萊迪思半導體 (LSCC) 2015 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Lattice Semiconductor 3Q 2015 conference call.

(Operator Instructions)

Today's call is being recorded, with an encore replay beginning tonight 2 hours after the call.

You may dial 800-855-8367 and enter in the ID number to listen to the encore replay.

Thank you.

I would now like to turn the call over to our host, David Pasquale of Global IR Partners.

Sir, please go ahead.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's third-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.

Please note that we also just published a PowerPoint presentation on the IR site to accompany today's call.

The slides will be referenced in management's prepared comments.

And at this time, if you could please turn to slide 2. This covers the Safe Harbor.

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 fourth quarter of 2015.

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

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

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

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

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including in our fiscal year 2014 10-K and in 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.

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

By disclosing certain non-GAAP information, management intends to provide investors with additional information to promote 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.

At this time, I'd like to now turn the call over to Mr. Darin Billerbeck.

Please go ahead, sir.

Thank you, David, and thanks for everyone for joining us on our call today.

I'm going to start my comments on slide 3.

Results from the third quarter came in as expected.

GAAP revenue came in at $109.7 million, which was up 3% compared to our Q2.

Our non-GAAP margin was 55.7% and we improved on our net loss to $0.04 per share on a non-GAAP basis compared to $0.07 in Q2.

Turning to slide 4, we have not been afraid to take our new capabilities into areas we felt we could grow faster than the market.

The consumer market was our latest example.

We made a business where others said one could not exist.

We were also able to take advantage of the M&A market earlier this year with the acquisition of Silicon Image.

This significantly expanded our array of products and capabilities: from FPGAs to video IP standards expertise to DTV and AV leadership products to industry-leading millimeterwave technologies.

Not to mention, we benefited significantly from IP sales while collecting reoccurring royalties on HDMI and MHL.

All of these capabilities enable us to have broader, deeper discussions with our existing customers while opening up new opportunities at new customers.

Our portfolio is clearly much broader and stronger today than it was a year ago.

More capabilities equals more opportunities to grow.

At the same time, we've been ahead of plans on achieving synergies from the Silicon Image integration.

What once was a number in the $30 million range has expanded closer to $49 million in actionable synergies.

In line with market environment and our constant drive to build a lean, agile organization, we also took additional actions in the third quarter to resize our Company.

That resizing resulted in a reduction of about 13% of our total workforce.

Our resizing was above and beyond the actions we'd already taken with our stated synergies.

Additionally, this was also in line with our comments on the Q2 call, where we said based on our additional review, we would reduce our OpEx by an additional $10 million to $15 million on an annualized basis and to reach our target operating income.

The resizing numbers actually came in above the $10 million to $15 million stated goal, at around $25 million.

Joe will walk you through the impact this has on our model.

These difficult but necessary decisions aligned our resources with our long-term strategic plan and will not impact our ability to meet our customer needs or further our capabilities.

The bottom line is there were opportunities to reduce the spending in just about every area.

One particular area that is very near and dear to me is R&D.

Since I joined Lattice, the team has worked diligently to evaluate all programs, resources, and capabilities to align them to a long-term plan.

The key has always been to prioritize programs based on the highest potential return with the best chances of winning and defending.

We created compelling affordable roadmap with faster launches and more differentiated solutions, utilizing even more engineering [reuse].

From fifth-generation iCE, third-generation MOC and ECP families, to our newest imaging and millimeterwave products, we continue to strive for getting more out of less while creating solutions that just plain work.

With that, we continue to support and invest all three of our major capabilities: FPGAs, wired ASSPs, and millimeterwave technology.

And we are expanding in all three of our key market segments: consumer, industrial, and communications.

We are gaining traction in our key markets and we feel confident about our business prospects longer term.

If you turn to slide 5, I want to touch on a few examples where we're winning.

Our iCE product family continues to find homes in smartphone, tablets, wearables, vending machines, and even smartcard readers, where only a tiny FPGA can execute the always-on functionality while conserving power.

We are also committed to driving the next-generation HDMI standard to higher levels of performance and capabilities.

Our leadership and expertise will drive the next 4K and 8K TV interfaces, offering significantly higher bandwidth for applications like HD audio and [e-arch].

We expect we will have a nine-month time-to-market advantage in this area.

XO3 is in full production and you can expect to see a fast ramp, similar to what we achieved on XO2.

We just released a high speed version of our successful XO3 product to support up to 900 megabits per second on D5 transceivers.

Our ECP5 product is targeted for compact low-power high-volume application, such as small cells, microservers, broadband access, and industrial video.

ECP5 is the optimal product to add features and functionalities that complement those delivered by ASICs and ASSPs, reducing development risk and accelerating time-to-market.

60 gigahertz is very real.

Our technology has enabled the first 60-gigahertz smartphone.

This design is in production and creating a new use case for a mobile set-top box and mobile productivity solution, lossless point-to-point 1080p with zero latency.

What does that capability really do?

It enables you to play movies or games from your mobile device to your TV without compression or wires.

There will be zero lag, which is perfect for video streaming and gaming.

In addition, we can use the same technology to support backhaul applications for next-gen wireless and wireline networks.

These are applications that demand high speed reliable wireless data transmission over hundreds of meters.

We are already working with key customers to make this happen and there's some exciting growth possibilities.

The important takeaway today is that while the markets are volatile and headwinds remain, Lattice is positioned well to weather the storm.

That concludes my initial comments.

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

Joe?

Thanks, Darin.

If you turn to slide 6, I'll discuss the financial highlights from the quarter.

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

For the fiscal third quarter of 2015, revenue was $109.7 million on a GAAP basis and $110.1 million on a non-GAAP basis.

Gross margin for Q3 2015 was 54.5% on a GAAP basis and 55.7% on a non-GAAP basis.

This includes $1.2 million in charges associated with ramping a dual source 40 nanometer fab and backend capability, which negatively impacted gross margin by approximately 1%.

We expect a comparable impact to occur in Q4 and in Q1 2016.

Total non-GAAP operating expenses for the third quarter were $57.6 million, excluding $6.8 million in restructuring charges, $0.6 million in acquisition-related charges, $8.9 million in amortization of acquired intangibles, and $3.8 million in stock-based compensation.

This compares to our guidance of approximately $60 million, plus or minus 2%, on a non-GAAP basis.

The sequential decrease in non-GAAP expenses compared to Q2 reflects the continued successful integration of Silicon Image and our laser focus on synergy value capture.

Income tax expense for the quarter was $0.3 million.

Cash tax expense was approximately $2.3 million for the quarter.

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

The annualized cash tax amount is largely dependent on foreign withholding taxes associated with our licensing revenue.

On a GAAP basis, reflecting the aggregate impact of the various items mentioned, we recorded a net loss for the third quarter of approximately $24.9 million, or a loss of $0.21 per basic and diluted share.

On a non-GAAP basis, net loss was $5.2 million or $0.04 per basic and diluted share.

For the quarter, basic and diluted share count was approximately 117.7 million shares.

Net cash used in operating activities was $10.4 million in Q3.

We ended the quarter with cash and investments of approximately $118.4 million.

Accounts receivable was $85.3 million at the end of Q3 as compared to $76.9 million at the end of Q2.

Days sales outstanding were 71 days compared to 66 days last quarter.

Inventory at quarter end was $79 million compared to $80.8 million at the end of Q2.

Months of inventory stands at 4.8 months compared to 5 months at the end of Q2.

We spent approximately $4.6 million on capital expenditures and incurred $17.6 million in depreciation and amortization expense during the quarter compared to $4.2 million and $17.5 million, respectively, in Q2.

The interest expense for the quarter was $5.8 million.

On slide 7, you can see our achievement of above-target synergies.

When we announced our acquisition of Silicon Image earlier this year, we committed to synergies in the $30 million range.

We moved this up to $42 million shortly afterwards.

To date, we have increased our action synergies to approximately $49 million.

This amount correlates to actions we have committed to take after the acquisition of Silicon Image.

Additional reductions based on the actions taken this month are not reflected in this value.

If you turn to slide 8, you can see what we've done with our recently announced job action.

We announced a workforce reduction of approximately 13%.

The latest action is part of our overall plan to reduce costs and better align our workforce with the long-term strategic needs of our business.

This is an integral component to our plan to achieve a 20% non-GAAP operating income target.

As a result, we have accrued severance and related costs of approximately $5.7 million as a part of a restructuring charge in Q3.

We expect to incur approximately $500,000 in additional charges associated with this action over the next 6 months.

In taking into account our upwardly revised synergy amount and the job action, we expect to be at an annualized OpEx run rate of approximately $175 million for 2016.

This concludes the financial review portion of the call.

I'm going to turn it back over to Darin to talk about our fourth-quarter business outlook.

Darin?

Thank you, Joe.

In terms of our specific expectations on a non-GAAP basis for the fourth quarter 2015, we expect revenues to be approximately flat to plus or minus 3% compared to Q3 of 2015.

Q4 gross margins are expected to be approximately 57%, plus or minus 2%.

Total operating expenses are expected to be approximately $49 million, plus or minus 3%.

Q4 restructuring charges are expected to be approximately $7 million, with acquisition-related charges, including the amortization of acquired intangibles in Q4, expected to be approximately $9.5 million.

In summary, the macro environment continues to provide headwinds.

We understand this and have proactively sized our business to meet our financial goals without compromising our future growth.

We have clear competitive advantage in many areas with our mantras of low-power, low-cost, small form factor FPGAs, along with our leadership imaging and millimeter wave product offerings.

We have the right team in place that is highly capable and committed to the long-term success of Lattice.

So while the macro environment may not be that great, we understand that cycles don't last forever.

The market doesn't go up forever, nor does it go down forever.

When the macro improves, Lattice will be ready with a leaner operating structure and a powerful solutions portfolio positioned to win.

That concludes our prepared remarks.

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

(Operator Instructions) Jamie [Zitari], Baird.

I was just wondering if you could talk about the opportunities offered by Type-C connectors for Lattice?

Yes.

In fact -- this is Darin, by the way.

You are going to see Type-Cs in a lot of different areas.

The most recent, at least, that are encouraging to us was the Microsoft offering that you've been seeing on all the different phones, tablets and also the chargers.

We spent a lot of time on the European design wins there.

We've also got some additional design wins in other areas, but most of them to the most part haven't ramped as high as we had expected, at least within the Q3 and Q4 time period.

But we are seeing some progress and the latest offerings actually with Microsoft supported by Salcomp are going to be some of the big deals that we are going to see over time.

^

Okay, thank you.

And what is the demand outlook for iCE40 -- the iCE40 type of products in smartphones.

Are there any functionalities which can bring this products back into phones that microcontrollers cannot handle currently?

Oh, yes.

There's a ton of different opportunities.

Again, when we started, we were doing some just basic IR remote and we were doing the barcode label and type features.

Today, there's more RAM on these devices, lower power on these devices, so they can do just about any recognition or detection feature that requires an always-on functionality at extremely low power, which is difficult to response.

So think about the difference between a microcontroller and FPGA.

We can respond very quickly to things like a touch or a voice command, where a microcontroller can't -- there's the slow speed.

On the other hand, a microcontroller can do slow calculation, which are probably a low-power application that they are better at than an FPGA.

So we look at those applications and again, it's almost like instant on, always listening, very, very low power.

^

Thank you.

And just one more question: could you give the status of industrial demand in Europe, which is I know is a higher-margin business for you?

Yes.

For this quarter, if you look at Europe in general, it was down a little bit.

But we are expecting I think next quarter for it to be just flat or slightly up.

So Europe hasn't been as impacted by the macro events in China as some of the other.

Europe and America actually have been kind of our high points.

China has been really the lowest point just to date.

Japan is suffering a little bit, but China is really the big digger for us.

Thank you very much.

Christopher Longiaru, Sidoti & Company.

Thanks for taking my question.

Could you just talk a little bit more around some of the opportunities?

Can you just talk more about some of the opportunities around 60 gigahertz and kind of how those filter in from a timing perspective?

Like, obviously, some of the opportunities that you have in smartphones and consumer are faster.

You talked about backhaul a little bit.

That obviously takes a little longer.

Just some of your long-term views on that?

So I think there's really going to be almost 5 different versions of millimeterwave, which is 60 gigabits.

And it goes between 20 and 70 gigahertz or that range.

But for the first one, if you talk about Snap, which is really kind of our very close proximity high-performance data transfer, there's 2 opportunities there.

They won't be huge in 2016, but we are starting the development.

One is kind of the connector-less laptop, where you plug it into a docking station and there's no more connectors.

And that's all kind of like USB functionality at USB Type-C -- 3.1 Type-C performance.

So 6 gigabits to 12 gigabits, where you put your laptop in and basically, there's no connectors on the laptop, no connectors on the docking station.

That's one.

The other one is simple sync and transfer, where you just drop your phone down and as you are charging it, you could transfer the data or put it next to a device and transfer the data.

The speeds of that type of a data transfer can download a high definition movie in probably about 7 to 10 seconds.

So pretty darn fast there.

So that's kind of on the consumer portion of it.

Then there's also a wide gig portion of it, where Intel and Qualcomm are driving different angles.

Intel is driving from the laptop; Qualcomm is driving from the smartphone.

So you're going to see both of those start rolling out in the next couple of years, albeit not big.

We won't play significantly in the phones or the laptops; where we will play in the accessories.

So our Gen3 radio that currently does the [LayTV] YHD solution also works for a wide gig.

It just has a different baseband.

So that type of a market I don't expect to happen for 2 to 3 years in volume.

The bigger one that we really differentiates ourselves on is this hundreds of meters solution, where you are working with the big carriers that want to have fiber-to-the-home or fiber-to-the-campus or through a different media.

And it's a high-speed data transfer with multiple antennas and larger baseband, but it uses a similar radio as the Gen3 radio that we use for YHD and other things.

So I actually think the biggest differentiator for us today is going to be that backhaul wireless solution.

That's a big market.

It's a big differentiator.

A lot of the FPGA guys don't have those capabilities and we are competing with completely different people in that market.

We'll also be successful in the consumer stuff, but we're not going to see triple digit numbers on wireless probably for the next 3 to 5. The biggest seller today is YHD, which is the 1080p solution that we do across on the LayTV to the TV.

And that's just flat out 1080p wireless that goes from any mobile device directly to your TV.

And all the TV needs is a HDMI connector to a receiver and we make that, too.

So we make both the transceiver and the receiver for both of those applications.

One in the phone; the other one goes in the TV.

And some of those are already in I think the Samsung TVs.

Is that right?

No, they are actually in the LayTV phones and the LayTV TV dongles.

Samsung has not put 60 gigahertz into TVs today.

And my other question has to do with -- you guys cut a lot of costs out.

Can you talk about the $49 million in synergies.

How much of that was gross margin or on a cost of goods sold line.

Just to get an idea of kind of what a normalized gross margin will look like when some of the industrial demand comes back.

Under $5 million was gross margin related of that $49 million.

Okay.

Great, all right.

That's all I have for now.

Thanks, guys.

I appreciate it.

Mark Lipacis, Jefferies.

Thanks for taking my question.

First question on the OpEx savings going forward.

The bogey looks to be $175 million run rate in 2016.

Is that for the full year or do you expect to hit that run rate at some time during the year?

And how should we think about the savings moving through the year until you get to that run rate?

That's a full year.

So we expected to leave this year with our synergies intact and then the headcount actions that we took are virtually completed by the end of this year, also.

So it's a full-year run rate and it will fluctuate throughout the year because you will have different periods where MATs are higher and so forth.

So there's some variability in there, but that's the annualized number.

So in Q1 -- so the $49 million of OpEx that you guided for Q4.

So you'll have some kind of a step down in Q1 -- is that the right way to think about it?

And then kind of bouncing around plus or minus from there?

Yes.

That is the right way to think about it.

Correct.

Okay.

Great.

And then on the different product cycles that you highlighted, which ones do you think have the best opportunity to provide an upside surprise in 2016?

Thank you.

Mobile devices are for sure the highest probability as we go through it.

I don't think the comms infrastructure buildout is going to be significant next year.

In industrial, when it snaps back, it doesn't snap back in those giant ways.

So I think you are really talking about the mobile platforms, albeit being smartphones and tablets.

And it's really trying to get into some of the bigger design wins like we had the past.

And I think those are the opportunities that really change the game and they drive it lot of EBITDA, if you will, that we can pay down the debt.

Okay.

Thank you.

Jorge Rivas, Craig-Hallum.

Hi, guys.

This Jorge is sitting in for Richard today.

First question on your communications segment.

I wonder if you can provide some color, given that many other companies haven't actually made a call on the recovery in the China LTE buildout, but you had a nice upside there.

So I'm wondering what drove the upside?

Whether this was driven by a design win or maybe you are seeing some benefits from the Altera acquisition.

Yes, I would love to say the latter, but that's not it.

I think the bottom line was Q2 was so bad that when Q3 came back, we were up almost 20% between Q2 and Q3.

So it's kind of stepping back, but it's not reaching the Q4 level.

We actually thought -- we originally entered the year and talked to our key comms guys that they said, yes, Q2 is an abnormality.

Q3 will come back and then Q4 will be strong.

We are not seeing that.

So we got an uplift in Q3, which was significant because Q2 was low.

But we are kind of seeing it just flattish between Q3 and Q4, so it's not stepping back up to the Q1 levels.

Great.

That's helpful.

And one last question.

So wondering about your largest mobile customer in Korea that are slated to introduce their next flagship product in early calendar 2016.

So should we anticipate that you still have an opportunity to get in there?

We don't comment in any of our large OEMs.

We don't have any specifics on any of those things, but I can tell you is we feel comfortable with the design win opportunities that we have.

And again, there are always possibilities we can't commit to them as we walk through it.

But I think we have to be careful with Samsung.

And I'll be a little bit more specific with Samsung because they are going through their own structural changes in their mobile world because they are having a difficult time, I think, in the high end.

And so as Samsung moves forward, the question is will they have the volumes that they once had in those high end products?

Because it feels like based on some of their earnings releases I've seen in the last couple of days that there's one very, very dominant figure in the high end.

And that does impact the Chinese manufacturers also.

Because remember, last year, we were very focused on winning China Inc.

in the mobile opportunities, which we thought would be pretty significant.

And we got all those wins, but the volumes just didn't materialize.

So the winners in Asia, from what I can tell, seem to be Huawei, LZ, and then possibly HTC if they make a comeback.

But right now, they don't look like they are making it.

So as we kind of walk through this, we are seeing the big winners in China being the Chinese OEMs, which are Huawei and ZTE.

Obviously, Samsung will be there.

I don't think anybody else survives long term.

Okay.

That's all for me.

Thanks a lot.

Bill Dezellem, Tieton Capital Management.

The gross margin forecasts that you gave is nicely up from the third quarter.

And I don't think that I have clarity on how you are getting that.

It's a mix issue.

So we have a better mix going into Q4 than Q3.

We've been targeting in the range of 56% to 60% going forward and we're still in that range.

So when I see the high end, we move it up a little bit.

It's flat out mix.

It's really consumer down, industrial flat to slightly up, and licensing up.

That's the mix.

So you are going to see that come up.

And over time, does licensing actually increase as a percentage and therefore that gross margin target will continue to grow?

Yes, it increased a little in Q3 because it was pretty low in Q4.

So -- but we're seeing that as being stronger than what we would have thought.

So that's what really lifts it up because that's a fairly nice gross margin.

And it's pretty steady, so licensing is fairly predictable.

It gets a little bit lumpy with some of the core work that we do, but it's really predictable.

So as you see flexes in consumer, for example, licensing will have a greater impact.

That's helpful.

And then did we hear you correctly that relative to USB connectors, you are really still not seeing much in terms of the ramp that is still in front of us?

Yes.

Obviously, we are disappointed by the USB Type-C.

I actually own a phone that has USB Type-C that probably no one in the US has, which is the LayTV, which has our 60 gigahertz solution.

And I hooked it up to our TV at home just to see how well it would work.

That USB connector is phenomenal -- better than anything I've ever seen on any appliance ever.

And I wish you had it everywhere, but the problem is those USB connectors are only starting to become available.

We were told they would be available in early 2015 and I've only seen two devices that are using it today.

So as Microsoft and these other big manufacturers embrace it, then you are going to see that next year.

What that means for us, Bill, is that you are going to see a transition from that FPGA that we explained to you to our ASSP product pretty quick.

We thought we would ship more FPGAs into that market than we did, so these guys will actually -- some will use an FPGA solution, but they will transition to our ASSP solution faster than what we thought, which is good.

You are not going to lose the business, the good news.

But the bad news is it's been played in the production ramp.

So this is a case where had you not purchased Silicon Image, you almost would've been skipped over -- not totally, but almost.

But now you'll be able to participate in [by that] delay.

Yes, absolutely.

And let's not forget some of the things that we can do that nobody else can do, right?

So we have the ability to put HDMI and EDP over USB Type-C and we can either do that inside of the device or we can do it outside of the device.

So the nice thing about having that image expertise now is, like you said, I don't get to find out with an FPGA.

But more meaningful is that we can be the people that can provide the access of video out of any mobile device if they use USB Type-C.

Thank you.

And one additional question, ECP5 -- did that ship in volume this quarter or was it just introduced this quarter?

We've been sampling it for over a year.

It's been in production since early 2015, but it's a slow ramper because of the complexity of the designs.

We are shipping some volume today, but not really material that would affect.

But we do expect that over time to be a faster growth than what we saw in its predecessor, which was ECP3, just because there's more solution and it services more markets.

ECP3 was a comm-centric device.

ECP5 handles Het/Nets, but also microservers and multiple video applications in industrial.

So that's a much more diverse product than we saw with ECP3.

We are actually seeing more design opportunities in the industrial space on 5 early on than we are across comms.

Congratulations and thank you both for the time.

[Prudy Ho], China Everbright Securities.

Hello.

Good afternoon, management.

This is (technical difficulty) from China Everbright Securities overseas TMT team.

And I guess I'm the newbie here.

So my question is regarding your iCE40.

So I'd like to understand more about how do you see yourself in supplying this with the cell phone market.

Or do you more see yourself in supplying it to the Internet of Things market?

So along the lines, I'd like to know your view on the Internet of Things market size expansion going forward?

[That would be my] question is about --

Okay, let me -- before we go too far -- so the iCE 40 product, the first [expantiation] of it was in the smartphone industry doing IR remote, barcode label, those things.

As it's evolved, it's created -- it actually has more DSP functionality and even lower power with different RAM configuration.

What that enables it to do is it can actually do very, very low power instant-on features, but it can also do display and sensor interfaces that an application processor may be asleep and not want to do.

So you'll find applications like in the Pebble Watch, we do something different than we do in the Samsung Gear, which might be different than something we do in the Citizen Watch.

So each one of those things -- in one case, we interface to the GPS.

In another case, we do the display.

In another case, we do the sensor.

And then finally in another, we will do a simple Bluetooth wireless solution for them.

So you look at us as a low-cost low IO product than can interface between just about any one of the interfaces or the displays that they have.

So that's really what it does in wearables.

And then in smartphones, you want to think of it more as detection as anything.

It's a product that's sitting idle that's waiting for either a detection or a recognition feature.

So it could detect your voice; it could recognize a fingerprint.

It can do an iris scan.

It can do multiple different functionality, depending on what the customer wants.

So it's a very flexible device that they can program to meet their needs or we can provide a canned solution matrix out of about 20 different opportunities that we have.

The Chinese manufacturers typically wants an off-the-shelf solution, whereas the big OEMs want to have their own design resources or have us do it for them.

So it's a very flexible device, very low power, and enables people to put products into their products that are very low cost.

Okay.

And would you mind also commenting on (technical difficulty) ZTE and Huawei?

In the comms market or in smartphone?

Smartphones.

So in smartphone, like the plank -- for instance, there's the plank phone that Huawei has.

There's different versions of the plank.

We do support them in multiple features -- I can't tell you what they are.

ZTE -- also we support ZTE.

So both of those customers we have some pretty good relationships and capabilities.

But they also ship -- let's not forget: they ship high-end phones, they ship medium-end phones, and some of the low-end phones.

I expect both of those manufacturers to move up to the higher end smartphones in China long term because I think that's where the money is for them.

So both of them will be more the innovators in China as opposed to what you see out of Xiaomi or Oppo or some of the Internet sales phones.

So I think Huawei and ZTE will lead that.

The latest smartphone I've seen from Huawei is pretty impressive.

The screen is bigger than any screen I've seen as far as the thinness of the edge and the side.

So I think these guys are being really creative in the form factors, but don't count out ZTE.

They have some pretty fabulous phones, too.

Great, thank you.

Rob Jost, Invesco.

I have a couple.

I heard just general comments around where you were seeing weaknesses and strengths.

I was cut off for a second with the operator, so I didn't hear all of what you said.

It sounded like you had a bounce back in -- was it your comms in China?

Yes.

We had a bounce back in comms for sure.

So as we kind of walked through it, comms -- industrial was fairly flat and then consumer was down.

So we had licensing and communications up, industrial fairly flat, and then consumer was down.

That's what Joe was talking about.

If consumer continues to go down, then our margins go up and that's the mix.

Okay.

So then looking out to the fourth quarter then, now that you've had this kind of correction, I guess, from the second quarter to the third quarter with these comms, is your outlook that it steps down again?

Or is it sort of flat from 3Q?

No, the way I would look at it today, at least the way that we are looking at the forecast that we've given you guys, is consumer we expect to be down slightly once again.

Industrial I think will be flat to slightly up.

I think that licensing will be up and then communications will be flat to slightly up.

The comms -- so again our consumer, I think, will go down.

And that part of that is that SIMG has a seasonality in Q4 and we knew that as we walked into Q4.

We just thought that that the macro for comms and [DSTE] and some of the t-comm stuff that we had invested would make up more for some of the downsides in the other areas.

And comms isn't coming back as much as we thought and neither is distribution worldwide.

And that's all driven by the softness in China.

Okay.

And then my last question is just around the cost saves.

I am looking at your slide 7. It looks like on the 40 -- I'm trying to figure out here.

What have you actioned on?

Have you actioned on all $49 million?

Yes.

Okay.

So then what was the impact for the quarter of the $49 million?

The impact for the quarter in terms of the reductions?

Yes.

We're thinking -- hold on.

That's a good question because we've been tracking it as we go forward.

I heard you say comms were about 5.

Yes.

COGS were 5 of the total.

So that's not all fourth-quarter related.

Oh, okay.

Okay.

So it's about $2 million, $2.5 million this quarter of what impacted in this quarter.

So we had some over time.

Okay.

All right.

So we're still -- I was going to say we still have yet to see the impact flowthrough, okay.

I thought we were further ahead than that.

Correct.

You've seen some of the impact flowing through because you've seen reductions in our OpEx over time.

So we were at 63 last quarter.

We did 56 this quarter, so we've seen that step down.

You see $49 million going into the next quarter and then you'll see another step down as we hit this $175 million going into next year.

Some of that is still synergies, because they will happen in Q4, and you will see the benefit in Q1 and beyond.

And then you will also see the reduction of the actions that we just took begin --

Okay.

When do you see the $49 million hitting full run rate?

Is that early 2016?

Q1.

Q1.

End of the year, it will be done.

Okay.

Perfect.

Okay.

Thanks, guys.

Steve Hessman, Pineridge Investments.

Just one question.

What's your target leverage and how do you plan to pay down the debt?

So we haven't got a target leverage that we've been operating to.

We've got a debt sweep that we have to adhere to based on free cash flow, 70% sweep.

So our plan is debt first before we do anything else in terms of buyback or anything like that.

So debt is clearly our number one priority.

What is your current leverage?

Growth and debt payback.

Sorry?

What is your current leverage?

Current leverage I think is 4.5-ish.

Okay.

Thank you.

Chris Rolland, FBR & Co.

Hi, guys.

First question -- kind of bigger picture I guess for Darin.

So Darin, as we're looking into 2016, what new products are you most excited about?

What's going to be a potential real needle mover for you guys?

Well, the newest product that I most excited about is one that we developed a year ago that is a pretty good killer solution in smartphones.

And I won't tell you exactly what it is, but the nice thing is that we have it and we are rolling through it, which is good.

But the things that excite me that are coming up -- we've got a pretty interesting product that we're going to come out with next year which is more of a programmable ASSP.

And this is the first time where we've taken the benefits of a specific market segment, hardened a lot of the IP, and then made it programmable.

So it doesn't have as many IOs as a traditional FPGA, but it's a lot more flexible and it's a target at the specific market.

And that's kind of the first expantiation of what we said that we would do with the acquisition-related capabilities, which was let's tie some of the video capabilities that we have into a product that has the flexibility for a specific marketplace.

I won't tell you exactly what it is, but that's exciting to me.

The other one is the millimeterwave backhaul is exciting because I think it's going to get more traction than people think.

Not be big in revenue for 2016, but we should see some good stuff in 2017.

And then let's not forget the millimeterwave.

And what we're finding is a very interesting play with the Y-HD in medical and in the industrial field, where we are starting to see medical -- like a surgery room that wants to go completely wireless so they don't have any cables within the room that have to be cleaned.

So those are some very unique opportunities that we are starting to see more applications for because we have the product.

And it's something that direct communication between, let's say, a surgical instruments and a display without having cables strewn all over the place in the surgical room.

So healthcare actually is turning out to be something that may be a good potential for us that's close proximity.

60 gigabits is big and then the backhaul.

I don't think Y-Gig will be big in anyway next year, but I think the other capabilities will start to grow.

The smartphone product sounds pretty exciting.

Do you already have a design win for it or you won't be sampling until next year?

No, we have a couple of design wins here and there with that product.

I can't comment on the design wins in that particular area because we're not supposed to.

So what we try to do is stay kind of agnostic to any of those comments.

But the bottom line is we built the product a couple of years ago -- actually a year and a half ago.

It took a while to get it perfect for the smartphone and I think that will be one of our larger possible growth opportunities.

Cool.

One more, if I can.

So for USB 3.1 C, some other guys are making some noise out there -- Fairchild, the NXP in particular.

So would you consider this a back-half disappointment for you guys?

Or are you guys where you thought you would be?

And how do you look at 2016?

Are there still a lot of great opportunities for you guys?

Yes, absolutely a disappointment.

When we came into the year, we had -- I was looking at it I think in April.

And there was $53 million of opportunity that I was looking at for USB that -- obviously, it's lifetime revenue that we were looking at that was just in front of us.

And the majority of that stuff just started pushing and pushing and pushing and pushing.

And there's so many different ways that you can architect USB Type-C because they have the DC, PD, they have all the charging, which is the wall stuff.

And then you also have the video and you have the high speed and slow speed data.

And so as we started focusing on the roadmap, we focused on areas where our video expertise and the switching expertise enabled us to go after some pretty good capabilities and some prospects.

It doesn't mean that we didn't win with the FPGAs early because we do have quite a few different design wins.

Albeit, I think people were over aggressive about what they thought our customers thought that they would ramp.

So I think that the accessory guys were ahead of the platform guys, meaning there weren't enough devices that had USB Type-C designed into them for the accessory guys to support, which drove the volumes down.

So yes, absolute disappointment.

We do expect to have some solid USB growth next year, albeit it's going to be different than we thought.

It may be more on our ASSP than we thought versus our FPGA.

Awesome.

Thanks, guys.

Todd Morgan, Jefferies.

Good afternoon.

You guys have covered a lot of stuff.

I did want to try and follow up on the incremental cost saving comments that you'd made earlier.

This has I guess been a big part of the story and you've talked a lot about some of the things that you've done already.

Can you at least generalize about what some of those areas are and kind of how far you are going in kind of uncovering these additional opportunities that you've laid out?

So are you talking about the synergy or the recent action that we took to kind of resize?

I guess both, right?

Because you've increased those numbers kind of all along.

So on the synergy side, it's a little bit different because the synergies were just combinational effect.

And we looked at that and we started finding more and more opportunities in that combinational effect and that's related to overlapping capabilities, capabilities that we can streamline, facilities that are overlapping, combining facilities -- that kind of thing.

So that was all associated with just bringing the two companies together and optimizing.

That's where the $49 million came from and that's just -- as we dug deeper, more and more came out.

It doesn't do anything to hurt our overall capabilities and it kept us pretty close to the time frame of projects that we were anticipating meeting as the two companies combined.

The synergy action or I'll call it the -- not the synergy action, but the headcount and workforce resizing that we just did was really a function of looking at what do we need to optimize short term versus long term?

So it was a roadmap-driven exercise that we leveraged what we looked at our strategic long-range plan and said what can I move out, what can I move forward, what can I afford to drop?

Because it's really not a capability that we want to keep.

So there was a lot of work done in R&D around timing and when projects would be completed as well as what we can combine together.

So this one was one where we actually took capabilities and we do lose some short-term speed in getting things done.

We have not sacrificed any long-term capabilities in this exercise.

Does that make sense?

Sure.

And again, especially, it sounds like there's a lot of the sort of R&D assessment and -- is a big part of what you are talking about here.

Yes, R&D -- let's not forget.

R&D was a big part of our spending overrun for both companies.

And so when we combined them, we said look, if we are going to go ahead and hit an operating income of 20%, R&D needs to be sitting around 19%, 20%.

So we really looked at the programs and then we looked at the capability.

And what we tried to do is really structure ourselves so that we have certain capabilities in the United States and then other capabilities overseas.

So we picked up facilities in Hyderabad, which are capable of doing some future designs.

We also have design capabilities in China and the Philippines.

In the Philippines, as Joe was mentioning on some of the synergy things, we closed Taiwan and moved everything to the Philippines, which really lowered our overall cost.

So we spend a lot of time really looking at the capabilities.

And the next phase of this thing is going to be making each site more capable of doing imaging and FPGA along with some of the millimeterwave.

So the challenge we have long term is not just having specific resources that can do specific things, but really kind of having everybody in a lot of the sites be able to do the different capabilities.

And that way, we have more flexibility.

That's helpful, Darin.

Thanks.

(Operator Instructions)

Thanks for taking my follow-up.

Just a quick follow-up on the HDMI commentary that you made.

What is your revenue outlook for 2016 for HDMI?

And how does the ramp-up of 4K TVs affect that revenue outlook?

So we would expect -- I won't give you specifics, but I'm going to expect that HDMI revenue in 2016 actually goes down slightly because of the transition to the next specification.

And then in 2017, it comes back up.

So on a Silicon basis, right.

Now, the royalty basis remains fairly constant through time.

So you'll see the royalty stuff continue -- that revenue stream continues as long as that's particular.

And then the next version just adds more to that royalty base.

So we expect the HDMI as it sits today will slow down and then in 2017 will pick back up.

Perfect.

That's very helpful.

Thank you.

And that is all the questions we have.

Sir, do you have any other further remarks?

We appreciate the continued support from all of our shareholders.

Lattice has more capabilities than ever with multiple flavors of FPGAs, imaging products, and millimeterwave technology.

More capabilities obviously means more opportunities to grow.

Our goals remain clear: continue to grow faster than the market and focus on increasing our shareholder value.

And it really all comes down to winning new opportunities while actually keeping flawless on the ones that we have.

So thanks again for your support.

Sanjay Devgan, Columbia Management.

Just a quick question on the gross margin.

You know, you talked about 57% gross margins next quarter, but there was a $1.2 million I guess charge that was kind of built into that.

And you guys talked about that comparable impact occurring in 4Q and 1Q.

So if I'm reading that correctly, does that mean that your gross margins would have been higher by that $1.2 million without that impact?

And that should kind of unwind as we get into Q2 and we should run at a higher gross margin rate?

Yes.

So the answer is we are going to run at a gross margin that is always dependent on mix, Sanjay.

So we know that.

But that particular charge is kind of a dual sourcing charge because we are going to have to move.

We have to move manufacturing to sites now versus fabs within the same site.

So there's requirements by some of the larger OEMs that say you have to have your product in different sites.

So that's why we had to take that charge and that was an unforecasted charge that hit the gross margin for this quarter.

And it will continue for a couple quarters as we kind of walk through this.

And it would've been higher, you are correct.

Our gross margin would've been higher.

I wouldn't call it up next year because of this dual site going away, because mix obviously changes big time.

Got it.

Okay.

That's helpful.

Thank you.

And sir, we do have no other questions.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.