萊迪思半導體 (LSCC) 2015 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Lattice Semiconductor First-Quarter 2015 Results conference call.

(Operator Instructions)

David Pasquale of Global IR Partners, you may begin your conference.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's first-quarter 2015 results conference call.

Joining us from the Company today are Mr. Darin Billerbeck, Lattice'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'll 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 fiscal second quarter and full-year 2015.

If at any time after this call we communicate any material changes to this guidance, we intend that such updates will begin 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 FY14 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 statement 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.

Some financial information presented by us during this call will be provided on both a GAAP and non-GAAP basis.

By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the Company's performance for results and underlying trends.

Management uses non-GAAP measures to better assess operating performance, and to establish operational goals.

Non-GAAP information should not be viewed by investors as a substitute for data prepared in accordance with GAAP.

If we use any non-GAAP financial measures during the call, you will find that the required presentation of and reconciliation to the most directly comparable GAAP financial measure in the Company's earnings press release.

I would now like to 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.

The goal for today is to update everyone on our current business and our longer-term revenue targets through 2015.

We understand with the Silicon Image acquisition, there's a lot of new data.

The first big take away from today's call is that we feel great about the Silicon Image acquisition, and our combined business outlook.

We are modeling midpoint non-GAAP revenue of approximately $485 million for the full-year 2015, and will continue to work to achieve above industry average growth.

To put this into perspective, we've already grown revenue from $279 million for the full-year 2012 to $330 million in 2013, to $366 million in 2014.

At $485 million, that's a 30% year on year projected growth.

Second, the year is developing as expected.

We told everybody on the last call that we anticipated the first couple of quarters of 2015 would be tough until consumer bounced back.

That has not changed.

We expect we will end 2015 with revenue from consumer up over 2014.

We also expect modest growth in industrial, while communications market is tracking slightly lower than 2014.

However, we do expect Q3 and Q4 communications revenues to be slightly better than Q2, as the China LTE deployment continues.

Revenue from China Inc will grow as we move throughout the year, along with other opportunities in intelligent connectivity solutions.

Underpinning our strategy is a powerful line of new products such as UltraLite, XO3, ECP5, Titan, Saber, Snap, [Y gig], and [Y HD], among others.

Third, our revenue risk has been significantly mitigated by the diversification of our end markets and reduced customer concentration.

To give you an example on the end market side, last year in consumer we were focused on the mobile opportunities, specifically high-end smartphones.

The consumer in 2015 now consists of DTVs, digital still cameras, AVRs, two-in-ones, tablets, wearables and other high-volume areas.

One diversification example on the customer front is a smartphone OEM that was about 20% of our revenue in Q1 of last year.

We now expect mobile revenue from that same OEM to be about 5% this year.

And potentially, we'll be larger in DTV revenue this year than in mobile at the same OEM.

Fourth, our team is hitting it out of the ballpark on execution, integration and consolidation.

We're around the clock given the huge potential we see.

Joe will walk you through the financials, but we've already taken targeted cost synergies up close to $42 million.

This is up over 30% from approximately $32 million when we announced our acquisition of Silicon Image earlier this year.

And up from approximately $36 million we committed to when we closed the deal in March.

The key here is, all of the actions we are taking are driving increased efficiencies at Lattice.

Nothing we have done has adversely impacted customers, and nothing we have done has impacted our road map.

Finally, we are laser-focused on driving profitability.

Our goal is clear.

We are working to achieve 20% non-GAAP operating income at any revenue level.

This will allow us to achieve our goal of doubling our non-GAAP earnings per share on an annualized basis over the next two years.

We view this as both realistic and achievable.

We've had an excellent track record of execution, which we will continue to build upon.

So you can see why we are optimistic.

We've been delivering above market growth over the past two years, while laying the groundwork for our long-term success.

We've been financially diligent, and have leveraged our balance sheet to further increase our scale as a global leader in smart connectivity solutions.

This has already opened new opportunities.

We intend to use our free cash flow to rapidly deleverage our balance sheet.

This in turn will give us added flexibility, and open additional opportunities.

We like this cycle and are confident we will drive increased value for customers and shareholders as we move forward.

In terms of other color on end market and geographic revenue, we've provided a detailed table as part of our Q1 release.

That concludes my initial comments, I will now turn the call over to Joe for details on the financials.

Joe?

Thanks, Darin.

Our acquisition of Silicon Image closed on March 10, 2015.

Accordingly, our results include the financial results of Silicon Image from that date forward.

Q1 financial results were significantly impacted by a number of factors during the quarter, primarily related to the acquisition of Silicon Image.

Here's a quick summary.

$24.7 million of income tax expense, primarily related to establishing a full valuation allowance against our net deferred tax assets.

$18.2 million of acquisition related charges, including approximately $8 million in severance and stock compensation costs related to change of control payment to departing executives.

$4.9 million of restructuring charges as result of synergy actions already taken as we drive toward our targets.

$4.2 million related to GAAP purchase priced accounting including $1.2 million associated with deferred revenue, and $3 million associated with the sell through of acquired inventory.

And finally, $2.9 million of amortization of acquired intangible assets.

As part of our press release, we provided detailed reconciliations of GAAP to non-GAAP financial measures.

Including these and other reconciling items.

For the fiscal quarter 2015, revenue was $88.6 million on a GAAP basis, and $90.4 million on a non-GAAP basis.

We benefited in Q1 from about $5.9 million in revenue related to consumer electronics, which is evidence of our diversification in the consumer end market.

Our top seven customers accounted for just over 40% of our total Q1 revenue, with the largest three each at approximately 10%.

Gross margin for fiscal Q1 2015 was 54% on a GAAP basis, and 57.8% on a non-GAAP basis.

Operating expenses for the first quarter were $74.8 million, including $4.9 million in restructuring charges; $18.2 million in acquisition related expenses consisting of approximately $10.2 million in professional services related to M&A, including legal, accounting, licenses and fees; and approximately $8 million in severance and stock compensation costs related to change of control payments to departing executives.

And finally, $2.9 million related to amortization of acquired intangibles.

We expect to incur additional restructuring and acquisition-related expenses throughout 2015, as workforce and site consolidation actions are taken.

Income tax expense for the quarter was $24.7 million.

This includes approximately $21 million of tax expense resulting from establishing a full valuation allowance for our deferred tax assets.

The valuation allowance is the result of expected losses before taxes in the US on a GAAP basis, primarily due to forecasted interest expense on our long-term debt and the amortization of acquired intangibles.

Cash tax expense was approximately $1.1 million for the quarter.

We expect our annual cash tax expense to be between $8 million and $9 million.

On a GAAP basis, reflecting the aggregate impact of the various items mentioned, we recorded a net loss for the quarter of approximately $53.3 million or a loss of $0.46 per basic and diluted share.

On a non-GAAP basis, net income was $3.9 million or $0.03 per basic and diluted share.

For the quarter, diluted share count was approximately 117 million shares, net cash used in operating activities was $1.8 million in Q1.

We ended the quarter with cash and investments of approximately $159.8 million.

Accounts receivable increased to $80.8 million at the end of Q1, as compared to $62.4 million at the end of Q4.

Days sales outstanding increased to 82 days as compared to 67 days last quarter.

This increase is primarily due to the inclusion of the fair value of acquired receivables.

The inventory at quarter end was $80.6 million compared to $64.9 million at the end of Q4.

Months of inventory stands at 5.9 months compared to 5.2 months at the end of Q4.

This increase is due to including the fair value of acquired inventory from the Silicon Image acquisition.

We spent approximately $2.9 million on capital expenditures.

And incurred $7.9 million in depreciation and amortization expense during the quarter compared to $3.4 million and $5.4 million, respectively, in Q4.

We repurchased approximately 1.1 million shares under our share repurchase program in Q1 at a total cost of $7 million, which completed our previously authorized $20 million repurchase program.

Our cash strategy will shift to a focus on deleveraging our balance sheet.

In connection with our acquisition of Silicon Image, we issued $350 million in term debt.

This is shown in our balance sheet net of related financing costs.

Interest expense for the quarter was $1.6 million.

This concludes the financial review portion on the call.

I'm going to turn it back over to Darin for the second quarter full-year business outlook.

Darin?

Thank you, Joe.

As we look forward into Q2, we are positioned for another above market growth year in 2015.

After all, when was the last time Lattice had a triple-digit revenue quarter.

We will be relentless in delivering on the opportunities in front of us, and in continuing our successful integration and the consolidation plan which we started at the end of Q1.

In terms of our specific expectations, on a non-GAAP basis for the second quarter 2015, we expect revenues to be approximately $120 million plus or minus 3%.

Q2 gross margins are expected to be approximately 56.5%, plus or minus 2 points.

Total operating expenses are expected to be approximately $65.2 million, plus or minus 2%.

Q2 restructuring charges are expected to be approximately $10 million with acquisition-related charges including the amortization of acquired intangibles in Q2 expected to be approximately $10.5 million.

For the full-year 2015 on a non-GAAP basis we expect revenue midpoint for 2015 to be approximately $485 million.

We expect gross margin to be approximately 56.5%, plus or minus 2 points.

We expect total operating expenses in 2015 to be approximately $215 million, plus or minus 2%, excluding restructuring and the acquisition-related charges.

This includes the positive impact of any synergy savings.

Restructuring for the full-year 2015 are expected to be approximately $25 million.

With the acquisition-related charges, including the amortization of acquired intangibles, for the full-year expected to be approximately $49 million.

We expect annualized operating synergies to be approximately $42 million as we exit the year.

In summary, we are confident in the outlook of our business, and excited about the many opportunities in front of us.

We have broadened our intellectual property, our product lines, further diversified at end markets, and we no longer are reliant on a single customer for growth.

We're confident we can achieve our targets.

This concludes the adoption of USB 3.1 later this year, further development of the China market, and a rebound at consumer OEMs.

We have a great opportunity in front of us as we leverage our increased scale as the global leader in smartphone connectivity solutions, and drive the synergies across the business.

We appreciate your continued support as always.

This concludes our prepared remarks.

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

(Operator Instructions)

Tristan Gerra, Baird.

Could you give us some color as to the revenue outlook between your core business and Silicon Image?

Specifically, what type of sequential increase or change would you expect each should do for your core business?

And also, what type of year-over-year decline for Silicon Image you're looking at for the full year?

Yes, I don't want to comment on the decline for Silicon Image, Tristan.

But what I can say is, there was really wasn't a whole lot of Silicon Image mobile revenue at a large OEM post Q1.

Our LSC, the Lattice mobile, was down also but not quite as significantly as we walk through the year.

So we knew ahead of time that mobile was going to be a challenge for us.

But in the end, after we are done with the consolidation, you will see that the consumer market for us will be somewhere between about 40% to 45% of the total.

Industrial will sit about where it did before, with communications been quite a bit higher.

So we expect that we will still have a fairly diversified portfolio.

But I think the bigger difference, Tristan, is before our mobile, our accrued consumer products was really all about mobile and smartphones.

That diversification I talked about in the script is more about how we're diversifying from just mobile devices into tablets, into two-in-ones, into digital TVs, into AVRs and all sorts of other devices.

So instead of having one particular [post] in at one market, we have a diversified market.

And that's what really brought the Silicon Image in play for us was that diversification of consumer, being both growth, but also an area that we could keep the IP focused on leading edge standards.

And I think the biggest issue, Tristan, was we didn't have really the DNA in the Lattice side to get in front of those initiatives and consortiums as Silicon Image had.

Okay.

And you mentioned that Silicon Image doesn't have much mobile revenue anymore.

So it sounds like the bulk of the revenue adjustment related to the Samsung announcement that Silicon Image did last December is behind.

So is it fair to assume that there was a bigger downward adjustment in the first half of this year for Silicon Image revenue wise than there will be in a second half of this year?

Yes, there was a bigger decline I think that everybody anticipated.

Because I think on the MHL front, there was an elimination not only on the S6 but also on the S5, the S4, and some of even the Note products.

So when Samsung moved forward with the S6, they had a deliberate decision on focusing on products that had the highest gross margin.

So you started to see them start slowing down the S4 and the S5, and then building up the S6 as they went through it.

If you look at some of the commercials and advertising, you can see what that's happening already.

So I think there was and element of getting removed on MHL and not supporting MHL.

But then also not really ramping any of the previous products like they had done in the past, though MHL was removed from all of those almost at one time.

Okay.

That's useful.

And then last question regarding wireless infrastructure.

A lot of companies, obviously, over the past earnings season have talked about continued weakness.

Is there visibility into the second half leading us to believe that your wireless infrastructure business is going to pick up notably in Asia?

Then the follow-up question on to that is, how is your higher-margin European business impacted by the weakness of the euro?

So let's talk about the wireless infrastructure first.

We had modeled in that first part of 2015 would be difficult in the wireless, although we thought it would be better than Q4 and it was.

So Q1 actually was a little bit better.

But then as you look out at the year, you could tell the licenses looked like they got a little bit delayed, there were customers that maybe had inventory coming out of last year still.

So we still see Q3 and Q4 with all the licenses in place, and now you're starting to see people build.

We see Q3 and Q4 on the infrastructure side being healthier than it is in Q2.

Nothing to write home about, but not a decline.

So I think things will start modestly improving there.

Then as you were talking about in Europe, I think with the industrial side of Europe -- we haven't seen a lot of negativity from that yet.

Although we expected modest growth from the industrial throughout this year, and we're seeing that today.

So we see consumer as growing because of some of the diversification that we had overall between 2015 and 2014.

We see industrial going modestly overall, but that also includes Japan, and it includes China and some other areas.

So we haven't seen a significant shortfall in Europe.

And then the communications market we think will be slightly down going from 2014 to 2015.

Okay.

Thank you very much.

Christopher Rolland, FBR Capital Markets.

Hey, guys, thanks for the questions.

This is Joe on for Chris.

Just digging into the consumer market a little bit more.

You guys discussed briefly MHL.

But I was wondering if you could talk about the USB 3.1 opportunity, where we are with adoption there?

And then a little bit further, what you guys see with WiGig and wireless HD and where (inaudible) some revenues?

Let's start with USB 3.1.

There's a lot of really interesting applications for it.

I think the rollout of it might be slower than a lot of people thought.

But because we used an FPGA early, I think we've got some pretty good early adoptions.

We're past that point of trying to get design wins, and we're more into how fast these things roll out.

So at this point, we feel comfortable.

The other bonus that we got, was Silicon Image, is a product called the Saber.

And I don't know if you guys know that, but Saber was exactly what we were talking about when we acquired Silicon Image.

Which was Saber is the cost reduction of the FPGA that does the original 3.1.

So now we have an [asic] that displaces our [self] over time.

So we can use Saber in different places, but more for our wins that we have today than we can sustain them longer.

So that's the first initial FPGA to asic transition that we will have.

So that's one area, so we expect that to grow this year.

A lot of those design wins are done.

It's just how fast do they roll this out, and who's actually going to begin putting that in their laptops or phones or these others.

Because I've heard Samsung on a Galaxy S6 isn't going to USB 3.1.

So Apple says they are, other people say they are, so we will see the rollout as people adopt it.

The wireless, where did you want to go, on wireless HD versus WiGig?

Yes.

Okay.

So WiHD, just so everybody understands, WiHD is a super fast video wireless device that has zero latency.

So essentially, if you were going to project video from a device, let's say a gaming device to a TV, you wouldn't use WiGig.

You'd use WiHD.

So it is not going to be adopted as widely as WiGig, but there's applications where they want very low latency.

And we already going to have material revenue in 2015 on WiHD.

But what people don't understand is we also participate in WiGig, and we are currently working on verifying some of the interoperability of the based band with one of the larger mobile application processor companies.

So we have already have the [extantiation] of our WiGig baseband and our radios.

The nice thing is the radio technology that we use for WiGig is also the similar radio technology we use for WiHD.

And the beam forming that we use and the RF tilting is second to none in the industry.

So our radio is actually one of the biggest benefits that we have seen of this acquisition.

Not that it will generate revenue in 2015, but it's got a lot of potential for 2016 and beyond.

And it's not just limited to WiHD and WiGig, that same radio technology we can use in the back haul.

And in a very small version of it we use it in SNAP, which is the close proximity.

So I would expect WiGig to go as Intel and Qualcomm go.

Because they are going to drive WiGig adoption through the application processors, of tablets and of PCs, and then you will see two different versions of the wireless technology.

WiGig connectivity for things that are higher power, but then you will see things like SNAP for things that want very low power close proximity.

Because SNAP, WiGig can never reach the cost structures of SNAP.

Primarily because as to have all the interoperability, the max, the 5, whereas SNAP is a very simple baseband that just does what you would consider wireless USB two and three.

So a very high performance, it can do data, eventually it will do video.

So people can transit video straight across close proximity at a much lower power, a much lower cost than WiGig.

So it would be similar to what you'll see on when you originally came out with Bluetooth, and everybody said Wi-Fi is going to kill Bluetooth.

Wi-Fi can't do what Bluetooth does because of the power and because of the connectivity of it.

Great, that was super helpful.

And then switching gears into the industrial front.

I believe you had said that you got at that segment with some strength this year.

Where are we with the XO3 ramp, and if you could just give anymore qualitative color for the rest of this year?

Thanks.

Yes, so the nice thing about XO3, it is a pretty big cost reduction over XO2.

So on a cost per IO, it is quite a bit lower, and we will call it, more affordable than XO2.

So that is going actually really well.

Surprisingly, four or five years ago when we had talked about XO3 and we talked about the smaller pitches and lower cost packages.

People told me that, there's no way people will adopt 0.5-millimeter and 28-millimeter pitch, but they did.

And they did it because of the price point, and because the micro server guys are going with blade servers and smaller form factors.

So that's off going quite well.

In fact, the XO3 ramp with the flash version is doing really well.

There's another version of it that has OTP that isn't doing quite as well, but we would expect XO3 over time to overtake XO2 in the higher volume applications.

Today it doesn't feel as meaningful because it is in the hundreds of thousands of dollars, but it will get to the millions fast.

Great.

Thanks, guys.

Congrats on closing the deal.

Yes.

Sundeep Bajikar, Jefferies.

Hello, guys.

Thanks for taking the questions.

First just on USB 3.1 and MHL.

Just wondering to what extent is the outlook for USB 3.1 connected with the requirement to carry video?

Is that a primary mechanism for Lattice to be able to differentiate?

And if so, in what timeframe should we expect to see a capability like that in the market?

And as part of that, maybe also talk about embedded display board, give us a sense for whether Lattice might already have access to that IP to the extent you want to offer multiple solutions?

Okay, so let's start with MHL.

So the MHL was written into the spec for USB 3.1.

So you can already run MHL over USB 3.1.

So the nice thing is having MHL, having that IP and being one of the consortium counters enables us to have the IP and just run a ride.

So you will see a lot of video solutions.

EDP is also over USB 3.1, so people shouldn't think it is an exclusive game.

So you will see areas where they're driving displays, embedded display port will roll.

When you're trying to drive a big TV or a larger display, you will see MHL dominate.

Which is why I think it is 40% of the DTVs today have MHL in them as the connector, and it is kind of an MHL/HDMI connector, which is nice.

Because it's one of the fastest.

And it will eventually become one of the standards for 8K.

So we see MHL as relevant, even though today, you are see people like Samsung say hey I removed it.

Because Samsung was trying to play the game from a content perspective.

If you look at Microsoft, Microsoft is starting to play the game from a productivity standpoint.

So you are going to start to see when people want productivity, they are going to start using things like MHL because they want to take your two-in-one be able to project it up to the screen and have it near image that screen where MHL does quite a nice job on that.

EDP doesn't.

We do have both IPs, and we will develop products that will have both MHL, HDMI.

They will have [NIPI], and they will have USB.

So you're going to see all of those interfaces from us, because again, we prefer to be somebody who can provide all solutions not just one.

Now granted, on HDMI and MHL we'll get royalties.

So that's good.

But it doesn't mean we are going to defy gravity if those opportunities exist.

Okay, that's very helpful.

Switching gears, wanted to know how we should think about the timing for hybrid FPGA [ASFB] type solutions.

I know it is a little further out in the future.

And should we assume that such hybrid solutions would be based on mature node manufacturing like 28-nanometer for example?

Interesting.

So today, I'll give you a couple examples.

So today, there's obviously an example on USB 3.1 where there's different channels that can use programmability.

But I will give you one that we just found the other day that was quite interesting.

Somebody wanted an HDMI MHL bridge to USB 3. So we can do that with the Silicon Image HDMI receiver, and a Lattice ECB-5 FPGA.

So the first instantiation of that will be we will stack them, first we'll just sell two products by themselves.

Then what we will do in the old Intel days, is we will stack them and then we will integrate them.

So that's the progression that you use.

Is when the small form factor is needed, you will see a stack and HDMI receiver with a 5 gigabit SerDes FPGA.

After that, then we're going to go ahead, we'll stack and the we'll integrate to that particular solution.

And that gives customers the flexibility to do that, plus it also lowers the power and reduces the cost.

So you're going see a bunch of these things.

And in addition, we're finding things which I don't know if we will integrate over time, but there's things like we found out that as they've brought in their RF opportunities at the side beam, we can actually do some baseband control for beamforming and RF tilting along with the CPRI interfaces.

So the FPGA then gets tagged right onto the baseband that they have.

Eventually, one could argue that some of the algorithms for Silicon Images beamforming or SiBEAMS beamforming could be done in an FPGA tuned to the RF.

So those are areas where not every radio is going to fit with every baseband, so we are thinking through whether you want to put an FPGA on the side of the RF and make it more configurable.

Same thing with T-Cons.

We do configurable T-Cons in China, where there's an FPGA sitting up to next to the T-Con.

Now a lot of people go, T-Cons have no money, it is a really, really tough business.

Silicon Image used to be in the T-Con business.

So those are opportunities.

As we think through it, if we can lower the cost and lower the overall bill and material where people aren't spinning a T-Con every five minutes, that might be a great opportunity for us as we walk through this.

So lots of that stuff.

Clearly, we're not going after the Intel Altera acquisition which is probably more server and hardware acceleration.

We are going after more the of the integration so that people have the flexibility to be able to use cost-effective products in the product lines that they want to get them to market faster.

Okay, got it.

Very helpful.

And then the last one for me for Joe, how should we think of operating expenses as a percent of revenues going forward?

Should we expect them to trend in the 40% range or lower as a longer-term target into next year?

They will be in 40% or lower range, because we are targeting operating income of 20%.

That's what we are moving to with this acquisition.

We have the opportunity to do that.

That's driving some of the aggressive synergies that we are seeing also.

So you should see an operating income of 20%, that's the target.

Perfect, thanks so much.

(Operator Instructions)

Richard Shannon, Craig-Hallum.

Richard.

Darin, Joe, how are you guys doing?

Good.

Good.

Let me follow-up on that last question, Joe, and actually let me ask in a more specific manner.

Can you give us or do the math for us as you look at your OpEx going throughout this year?

Especially, do you expect to get that 20% pro forma operating margin number exiting this year, or it is going to be more into next year?

It will be next year.

This year, we are going to see synergies throughout the year.

We going to exit the year at that $42 million run rate.

And we will start to see this 20% operating income going into next year.

Does that help?

That's helpful.

I was trying to fix those two pieces of math together and it wasn't working.

So that's helpful.

You've got to take things down.

You've got to overlap.

We've got some headcount stuff, some site synergies that we are doing as we combine sites, things like that that are going to bleed through.

But we are going to be substantially complete with that this year exit at $42 million on run rate basis.

Okay, perfect.

Also following up on the question and topic on 60 gigahertz.

Wondering if you could give us a sense of timing on both the SNAP side and the WiGig side?

Could we see any meaningful revenues this year, and how does the competitive environment shaping on on WiGig?

Let's start with SNAP.

So SNAP, we're sampling USB 2 and 3 this week.

So you will see samples attacking some of the large OEMs.

More on the tablet kind of market starting first, and then just some other data transfer opportunities that we're going to have.

So that's going to happen right away.

WiHD, we will see meaningful shipments this year being material.

This year, but primarily driven I think like projectors and gaming and things like that.

So not the big market of laptop and display connectivities.

WiGig, you heard a lot of hoopla from people integrating some of the -- integrating the wireless into their application processors.

I think the jury is still out on whether the display guys want to adopt that, because it is a pretty expensive solution today.

It is cheaper to integrate on 14 of 16 nanometer.

But I think what you're going to see is the guys that play on the outside looking in, being not inside the application processors or microprocessors, are going to play on the outside.

Being the connected devices, they are going to be using something like 28-nanometer or 22-nanometer.

The cheapest is 28-nanometer, so you will see that baseband driven there.

I don't think you're going to see real revenue on that and probably until next year.

Then even then, I think the ramp is really into 2016 and into 2017 as that technology takes off.

Because there's a lot of ecosystem that's going to have to be done like the interoperability between the different WiGig solutions, because you have got one big buy has one solution and the other big guy has another solution.

So they're probably going to end up being some camps on some of the protocols and how inter operable it will be.

So we are sorting to that right now.

The nice thing is, we also have an FPGA that we can drive into this and help us get to market even faster.

Okay.

Maybe one last question for me.

Just on the big picture topic on the gross margins.

You have got a lot of different end markets here, you're talking about diversification in your prepared remarks.

If you exclude the licensing that came from Silicon Image with all the programmable parts and the standard parts in all these end markets.

How do you see the gross margins trending over the next one to two years?

It's something that can stay at this 55% level?

Could it go lower as you get in a higher volume markets?

How do you think about this area?

I think about identically as Silicon Blue, when we first bought Silicon Blue and everyone said there's no way they'll ever get the margins up to 50%.

And because we drove volumes we were able to drive the cost.

So a lot of the Silicon Image products don't get the benefits of the lower cost structures that we had by driving some of the high volumes that we had.

So I think that what you're going to see is, we are going to have to be very targeted in our approaches with the consumer.

But then also, we are going have to drive the cost structures like we did with Silicon Blue.

So we're going to have to be driving the right package solutions, the right assembly test manufacturers.

Being the trick that we did to lower costs was we picked standard packages that already had extremely low cost.

Brought our products into the lower cost packages, and then drove the silicon costs, the testing costs, and all the other things down.

So a lot of that is part of the synergy work that Joe doesn't count, but it is more the cost optimized portion that helps margin.

You don't count that as a synergy, you count that as a margin number.

Okay.

We've been driving that for the past three years in the Lattice business, the same model holds true.

Good enough.

That's all the questions for me guys.

Thank you.

Thanks, Richard.

Bill Gisella, Titan Capital Management.

Thank you.

A couple of questions.

The first one, and I hope I didn't miss this earlier on in your opening remarks.

But would you please explain the difference between the GAAP and the non-GAAP revenues, and how long you anticipate there to be a difference between the two?

Then secondarily, the distribution direct split shifted in the quarter by a reasonably wide margin.

I was curious if that was just noise or whether that's something structurally that's going to be different with the new consolidated companies?

So I did walk through the differences between GAAP and non-GAAP in the initial commentary.

And I can walk through it again, but there's a bunch of stuff that hit non-GAAP related to, for example, we had a tax hit of $24.7 million that was driven by --

Joe, may I interrupt you.

Not the expense items, specifically the revenue GAAP non-GAAP differential.

That's a deferred revenue issue.

And that will be done by the end of this year.

And there's also on the cost side, we had the step up for the acquired inventory value.

That will have bled up into the year also.

Okay, great, thank you.

And then the direct (multiple speakers) --

The direct distribution, that's an artifact of the OEMs being down, the large OEMs being down and distribution being up.

So it is all about switch, and that's really in the noise.

So you'll see that bounce around that level.

So it's really in the noise of the quarter on how well the OEMs did versus the distribution, and distribution this quarter did much better.

Great.

Thank you both.

Thanks, Bill.

(Operator Instructions)

David Duley, Steelhead.

Thanks so much for taking my question.

Just a little confusing and I'm not sure if you addressed it earlier because I was a minute late coming onto the call.

But as far as your annual guidance, what are you assuming for the core Lattice revenue?

Is that still somewhat flattish or is it down I think it was flat to down before or something like that, could you just help us out with that?

In Q1, it was supposed to be flat to down.

We're going to try to combine the companies over time, but Q2 it was going to be fairly consistent with Q1 as we move through it.

We knew that Silicon Image was going to have some issues because of the large OEM that had designed them out of their platforms.

So that's really the delta between a lot of the Q2 numbers that you see.

But the nice thing for us is, as we are moving forward through Q3 and Q4, we do expect to grow as we gave out the guidance for the year.

So, then most of the Delta I guess -- so that kind of answers my question.

So then for the year, the Lattice position will be somewhat flattish with the strong second-half?

Flattish to what?

Are you talking about -- so you're -- ?

$60 million that you did last year.

I think what you want to do is ignore looking at the rear view mirror.

What we are trying to do right now is just get a handle on both businesses and the opportunities that we have.

So we are focused on looking at what Silicon Image opportunities are in DTVs, because we expect DTVs to grow with some of the HDCP, the high def content production devices that we have.

So Silicon Image will grow.

The issue is, they were shrinking so fast in the mobile segment, that that put a damper on some of the stuff.

Going forward, it gets a little tough too.

Because, as Darin pointed out, the one example we had where Saber is coming in as an ASSP that will take over the FPGA in USB side.

So there's some mix going on there where we had forecasted potentially longer FPGAs, well we are going to be Saber now.

So those kind of opportunities are starting to show up.

So we'd much rather look at this going forward as a combined Company, and not start splitting the hairs, so to speak.

Okay.

And --

Also remember, we didn't include a lot of Q1 revenue for Silicon Image.

So that's why when people look the data, there was revenue that we didn't recognize in Q1.

So as we are moving through the year, our expectations, as Joe said, is really look at those growth potentials and then it really becomes a margin play.

Because we could continue to service some things with the FPGAs, but it they're from a very competitive environment, we're going to put products like Saber right into those spots and convert them.

Because then we're going to end up with a lower ASSP, but a much higher margin, but much higher volume.

That was the intention.

We get in first with an FPGA, and then we defend longer with an ASSP.

Okay.

Just on the operating census, and people have asked a couple different times.

But just on a dollar basis instead of what the savings is or what percentage it is going to be, because that's a little confusing.

Dollar-wise, what should we -- the Q2 guidance as far as operating expenses, what do you think linearly the dollar expenses on operating expenses will look like going into Q3 and Q4 in the second half?

That tough.

Because you have got dollars that are hitting for acquisition related charges that are front-end loaded in the year.

You've got some restructuring charges that are front-end loaded in the year, as we do people and site movements.

So that's a tough one.

But without the one timers perhaps.

Because you're saying that you've got to get all the cost savings by year end.

So obviously, we know the beginning and ending number just roughing it out without the acquisition-related stuff.

We targeted for Q2, operating expenses are going to be approximately $65.2 million plus or minus 2% on a non-GAAP basis, so that's of excluding all that stuff.

And we will decline going forward as we get savings.

It will decline all the way till Q4, but you're not going to get all the synergy savings in 2015.

You're coming in later in the year, and some of those related cost reductions aren't going to happen even until the June timeframe, July timeframe and beyond.

So you take a linear swag at it if you go that way, and then end up at the $42 million.

Okay, I see.

All the cuts will be made by year end, but the impact on the P&L still takes a few quarters to sift through.

Sure.

So there's people that are still lagging and so forth.

Okay, thank you very much, that's it.

(Operator Instructions)

Todd Morgan, Jefferies.

Thank you, and thanks for holding the call.

Just to follow-up on the cost-saving discussion.

So when you announced the deal, I think you'd said $32 million of cost saves were the amount expected.

And now you've found I guess another $10 million as the deal is closed and you looked at it.

Can you talk about what types of areas that additional savings amount has come from?

Where are those additional savings?

Where are they coming from?

We started looking at things in a center of excellence approach.

And as we started are looking at those, we found more opportunities to cut.

So we are rapidly moving to the centers of excellence, and we are finding duplication of effort in some cases, duplication of functions in some cases.

So we are moving that away and taking care of that earlier.

We are seeing an overall potential reduction in headcount.

We've got sites in Asia, for example, that we are moving to lower-cost geos so we're shifting from China and Taiwan into the Philippines and into India.

We shifted more responsibility to lower-cost geos than we anticipated, so stuff leaving the US going overseas.

It has been more than expected as we really dove in deep.

Does that help?

(Multiple speakers) say is, within the G&A element also, so there's some consolidation going on, we're getting much more efficient and getting rid of duplications there.

And a lot of the internal consulting type expending.

That was one of the bigger things that I think was uncovered was there was a lot of consultants and outside services, and all this other stuff we do internally.

So we found a lot of that stuff.

Great, that's the right kind of number.

And then just secondly, $159 million of cash at the end of the quarter.

Can you give us a sense of what the needed minimum balance is, or what your target cash flow would be?

Because my guess is, you have a lot extra right now.

We've talked to $100 million every time we've talked about this.

And we've done what we call nuclear winter scenarios, and it's in the $90 million to $100 million range.

So that's the target.

We expected to be at about $159 million, $160 million when we modeled this as we did the close and went through the quarter.

But also by not doing the stock buyback plan that we had been doing.

We expect to free up more cash to really deleverage.

And that's the plan, because people keep asking, when are you going to deleverage?

Some people want us to go slower, other people want us to go faster.

But we have a plan.

We want to get this thing paid down as quickly as possible, and our goal was in three years and really the debt is pretty much balanced.

So we want to have the debt to be below the cash.

Great, thank you very much.

(Operator Instructions)

Operator, I think we are out of time right now.

So I think we're going to have to move on.

So I would like to go ahead and summarize if I could, and then we're going to have follow-up calls with everybody if they have any further questions.

So in summary, we are really excited about the prospect for the combination of Lattice and Silicon Image.

There's a lot of heavy lifting to do to realize the synergies, but we will get it done.

We are no longer relying on one customer, or one portion of the consumer market for growth.

2015 is going to definitely be a year of transitions for us, but our actions today will shape the Company for many years to come.

So I want to thank you all for your continued support, and look forward to your questions in more of the closed sessions.

Thank you.

This concludes today's conference call.

You may now disconnect.