with.

So, our goal is really diversify some of that shipment into more of mobile, and we do have some interesting design opportunities and some design wins at some of the other areas, which is what we're focused on.

So, it's really, not only focusing on the specific areas that we're winning in, but also taking what we've learned and focusing more on some of the other areas of bigger customers or different customers in a different geography.

And, there's geography -- there's consumer in the United States; there's consumer, obviously, in Korea; and then, there's consumer in Taiwan and China.

So, there's quite a few different regions that we are targeting today to expand the customer base.

Okay.

How's the split of revenues in mobile between cameras and phones, today?

I've got to think about that.

It's probably 20%/80%.

20% camera?

Yes, camera; 80% mobile.

Okay.

Maybe off a little, but that's what it feels like.

Okay.

It's my understanding, in your -- you mentioned you have one specific large customer on the phone side there that's kind of a quasi-platform type of a win.

You talked about potential for three or four more customers this year.

Are those opportunities for larger-volume platform wins?

Or, how can you characterize the possible benefit there?

You have to look at it in terms of the smartphone industry.

If you look at who the big guys are, you can kind of figure out their volumes, and then you look at the next three to four players, and they are smaller than those big guys, but they are still very significant from a revenue perspective.

So, that's really what we're trying to focus on.

Are they big?

They are big in relative terms, compared to some the other markets we serve, but they are not as big as some of the dominant players in the smartphone market.

They will add to the baseline, and that's the goal, right?

We are trying to add to the baseline so you have more diversity through that.

Okay, fair enough.

One last question for me for Joe.

Joe, can you tell us where you sit in terms of your share repurchase plan, and what are you thinking about going forward?

Are you thinking about reloading that?

Obviously, you have a lot of cash, and certainly, could be doing more on share repurchases if you wanted to.

But, kind of wanted to know what your forward plans are?

We still have some dollars left in the existing plan, and we'll definitely talk with the Board about reloading it.

We've been using it as an option, basically hedge for options solution, and we will continue with that going forward.

Okay.

Perfect, thanks a lot, guys.

That's all for me.

David Duley, Steelhead Securities.

I think on the last conference call you had given us an iCE number.

Do you recall what that was?

An iCE number.

I don't know --

You mentioned 15 million units this quarter.

I think you gave us an update last quarter.

I was wondering if you had that number off the top of your head?

Didn't we say a 10-million number?

Or, we had passed 10 million, I believe.

Right, okay.

I think you were just talking about this -- to make it clear, though, this is -- the iCE revenue now is mainly with one big handset customer, and the goal is to bring three or four iCE customers online over the next year?

It's in the smartphone area.

It's more than one customer.

It, also, is sold -- iCE being sold into digital still camera, which was some big designs wins that we had, and then is sold it to the broad market.

That broad-market applications are things like hand-held GPS, all sorts of things like that.

So --

In the handset market, it's mainly one customer.

Is that what you were saying?

It's primarily one today, and that's what we are changing, right?

That's what we are changing through time.

Okay.

Can you mention what your 40-nanometer revenue was as a percentage of the total?

Hold on a second.

I can calculate it.

It's probably a little bit more than 10%.

That should, obviously, be one of the -- a rapidly growing metric going throughout the year?

Yes, especially as we move -- as we do a couple things.

One is as we move more products to 40 nanometer, which is our plan, you'll start to see 40 nanometer be a bigger part.

You'll also see a challenge or a race between 45 and 65 because we do have the comms products today shipping on 65, and we have XO2 on 65.

So, you may see -- you can't just say -- hey, 40 nanometer is taking off like a hose because you still have other things ramping on older technology, and then they will come on 40 nanometer over time.

Okay.

What other major product lines do you intend to move to 40 nanometer in 2013?

It would be obvious that we would move our comms products to 40 nanometer.

And, it would be obvious that long term, we would move some of our Mach products to 40 nanometer over time.

But, the timing of that is when we see it as a cost-effective move.

Right.

See, that's the challenge.

When you have -- a lot of people have that thought process that everything should move to 28 nanometer, and that's not true, and not everything should move to 40 nanometer.

What you want to do is you want to time your production on 40 nanometer with -- past the peak of the technology for small die, or you actually end up paying more.

That's what Joe is alluding to.

There's a time element for us on some of the smaller devices that says -- hey, when it gets cost effective, we will move it.

Until then, it's more cost effective to do on 65 nanometer.

So, it's more what the foundry pricing is rather than the size of your --?

No, it's actually -- you can say that, but it's actually a little bit less complex than that.

It's when their depreciation on their factory rolls off, right?

You can actually factor it in -- the first couple of years, everything's really, really expensive because they're paying for all of the equipment.

But then, by about the third or fourth year on that stuff, that peak starts to come down.

So, that's --

Generally, you have large die, so this math works in your favor because of that?

We have small die, which gives us a delay factor versus our competitors.

Remember, they have behemoth die that they have to put on 28 nanometer and 22 nanometer, and they have got to invest on leading-edge technology.

We have small die, which means we can be a technology behind them and still compete.

If we focus on low power, low cost in the innovation for the markets we serve, you can't do what we do on 28 nanometer.

Right?

Because, it doesn't make any sense.

It costs more (multiple speakers).

Okay, got you.

Just two quick housekeeping questions.

Could you talk about the inventory situation?

I think you mentioned you took advantage of wafer pricing.

I would imagine that means you built a wafer bank.

If you could talk a little bit about that and the inventory that you see in the channel?

Then, as a follow on, could you talk about what positions, as far as new managers that were hired into the Company?

Sure.

The inventory positions that we did was for two reasons.

One is we have to position -- the consumer inventory model is different than the comms inventory model, so we have to position more product, even though on a unit base it looks high, on a dollar base, it is not as big.

We have to position product for some of the future ramps, which are pretty big.

On the comms side of things, you want to take advantage of -- if you trickle a few wafers through the system, your pricing is different than if you are working with them on the right time because maybe they have a lull in some of their factories, so they'll give you better pricing.

So, we timed some of our volumes to get the lowest possible cost, knowing that there's multiple customers, so you don't get stuck with an inventory position.

So, that's what we do.

In order for us to keep the margins where we do, we try to lower the cost structure on certain product.

On other products, we actually have to focus the inventory so that we can handle the demand surges of the mobile products because those surges are huge.

It's a slightly different model, and we expected that.

The positions, as we alluded to, we brought in a -- probably, three different senior managers for the marketing function.

One from product-line business plan standpoint, which is all of the marketing; and then, we have a vertical called comms, and a vertical called consumer, and industrial, then medical.

Three different people in the marketing organization, well-versed in FPGAs, have a lot of experience in FPGAs.

Then, you know that Mustafa Veziroglu was brought in as our CVP of Marketing last quarter.

Okay, so it's kind of a whole retooling of the marketing organization.

Exactly.

Retooling it to be very focused on the market segments, and then, the overall FPGA market.

And then, putting more focus even on the consumer mobile and ultra-low density side.

I promise this is the last one.

You classify iCE in the -- is it a PLD or --?

PLD, which is why our PLD grew quite a bit last quarter between Q3 and Q4.

That makes so much more sense, thank you.

(Operator Instructions)

Bill Dezellem, Tieton Capital.

I'd like to follow up on the inventory question, please.

Given that your guidance is for the first quarter is a minus 2% to minus 4% on the revenue change; and yet, you are also telling us that you are increasing revenue -- pardon me, increasing inventory in anticipation of customer ramps.

That implies -- I should ask it as a question.

Does that imply that number one, you already have design wins that you are building inventory for?

And number two, does it also imply that you will be building inventory again in the first quarter in anticipation of the initial ramp?

One might allude to what you just said is true -- being, I'm not going to build stuff unless I have a home for it.

Q1, I would try to build inventory for Q2 and Q3 volume commitment.

Q4 is really for Q1 and Q2, so you kind of have to stay ahead of it.

You probably won't see as dramatic a growth in those quarters because of the run rate.

Let's see, I was following up until that last thing that you said, Joe.

Say that, please, again?

We grew this quarter in preparation for a ramp.

Yes.

As we ramp, we will bleed off that inventory and we will continue to replenish.

I don't expect us to drop, but I don't expect us to go up another $7 million next quarter.

Right, so --

Of inventory --

Where Joe is going to is you have to build up to an initial ramp, and then you want to linearize your wafers versus the demand.

Because, once you get up to a point, you don't have that big ramp; and then, at that point, you're going to carry right amount of inventory based on the fluctuations.

We had to build it up because you're at the beginning of it.

Once you get there, it'll sit at a standard rate, which is pretty close to that rate, by the way.

You're pretty close to that rate right now?

Yes.

Once you get to that point, you're not going to increase it anymore, but it may kind of spike up and down depending on those demands.

But, when you talk about that, you're not talking about a huge dollar figure, but you are talking about a huge unit figure.

That initial ramp that -- where you start selling product will be happening -- I'm trying to read between the lines here -- maybe late first quarter, but realistically, more in the second quarter?

Would that be a correct way to think about it?

That's probably not a bad assumption.

That may actually be answering, now, my second question, which is that you have referenced earlier in the remarks that the second half is looking better than the first half.

And that again, comes back to these design wins that you're building inventory for right now, and possibly, in future quarters?

Right, and you also have to look at the total product portfolio, not just consumer.

When you look at consumer, that's one thing, but we also have wins in industrial; we have wins in automotive; we have -- so some of the stuff that we've been working on for the last two years is actually coming into production.

The question is really does the macro event help you?

In some cases, we are beginning to see those ramps, so we have some credible evidence that those will happen through next year.

In other cases, depending on the macro, people will slip and slide stuff, right?

That's kind of what we've got to look at.

For today, we are positioning as if that second half and middle of the year are better than the first quarter, which seems to be kind of attached to Q4.

If you put it in terms of a lull, Q4, Q1 seem to be more of a lull; and then, you can start to see some the design wins and some of the production dates starting to push to the point where you go -- okay, that's reasonable that we can get those.

That's why we made the comment we think that second half may be better than the first half.

Given what you have said, here, in response to my questions and previous question, does this imply that there may be enough incremental wins in business in the second half of the year that your fourth quarter may be more flattish rather than sequentially down, as it has been, as you embark upon this transformation?

We don't typically give guidance way out there, right, because we're not supposed to.

But, I would argue that, as you go through the year, if you continue to win in markets that aren't cyclical, you would be correct.

The issue that we have always been is because 47% or 48% of our business has typically been in comms over the years.

We go as comms goes, so if comms is cyclical and drops down in Q4, we do.

But, if we are broadening our market focus, some of the other things -- like in Q4, we actually did have some offset between comms and consumer.

So, we had 20% of our shipment was consumer.

So it kind of shows that as we grow up on our ULD versus LD space commitment, that you would like to have other market segments be bigger so that you don't have that comms effect.

That is helpful.

Finally, in response to an earlier question that was creating a theory as to why North America was up, you said it was not what the questioner had thought.

What was the reason that North America was up?

It was up just a little bit.

I think a lot of that stuff is just -- it's not comm.

We don't ship a lot of comms into the US.

For sure, we don't ship a lot of consumer, yet, into the US.

So, it can be just distribution is driving numbers, also, as you go through the year.

It's not up substantially, so there is nothing I would say -- there is one effect that has it.

I think it's just the fact of the Q3 to Q4 is relatively flattish.

I don't think it is up that much.

No, it is up a small amount (multiple speakers).

It stayed consistent; and then, overall revenue dropped, so you saw a slight uptick.

Right.

My comment was really, it's not consumer.

Right?

It's just everything else kind of ooched up.

That's helpful.

Thank you, both.

At this time, there are no further questions.

I am going turn it over to Management for any closing remarks.

Just to close, we continue to see a lot of benefits from streamlining our Company structure.

New products are growing very fast.

We're making tremendous strides in the ultra-low density space, primarily, in the consumer market.

And, our low density, low cost affordable innovation commitments resonates with our customers.

Thanks, again, for everybody joining us on the call.

Ladies and gentlemen, thank you for your participation in today's conference call.

You may now disconnect.