萊迪思半導體 (LSCC) 2014 Q2 法說會逐字稿

Good evening, ladies and gentlemen. My name is Latisha, and I will be your conference operator today. At this time I would like to welcome everyone to the Lattice Semiconductor Second Quarter call. (Operator Instructions)

Thank you. I would now turn the call over to Mr. David Pasquale. You may begin your conference, sir.

Thank you, Operator. Welcome, everyone, to Lattice Semiconductor's Second Quarter 2014 Results Conference Call. Joining us today from the Company 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 the SEC Regulation FD. This call includes and constitutes the Company's official guidance for the third quarter of fiscal 2014. 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 public 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 2013 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 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. Our second quarter revenue came in at $99.3 million, which was another record for Lattice. This is up over 17% from where we were in Q2 of last year, and up nearly 3% over our record quarter in Q1.

Gross margins for Q2 came in a 55.4% versus 53.3% in Q2 of last year, and 56% last quarter. If you focus on the first half of 2014 so far, revenue was up almost 26% to $196 million, compared to $156 million for the first half of 2013.

EPS for the first half of 2014 was $0.20, already above the entire year EPS for 2013. The big takeaway from Q2 is we are pushing forward, and making inroads into all of our focused business segments. We continue to expand opportunities in the consumer market, while growing our communications and industry businesses. By targeting diverse markets, we're able to lessen the impact of the consumer market volatility, still achieving our target gross margin levels of the mid-50s.

I'm often asked- what is our long-term goal at Lattice? Is it to catch up with Altera and Xilinx? No. Short-term positioning of the company for a sale? No. Our goal is growth, to grow Lattice into a billion-dollar company over time. We believe this is the best way to drive continued shareholder value. To achieve this goal, we must have the right strategy.

So what's our strategy to get to a billion dollars revenue over time? We need to go even bigger in consumer. Additionally, we need to double our industrial and our communication businesses. And finally, we need to buy something, big, double, buy.

So what does that really mean? In the consumer market, the challenge is how to get even bigger. The challenge and opportunities haven't changed. We must continue to win and expand our presence at our largest customer. We need to ensure that our new iCE40 Ultra wins the latest platform, while our R&D teams continue to develop the world's most advanced, low-power solution for the next big thing.

For the consumer market, it's all about extremely low power, tiny form factors, the right price for the bill of material of the device, creating flexibility and agility to meet the time-to-market challenges of our customers. All these capabilities are right in our wheelhouse.

Our record growth over the last six quarters has proven the value of FPGAs in the consumer market. While we've made great strides at winning the top two, there's still work to be done. And in order to truly realize success, we must ship in the two top-selling smartphones in the world simultaneously, not just shipping to peripheral devices at either. After the top two, we are focused on winning the top 7 of 10 smartphone manufacturers, and we did just that.

However, the dynamics of the smartphone markets have changed dramatically in the past six to nine months. [China Inc.] has emerged in a much bigger way than anticipated by many. In Q1, Huawei was the number three supplier of smartphones worldwide. After Huawei, the China Inc. lineup includes Lenovo, ZTE, Coolpad, and Xiaomi. Clearly, the targets are moving.

The good news for Lattice is we've been all over these opportunities for the past few years. Our success in China Inc. means we expect meaningful shipments to occur in Q4 of this year. These wins will help broaden our mix of customers.

Our feature-rich solutions are the key to winning at the innovative leading-edge suppliers. But now we are beginning to see another opportunity, a market shift that is opening up in the mid-level smartphones. The mid-tier suppliers are taking last year's innovative features from leading suppliers and applying them to this year's low-cost mid-tier phones. Low-cost sensor hubs with good enough features are opening up further opportunities for FPGAs, not just microcontrollers. Expanding capabilities by lowering the overall bill of material is the key to winning this market.

To double our business in the communications market, we must extend the life of ECP3 while we ramp ECP5. Additionally, let's not forget MachXO, MachXO2, and MachXO3. With clear leadership in voltage SKUs, cost per I/O, power and footprint, the Mach family continues to gain ground in the control plane and I/O expansion areas of the entire communications infrastructure.

We have clear advantages in HetNet small cell servers, and anything that needs low power and small form factors. To win in this space, we are aggressively introducing products with more capabilities, lower power, and lower cost structures to gain share against those whose sole strategy is to offer bigger, higher power and more expensive products.

We complement our customer's ASIC integration, versus competing with them. Together with our communications customers, we provide compelling low-cost solutions, utilizing the strength of their ASIC, with the flexibility of our FPGA. One example is our recent introduction of ECP5. It combines 30% lower power, 40% lower cost, and 2x the functional density in the smallest possible package.

In order to double the industrial market, we must continue to gain mindshare on how and where to use FPGAs. Most people think of the Internet of Things as consumer-focused. However, the Internet of Things is also quickly gaining ground in the industrial market, with all things wirelessly connected, seamlessly working together, with video capturing your every move.

The Lattice opportunities continue to grow as industrial transforms itself into a faster, more nimble market. From video to human interfaces, to machines talking to machines, the time-to-market requirements volumes can't justify an ASIC.

As the industrial market adopts and embraces mobility, we have advantages with our low-power, small form factor, and low-cost offerings. In industrial, it's all about solutions and how solid your roadmap is along with development kits. It's about winning where traditional competition isn't, and microcontrollers can't compete.

We must utilize our enhanced and connect advantages, along with our fast response and parallel processing, to create areas of defense and differentiation. Extending our offerings from both new products and repositioning our older products, continues to give us advantages in a market where constancy of purpose and long-term support are more important than revolutionizing the world overnight.

Finally, to achieve our goals, we must remain open to inorganic growth opportunities. Just as our acquisition of SiliconBlue accelerated our move into the consumer market, we must be prepared to seize opportunities as they present themselves that will both solidify and extend our current market advantages.

We wish there was a long list of additional SiliconBlues out there for us. But that's not been the case. We've spent a lot of time evaluating potential opportunities as part of our normal course of business. We've not pulled the trigger on anything recently, because of the strategic fit, valuation, or potential synergies did not meet our criteria. We're not going to buy something just to announce a deal.

We continue to look at the landscape for external opportunities as a complementary way to further strengthen our technology portfolio, personnel and customer relationships. At the same time, we will continue to reinvest in our existing business. We've consistently proven the effectiveness of our R&D roadmap, and our ability to drive organic growth and increase profitability.

Let me give you some additional data points about second quarter before turning the call over to Joe. Revenue from new products decreased 2.5% in Q2 to $49.6 million. This is equivalent to a $1.3 million reduction for the quarter. And it's normal to have a slight pullback, given the past quarters of rapid growth.

Revenue for mainstream products was up about 15% to $38 million, led by the increase in our 4K and XO products. This was driven by [COMS] and ISM growth in the European distribution. We'd expect to see COMS portion likely down in Q3, with industrial holding steady.

Revenue for mature products declined about 7% to $11.7 million. On a geographic basis, revenue from Asia, including Japan, was 74% of the total revenue, compared to 75% in Q1, but up about 1% on a dollar basis. Within Asia, Japan revenue was about 20%, Taiwan up about 26% and China up about 5%.

Growth was led by our gains in our [Asian] distribution, which more than offset the declines at certain larger OEMs.

Revenue from the Americas comprised 10% of the total revenue, which was flat with Q1, but up about 10% on a dollar basis.

Revenue in Europe accounted for about 16% of the total revenue, compared to 15% in Q1, and was up about 7% on a dollar basis. This is the second quarter of growth in Europe. And the growth is coming from the broad distribution channel and the communications businesses. We expect the overall improvement in Europe, albeit slow, will continue throughout the summer and into Q4.

On an end market basis, industrial was about 30% of the total in the second quarter, compared to 28% in Q1, and up nearly 10% on a dollar basis.

Communications represented 44% of the total revenue in the second quarter, up from 41% in the first. On a dollar basis COMS revenue increased nearly 11% sequentially. COMS continued to benefit from the 4G LTE build-out in China. We do, however, anticipate that demand in the segment will slow in Q3, as key OEMs absorb inventory in connection with their build ahead for this rollout. We also saw strength in Europe at key OEMs which offset slight declines at some key China OEMs.

The consumer market represented about 26% of the total revenue in the second quarter, compared to about 31% in Q1. On a dollar basis, consumer market revenue decreased to approximately 14% quarter on quarter.

That concludes my initial comments. I will now turn the call over to Joe. Joe?

Thanks, Darin. Revenue for the second quarter was $99.3 million, an increase of 2.8% from the first quarter, and an increase of 17.2% from $84.7 million in the second quarter of 2013.

Gross margin for Q2 was 55.4%, compared to 56% in the prior quarter, and 53.3% in the second quarter of 2013. Gross margin continues to be in line with our long-term gross margin target of the mid-50% range.

Operating expenses for the second quarter came in at $41.9 million. This about $1.1 million above Q1, due primarily to higher variable compensation and severance expense. Variable compensation with fluctuate based on current and forecasted revenue. The severance expense is related to specific reevaluation of some positions and is not part of a larger initiative. We do not expect these items to reoccur in Q3, and our OpEx will be sequentially lower.

As a percentage of revenue, OpEx held flat at 42% in Q2 2014, equal to the 42.1% in Q1, and was down from 45% in Q2 2013.

Net income for the [second] quarter was $11.8 million or $0.10 per basic and diluted share, as compared to net income of $12 million or $0.10 per basic and diluted share in the first quarter, and net income of $5 million or $0.04 per basic and diluted share in the year-ago period.

For the quarter, diluted share count was approximately 121 million shares. Operating cash flow was $21.1 million for Q2. We ended the quarter with a balance of cash and investments of approximately $247 million, an increase of nearly $22 million over the prior quarter. We continue to have no debt.

Accounts receivable were essentially flat at the end of Q2, at $66.3 million, as compared to $66.7 million at the end of last quarter. Days sales outstanding declined to 60 days, compared to 62 days last quarter.

Inventory at quarter end was $59.3 million, compared to $58.2 million at the end of Q1. Months of inventory now stands at 4.4 months, compared to 4.1 months at the end of Q1.

We spent approximately $2.5 million on capital expenditures, and incurred $5.8 million in depreciation and amortization expense during the quarter, compared to $2.4 million and $5.9 million, respectively, in Q1.

There was no activity under our share repurchase program in Q2. This concludes the financial portion of the call. I'm going to turn things back over to Darin for the third quarter business outlook. Darin?

Thank you, Joe. Executing on strategy will take hard work and flexibility in the ever-changing tech market. We must continue to enhance our product strategy, reinforce our core capabilities, and strengthen our teams.

Comfort means complacency, which has stalled countless companies. To win, we must continue to evolve. Our DNA must exude creativity and innovation and drives that no one else can match. We must be selective about what products we build, what markets we serve, and what further capabilities we need, while increasing our development and operational efficiencies.

There are many great opportunities for Lattice. I'm confident we can get there. We have the right team. We are positioned with the right products, the right strategy, and the shift in the market towards mobility continues to give us advantages.

In terms of specific expectations for third quarter 2014, we expect Q3 revenues to be 8% to 12% lower compared to Q2. Q3 gross margins are expected to be higher at approximately 56%, plus or minus two points. Total operating expenses are expected to be lower by approximately $1 million on a sequential basis.

While we do not provide guidance beyond the current quarter, as previously noted, we do see softness in our communication business in Q3, as a few of our larger OEMs work through what we believe is an inventory correction. The recent 4G licensing process has given us more visibility, and we currently believe we will see an Asian COMS demand increase in Q4.

Our consumer business, we are forecasting the demand softness we saw in Q2 to continue through Q3. We expect consumer volume pick-up in Q4, as new models are launched by our larger OEM customers, along with new businesses from our new China Inc. customers.

As I noted earlier, our distribution channel has been a bright spot led by Europe and Asia. We expect this growth rebound to continue as we move through Q3 and into Q4.

In summary, Lattice remains in a great position. We continue to execute on our strategy of creating innovative solutions for our customers. We have very compelling opportunities in front of us, and remain focused on flawless execution, and of course, and always, cost.

That concludes our prepared remarks. Operator, now I'd be happy to take any questions.

(Operator Instructions) Tristan Gerra.

Hi. Good afternoon. Could you talk about your new design win activity in consumer? Is this mostly in tablets later this year? When do you think you can diversify your customer base in terms of tier 1 in smartphones?

Well, you asked two questions there. So let me answer both, and then let's make sure that I covered them. In the growth that we're going to see in Q4 is primarily in smartphones in China that I mentioned. So it's not going to be in tablets; in smartphones in China.

The growth in Q1 and Q2 were primarily in the smartphone industries, and as we move forward, as you guys understand there's been some press on the success of certain phones, and that's hurt us as far as the design wins not shipping in the volumes that we thought. And that's okay. I mean we've won the designs, and we've won the forward-looking designs in those platforms also.

So as those new platforms ramp, we actually expect that Q4 will come back a little bit in consumer, which is why I gave some of that guidance.

Okay, that's useful. Given what seems to be a short-term slowdown in communication, and given your cash position, what should we expect in terms of potential share buyback?

We anticipate that we'll buying back shares through the last half of this year.

Great. And then one quick last one from me. In TD-LTE in wireless infrastructure notably in China and given some disappointment recently, this earnings around content of FPGAs in base station; could you talk a little bit about the dynamics that are taking place potentially in your favor in terms of traditional high-end FPGA content in base station, whether there is any ASIC conversion, and also the trend in your segment where we know you've been ramping recently in China in wireless infrastructure?

Yeah, so let's break that up. First of all, our Mach product families plays throughout, from the base stations all the way through the wireless remote radio head. So you'll see that in a control plane application throughout that infrastructure. What we're talking about now is like an ECP3 class family that has SERDES. And we will see that in a variety of applications within the cellular base stations, and also in the PTNs and other portions of the backhaul.

So what we're starting to see is that they're starting to replace some of the bigger FPGAs with their own ASICs, putting smaller FPGAs around them for a cost-reduction solution. So as the technology matures, when LTE first came out there was a lot of big FPGAs in those marketplaces. And we're seeing the likes of people like HiSilicon and other people do more of an integrated ASIC, but then still have the need for smaller FPGAs to surround that for I/O expansion or some control.

So we see that always happening. On the other hand, when they rollout 5G or the new technologies, they'll use the big FPGA. And that's always been the case.

If the wireless infrastructure sits for any length of time on any given technology, then you'll see those cost reductions and the ASICs displace more FPGAs.

Very useful. Thanks so much.

Sundeep Bajikar

Hi guys. Thanks for taking the question. First one on the China smartphone comment that you made. What types of smartphone devices were you referring to in terms of price points, when you talked about meaningful shipments into these devices in Q4?

And as a follow-up to that, what portion of sequential shipment growth in Q4 would be driven by such new Chinese phones, relative to higher end models from the large players?

So that types of ASPs we're seeing in China are somewhere between $200 and $300 for a device, which is quite a bit lower than we've seen in some of the smartphones. And when you look at the Chinese market, what we're seeing is that transition to more functionality, single models, with an integration effort that doesn't do everything that the high-end smartphones that we're used to in the United States. So they may take three or four different features.

So we would almost think of the China smartphone as more of a mid-tier product, maybe a?I'll give you an example, something like a Galaxy S4 versus an S5. So they would be looking at that as an S3 and S4 version, not something that can compete with the high-end S5, or even some of the other products. Does that makes sense?

Yes, it does. Great. And if you could just comment sort of the relative mix in terms of growth that you expect to see potentially in Q4 from these new devices versus kind of the traditional high-end devices that people are expecting to be launched.

Yes. So you're going to see. You'll see volume growths that are high. The ASPs are going to be lower, because the products that we actually serve those markets with are lower LUT density, and lower cost. So you're going to see the volumes as they take off. The revenue will be material. Obviously not as big as one of the tier 1 or tier 2, but if you look at the combined China Inc. over the next three to four years, you can kind of get a vision that that's going to be about the size of those guys.

All right. So we want to get in early, establish ourselves as really the de facto standard. And then as we move through and they continue to grow share within China, that we're positioned to take advantage of that ramp. So it's early for them for sure. But the revenue that we should see in Q4 would be material.

Great. That's very helpful. Next one, along the same lines, is there any change in your design win position at your largest customer on a year-over-year basis heading into the third quarter?

Yes. We actually have more.

Okay, great. And then last one from me, if you could give us a little more color around the recovery you expect in communications in Q4, what is giving you visibility into Q4 from where we stand today?

Well, it's a lot easier to get visibility when you start seeing a correction. Because once you have a correction you say, should I stop all my wafer starts? Or should I adjust my inventory? And so you can have a pretty meaningful discussion with our customers on what do they foresee and what's driving the issues that they're having in the market.

And so a lot of times they'll give you a little bit more color than when they're ramping. They're ramping, they're just keep ramping. And we don't have control, because we have VMI inventory. We don't have control to be able to manage that business. Because what will happen is we'll load up the inventory, and they'll pull these positions. So you can't do much about that, which is why?in the perfect world, we would have ramped Q1 maybe a little slower, Q2 a little slower, and Q3 would have been even higher.

Instead we go Q1 record, Q2 record, and now we go Q3 down. Had that been linearized, we probably wouldn't see the damage to the stock that we just saw today.

Okay. Thanks so much for the color.

(Operator Instructions) Your next question comes from the line of Richard Shannon.

Hey guys. Let's see here. A couple of questions, maybe to start with on the consumer side here. I'm just kind of delving into your guidance for the quarter. I think you said industrial will be kind of flattish if COMS is down and I don't know exactly what that means. But it seems to suggest that consumer might be down in the order of 15% or more sequentially. How close is that to your expectations?

Consumer is not down that much. Consumer is actually kind of flattish, down slightly. COMS is the big issue.

How much?so COMS would have to be down in the order of 20% then?

That's probably about right.

Okay. Okay, fair enough then. And just to confirm, I think I heard you say from the last question that you don't believe you've lost any sockets on a year-on-year basis at your largest consumer customer then?

No.

Okay. And then I think you've talked for a few quarters about hopefully getting 7 of the top 10 mobile OEMs shipping as customers by the end of the year. What's your latest update on that progress?

Yes, we've already done that. The issue is the 7 of the top 10 have really just become the five that I mentioned in the script, which was?you're talking about Lenovo, and ZTE, and Huawei, and Coolpad, and Xiaomi. Because those guys are all the guys that you're going to be seeing as the growth drivers for the China smartphone market. There may be a couple of other guys in there. But I always kind of pick those guys as the guys that I think they're going to dominate China and the Chinese subsidies that are moving to the LTE phones, I think that's going to have a pretty big impact on what these guys do in the next couple of years.

Okay, fair enough. My line must have gone out when you mentioned those, so I'm glad I asked that question. Maybe switching one last question over to the COM side here, following up on a couple of the last questions here about the dynamic of (inaudible) or replacement of the large FPGAs and putting smaller ones behind that or around that. What does that mean for your overall content per base station unit, and when do you start to see the impact of that?

Well, I think for us, it's probably a smaller impact than others, because again, we're not playing in the high end of this thing where they're going to try to?again, they're focusing on cost reducing the big, expensive FPGAs, and they've always done this. That's always been the challenge that they've had in the communications market.

And so what they'll do though, that's actually an advantage, I think, for us, because we sell products that are 150K LUTs and below. And everybody else sells products that are much, much higher to that into these spaces. So if they do it, go ahead, and build a customer ASIC. They're going to use the smaller FPGAs, which is what we'll get.

So I expect to get not only the MachXO business that we get today, but you're going to have high-speed connectivity albeit in lower LUT density tomorrow. So I expect that we'll actually benefit from that conversion. But they'll still drive the highest den stuff like 5G and anything above will use big FPGAs, because you can't build ASICs that fast. And you certainly can't certify them and verify them.

Okay. Fair enough. I may follow up with that a little bit later, but I'll jump in the line. Thanks a lot guys.

Okay, thanks.

[Bill Desulim]

Thank you. A group of questions, first of all, did you address why the gross margin will be going up sequentially in spite of your lower revenues? And if not, would you please help us understand that?

It's a mix issue, and it's a fact that we've been driving some excellent cost reductions going forward. So we're seeing the benefit of those cost reductions, and then we have mix where [DISTI] has been going up, and the industrial side has been going up and stronger. And some of the COMS products that we were selling had some margin challenges, and those are weaker in this quarter coming up.

You would expect absorption to go up. These things just offset it.

Yes, it's offset by lower cost reductions that we've had.

And as time progresses, when you see a rebound in the COMS business, are you anticipating that those products will mature to the point that they will not be a margin drag, and so will not only get the benefit of the revenue increase, but also get an incremental benefit from that higher gross margin than they were providing earlier in the year?

We're not calling a different model. We're still hovering in the mid-50% range. And that's where we anticipate staying. This is a nice quarter upside. We've got great cost reductions coming through. We're seeing it in all of our product lines on the cost side.

And as new products come out that helps us. As we move into different markets though, we may have ASP pressures, which is why we're still holding mid-50s. I feel a whole lot more comfortable with mid-50s today than we did when we were talking about it two or three quarters ago.

That's helpful. And then you also did mention, earlier in the call, a reference to inventories and trying to manage those. Very specifically though, your inventories were up in Q2 versus Q1. Is that a function of you were anticipating that third quarter was going to be a little higher and had to pull in, or help us understand that please.

No. That's really a function of the fact we had the Fujitsu fab transfer last quarter, where we built inventory due to that transfer for last-time buy purposes. That inventory is sitting on the books still, and will bleed off over time.

Got it. Okay, so that is still impacting and will continue to impact for a few quarters?

Correct.

Thank you, Joe. And then finally, there was a reference to buying shares back, but I'd like to just take it even one step backwards relative to your cash, and understand how you're thinking about your cash from a strategic standpoint, given that it represents a quarter or more of your market value. And I'm not trying to lead you in a particular direction, but more trying to understand how you're thinking about it.

In terms of how we'd like to use that capital or that allocation of that?

Yes. Given that it's such a high percentage of your market value.

Right. So we're at a point where we believe we're stable, much more stable now in cash generation. So we're looking very strongly at continuing the buyback program that we have and making it potentially more aggressive as we go forward. And we're looking at other options related to acquisitions. And that's been an ongoing, steady process that we look at. It's been difficult to find an add for us that would give us the capabilities that we want and the growth that we want. But that's continuing.

Thank you.

Ruben Roy

Hey, thank you. Hi, Darin. I jumped on quite late, so I might have missed this if you mentioned it. But I just wanted to drill in. It sounds like consumer is going to be flattish in Q3 and in terms of some of these new customers that you've won design sockets with; what do you think in terms of some of the product ramp schedules? Are they slated for 2014, or is that more of a 2015 event? And when do you start to see some diversification of your consumer customer base?

Oh, we'll see some. Some of these guys are ramping right now, but it's not as meaningful in Q3 as we expect it to be in Q4. So yes, we've been working on this for a while. As we stated?I think it was like almost a year ago, we were focused on really the top 7 out of the 10. But the names have all changed, right? Because Motorola got bought, and they got sold, and then all these other guys?and Lenovo is now a player. But the bottom line is, we've got design wins just about every place on the planet, and now what we're looking at is who is shipping the volume. So in China Inc., the guys shipping the volume are the ones that I listed. There's Coolpad, ZTE, Lenovo, Xiaomi, Huawei, Opal, all those guys, right?

So those guys are the focus of getting that volume, and they're ramping products on Q3 and Q4 and they just will constantly do switchovers. They'll ramp a product for about three to six months, and then they'll do another product. They don't typically do the multiple lines and the multiple platforms. They usually just do kind of a phone, they ramp it like crazy, and then they'll spin another phone in six months.

So you've got to always be on top of that with whatever the new feature sets that they need, which kind of makes us perfect for what they're trying to do. Because if they're turning it every six months, we're in really good shape.

Right, okay?

And your next question comes from the line of David Duley.

Yes, just a clarification, on your consumer handset business, Q2 and Q3 are weak because I think you mentioned you're seeing an inventory correction at your big customer or their phones didn't sell? Can you just clarify what you said? I missed it.

I think the main reason is that you're seeing not as much success on the newest phones that some people are having, and that you can read a lot about it in the press. There's just?there's not as big of an adoption. And I think there's other challenges that people are having. It's in China. If people had penetration in China, it was much greater last year than they're having today, because there's more competition from the people that I mentioned.

And I think that that's some of the challenges that you have, which is why you've got to win everywhere. I mean the challenge in consumer is if you're winning everywhere, you don't care who takes share. If you don't have everyone, and you're one of the persons that gets the share taken, then that's a problem.

But I think in this particular case, it's a product line that you're in that just didn't sell as well as they thought. It's not?

So mainly the weakness for you guys on the consumer space has been one big customer not doing what you thought they would do?

I think that for Q2 and Q3, yes.

Okay. And as far as how many customer do you see really getting into a major ramp here for 2015?whenever that starts, I guess Q4 it starts. But how many incremental customers would you guys be expecting to kind of ramp up during 2015?

For next year, our goal is to ramp a high percentage of the ones that I mentioned from China. And then additionally, not to lose the one that we're currently shipping to. I mean that's the priority. Because as we talked about before on the platform, the platforms that they have within certain manufacturers, they kind of have good, better and best. And as a new product comes in, the best product becomes better, and then they bring another best product in. And so they just kind of waterfall everything down. And using the example of Samsung today, they shipped the S3, the S4, and S5 all at the same time.

They didn't EOL or end of life the S3 when they brought the S4 and the S5. So the more products you're in, the more diversification that you have within those platforms. And then add onto that there's nodes, and there's tablets and there's everything else within there that you can proliferate out, depending on which platform you're on.

So the key is really diversifying within the platform, but then to diversify in the customer base, meaning it's really trying to both of the top two guys, and you've got to win all of the China Inc. guys, because together, in another couple of years, they're probably going to add up to a Samsung and an Apple.

Yes, no doubt. And can you talk about however you see this unfolding, what you think the growth trajectory of your consumer business will be over the next couple of years?

Well, our expectation this year, with the number of designs wins that we had, we would continue to grow. And it looks like we'll probably be flat to slightly up on consumer if I were to call it for the year right now. And I think a lot of that just comes with?it's not that we didn't get the right design wins. It's the success of those design wins in the market.

And so all we can do is continue to win every design win we can, and if they're successful in the market, we ship and ramp. Next year our growth is primarily going to come from China Inc., which we've been spending a lot time on in the consumer market. Any other new opportunities that we have and we're shipping to in tablets or other things that we're doing.

So I think that's going to be the growth trajectory for the next year.

Okay, thank you.

Thank you. And there are no more questions in queue. I will return the call back to the CEO for any remaining remarks.

Okay, thank you. As always, we appreciate your support to our team and our strategy. The progress we've made to execute to our growth strategy for the past years has been solid. Our challenge now is to continue to focus on areas where we can win and defend, while creating new market opportunities that we can serve.

Finally, we don't just sell FPGAs, we sell what you can do with them. So thanks again, guys.

And this concludes today's conference call. We ask that you now disconnect.