萊迪思半導體 (LSCC) 2016 Q1 法說會逐字稿

Good afternoon.

My name is Terry and I will be your conference operator.

At this time, I would like to welcome everyone to the Lattice Semiconductor Q1 2016 Results Call.

(Operator Instructions)

Thank you.

I would now like to turn the call over to our host, Mr. David Pasquale.

Thank you, operator.

Welcome, everyone, to Lattice Semiconductor's first quarter 2016 results conference call.

Joining us today from the company are Mr. Darin Billerbeck, Lattice's President and CEO, and Mr. Max Downing, Lattice's Interim CFO.

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

If you have not yet received a copy of today's results press 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 have also published a PowerPoint presentation on the IR site to accompany today's call.

Before we begin the formal remarks, I will read 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 second quarter of 2016.

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 the risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended January 02, 2016 and our quarterly reports on Form 10-Q.

The Company disclaims any obligation to publicly update or revise any such forward-looking statements to reflect events or circumstances that occur after this call.

Our prepared remarks also will be presented within the requirements of SEC Regulation G regarding Generally Accepted Accounting Principles or GAAP.

Some financial information presented by us during today's call will be provided on both a GAAP and a 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 this call, you will find that the required presentation of and reconciliation to the most directly comparable GAAP financial measure is in the Company's earnings press release.

I would like to now turn the call over to Mr. Darin Billerbeck.

Please go ahead, sir.

Thank you, David.

And thanks to everyone for joining us on our call today.

First quarter results were inline with expectations.

Revenue was at the low end of our guidance range while gross margin was at the high end.

The big Q1 takeaways are, number one, there were no surprises in the quarter.

Despite a softer consumer market, we hit our plan.

Importantly, we have increased visibility into a stronger second half and expect Q1 will represent the low point in revenue for the year.

Number two, proof points at the top five consumer OEMs for consumer mobile FPGAs.

Since we introduced our consumer mobile FPGAs five years ago, all of the key consumer mobile OEMs have embraced these products to bring leading edge innovation to the market.

We have solid wins across the board and continue to see momentum in emerging consumer markets, things like virtual reality headsets, drones, mini-projectors, and various camera technology.

Number three, we're investing to drive growth [for] prudent, we chose to make some additional investments in Q1 to drive future growth.

We have additional investment opportunities in Q2.

We continue to receive opportunities to build products that are directly inline with our capabilities and our Company vision.

These products utilize our skill sets in imaging technology along with our ability to lead in new connectivity standards.

We see these requests as both proof points and prudent risk taking to secure more wins at larger consumer mobile OEMs long-term.

The bottom line is our team is executing to plan.

In addition to the top five consumer OEMs embracing our capabilities, we are also working on many new growth opportunities.

These growth opportunities contributed to our diversified FPGA growth in Q1.

What is also interesting is we're now seeing many more opportunities in consumer markets beyond smart phones.

These opportunities our not as large in totality but the diversification is always good and the margins are higher.

The other market reality is that the consolidation of the industry has made many customers nervous.

Customers want to ensure partner stability and they need to have someone that will invest to support the product roadmaps.

They cannot afford to be disadvantaged by a supplier phasing out or dropping support of product lines or increasing lead times.

Even worse, someone that raises prices.

Lattice has staked out the position in the market as a reliable partner.

We have proven our ability to deliver high volume, high value solutions to the world's largest OEMs and to customers launching innovative new products that harness the power of the smartphone, smart home, and Internet of Things.

To give you a sense of the new opportunities we're winning worldwide, in Japan we were qualified as a premier supplier to OMRON, which opens up new opportunities for ASIC replacement.

We also had additional wins in the 4K TV market out of Japan and continue to gain traction in imaging with our XO2 product lines.

In Korea we expect to see further XO gains led by wins including the state of the art camera which has started mass production and will potentially launch into 60 countries worldwide.

This is on top of the potential revenue opportunities in both 4K TVs and mobile.

And our founder member status in the HDMI consortium continues to pay off for us, with recent wins including HDMI audio products.

In the Asia-Pacific region we are fully entrenched in all the top guys in consumer and cost.

We're making solid progress on a socket replacement at a top three LED control supplier in China.

This follows our displacement of a competitor's solution at another China-based server main board and backplane supplier.

Our team is also securing wins at China's leading drone manufacturer in addition to our motor control wins already to use our YHD solution for a wireless gimbal.

Our iCE product line also won us another customer for video synchronization and IO expansion in a virtual reality display.

Additionally, we secured YHD wins at another customer to enable and innovative detachable micro-projector.

These are just some of the recent examples.

We're having the same level of high success in the US, Europe, and from our industry channel.

We have a lot of runway ahead of us as we deliver on our promise of low power, small form factor, and the lowest cost per IO solution.

Within that, we expanded our FPJ family of products in Q1 with the addition of the MachXO3 10K devices.

These latest devices bring expanded IO and logic support for control PLD applications.

Increased on memory improves picture clarity for low-cost video bridging and large monitor displays.

We also announced a joint venture with MediaTek in Q1 to drive 4K ultrahigh definition over USB type C connectors.

There's a lot of potential demand for this solution in the smartphones and accessory markets in the growing 4K ultrahigh definition market.

The increased activity we're seeing is a positive reflection on the entire Lattice team and the value proposition we offer.

The macro isn't perfect right now but that's okay.

We continue to gain momentum in all our businesses which gives us confidence we can grow in the future.

Let me now turn the call over to Max for detail on our financial results.

Max?

Thank you, Darin.

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

For the first quarter of 2016, revenue was inline with our expectations at $96.5 million, both on a GAAP and a non-GAAP basis.

When compared to our fourth quarter, revenue declined 4.7% due to weaknesses in mobile and consumer, coupled with seasonal declines in licenses and services.

These were partially offset by strength in our industrial market.

Gross margin for the first quarter was 59.2% on a GAAP basis and 60% on a non-GAAP basis.

Our Q1 margin benefited from a higher margin product mix along with volume related purchase and manufacturing efficiencies.

Based on the rebound in consumer revenue expected in 2016, we expect gross margin to more in line with our long-term mid-50% target for the full year.

Total non-GAAP operating expenses for the first quarter were $51.9 million, excluding $5.4 million in restructuring charges, $8.7 million in amortization of acquired intangibles, and $4.3 million in stock-based compensation expense.

Our Q1 OpEx was slightly above our outlook due to focused investments we chose to make to pursue growth opportunities at strategic customers.

In addition, we incurred higher fees for professional services.

This has us currently tracking to the higher end of our OpEx plan for the year but still within our stated range.

We mentioned on the Q4 call that we had incurred an impairment charge related to Qterics which had been acquired along with the Silicon Image business.

In April we closed the sale of Qterics to a strategic buyer.

This follows our decision to no longer pursue the data services business and is in line with our commitment to allocating resources to the core business operations that will drive Lattice's long-term profitability.

The net cash proceeds from this sale will be used to pay down debt in Q2.

Going forward this will not have a material effect on our business.

Income tax expense for the first quarter was $1.9 million.

Cash tax expanse was approximately $2.5 million for the quarter.

We expect tax cash expense to be between $8 million and $10 million for the full year.

Our GAAP net loss for the first quarter was approximately $19.7 million or $0.17 per basic and diluted share.

On a non-GAAP basis, our net loss was approximately $1 million or $0.01 per basic and diluted share.

For the quarter, basic and diluted share count was approximately 118.8 million shares.

Net cash provided by operating activities was $23.1 million in the quarter.

We ended the quarter with cash and short-term investments of approximately $116.5 million, an increase of $13.9 million over the fourth quarter, reflecting our commitment to consistently generate positive cash flows.

Accounts receivable decreased to $84.4 million at the end of Q1, down from $88.5 million at the end of Q4.

Days sales outstanding remained flat quarter over quarter at 80 days.

Inventory at the end of the quarter was $82.6 million compared to $75.9 million at the end of the fourth quarter.

Months of inventory stands at 6.3 months compared to 4.8 months at the end of Q4.

This increase in inventory was planned to support the expected ramping of customer programs in the second half of the year.

We spent approximately $5.7 million on capital expenditures and incurred $17.3 million in depreciation and amortization expense during the quarter compared to $6.6 million and $17.9 million respectively in Q4.

Interest expense for the quarter was $5 million.

This concludes the financial review portion of the call.

I will now turn it back to Darin for our outlook.

Thank you, Max.

In terms of specific expectations on a non-GAAP basis, revenue for the second quarter of 2016 is expected to be between $97 million and $103 million.

Non-GAAP gross margin percentage for the second quarter of 2016 is expected to be approximately 57%, plus or minus 2%.

Non-GAAP operating expenses, excluding acquisition or restructuring related charges are expected to be approximately $47.5 million, plus or minus 3% for the second quarter of 2016.

In summary, it all comes down to execution.

Everything is in place for a strong second half 2016.

We delivered on our goal of ramping wins at the top five OEMs and are now pushing to ensure growth beyond the coming quarters.

There's a great opportunity in front of us created by the strength of our solutions and our market position.

Our mission is clear, to work with our customers to accelerate innovation for a better connected world.

This will drive our targeted revenue synergies and growth towards our operating income goal of 20%.

That concludes our prepared remarks.

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

(Operator Instructions) Tristan Gerra, Baird.

Hi.

Good afternoon.

Could you talk about what was the main driver for the double digit growth year over year in FPGA revenue in the quarter?

And then also if you could give us some color on what you're seeing in wireless infrastructure and notably near-term what type of trends do you see at your larger China customer?

Yes.

So, the first question, I think that when we came out of Q3 and Q4 of last year, you were seeing a lot of channel decreases as far as inventory levels.

I think everybody was leaving things quite a bit lower.

I don't think we're going to see double digit industrial growth as we kind of move through the second half of this year.

I think that just shored up some of the potential issues that were caused last year.

I think the macro recovery will help us, plus some of the opportunities.

We spent the last 2.5, 3 years trying to increase our opportunities 30% quarter on quarter, year on year.

And I think we're starting to see some of that as we're walking through the upcoming quarters.

The coms market, as I said last quarter, Tristan, I thought that the coms market was not particularly going to be good this year, probably be flat to down.

And I think if you looked at Xilinx's release, you're seeing the same thing.

So, I expect going from this quarter to next quarter we may be up just a little bit but that's just because some of the artifacts in Q1 caused by some of the governmental issues impacting one of our China OEMs.

I think that stuff recovers a little bit, but I think coms for the year is still what we thought, flat to slightly down.

Q1 to Q2, we think it's going to be probably flat to slightly up.

That's useful.

As a follow up, are you maintaining the full year revenue guidance that you provided on the last quarter?

We're not reaffirming the guidance as we kind of look at it today.

We're just looking at it this particular time as we think there's nothing to dissuade us from thinking that guidance is not inline with the things we said.

So, I think we're okay from the prospectus, Tristan, of we're right where we want to be in Q1 and Q2 to be centered.

And if all of our consumer mobile handset ramps throughout the year happen, we're in good shape.

Great.

Thank you.

Prudence Ho, Everbright Securities.

Hello, Darin and Max.

Thank you for taking my questions.

My question is about a more sensitive topic from China.

Given that the unique group in western digital didn't get through, what do you think the major hurdles are in general with foreign companies, especially with Chinese SOE background, trying to take up a major stake in a US semiconductor company?

And having said that, what's the view on them trying to creep up their stake in your company?

We don't typically comment on any of the Chinese entities doing things.

We can tell you that there are governmental regulations on a lot of things, as you're well aware of, for technology and things like that.

But the bottom line is this, we will treat Shinhwa just like we treat all of our investors.

We currently have had no communications with them.

But all of our large investors we talk to just about every quarter.

I'm sure they'll reach out and have the same discussion as a large shareholder to understand their investment profile and also understanding what their investment needs are as we walk through.

But it's the same communication we would have with any of our large shareholders.

Thank you.

Along those lines, instead of just taking over, do you think it would be easier or would it make any difference if the foreign entities tried to form a strategic partnership?

A lot of that's conjecture where people want to say what's going to happen.

There are US regulations on how much stock a person can have without approval.

So, I think as we look at this thing, it's business as usual for us.

We're trying just to grow.

We're trying not to get too hung up in the different rumors.

We're flattered by the fact that a Chinese -- let's just say investment firm is investing in Lattice because they see the potential growth prospective that we do have in the Asia region and I'm sure they'd like to share in the growth of the company stock.

Okay.

Thank you.

And finally, I'd like to make sure that -- so, your market positioning is still different from signings and in terms of doing storage and cloud computing?

Is that still the case?

Yeah.

We felt this primarily on the cloud outwards.

However, we do cross lines with Xilinx and Altera in the entire wired and wireless backhaul and we also cross with them on the server platforms for controlled PLD.

We think our portfolio is quite a bit stronger because of our focus on low power, low cost, and the movement to kind of the heterogeneous network where there's more different server applications outside that require power efficiency which we lead in in the FPGA market.

So, we're very happy with our positioning in those markets.

And we're also very happy by the Intel-Altera which seems to be defocusing some of the customers on trying to understand if there's better solutions than what they had in the past with partners that are more stable over time which we consider ourselves one of.

So, Xilinx-Altera has a little bit of overlap but mostly we're closer to the Internet of Things applications.

Good.

Thank you so much.

Christopher Longiaru, Sidoti & Company.

You made two comments I'd like to jump into.

One was you talked about visibility improving.

Could you give us a little more granularity into that?

Where were the improvements and exactly how much extra time do you have into order times or ramps?

Can you give us a little color there?

In every consumer mobile ramp there's a design in, there's a pre-production, there's a production, and then there's a high volume manufacture and then there's the end of life phases.

So, when we say we have more visibility and as those phases move from left to right, you begin to see more impact as you move through that and more certainty of some of those things.

It's still always a risk with some of the big suppliers because they can make a decision at the last minute.

But as Max alluded to, we are carrying inventory, positioning ourselves for success with that visibility.

Great.

And then the other question with just in terms of inventory and channel inventory.

It's been lean.

It keeps getting pared down.

At what point do you think it has to level out at?

At what point do you think inventories are too lean and there needs to be some type of restocking?

I think we saw some of that going from Q4 to Q1 in the industrial market because we were -- our number for 2015 were actually horrible after Q1.

Q1 was our high which was surprising to us because usually it ramps.

So, we could tell there was a lot of not restocking but unstocking if you can of that stuff.

And so, I think as we kind of walk through the year, we were very suspicious that Q3 and Q4, there just wasn't enough inventory and then all of a sudden Q1 bounced back with the backlog and we're also seeing the same thing in Q2 where we think we're seeing a little bit more stable and solid backlog.

So, as we look at those indicators we say -- they probably did run it too lean in Q3 and Q4 of last year.

The question is how far does it go with all the other economic indicators out there?

Got it.

Okay.

And then working down the income statement, you talked about moving back towards your midterm goal on the gross margin line.

Gross margins were up substantially, a large part is mix.

But some of it is just integration of things that you have, right?

So, can you give us kind of an idea of how much falls into each basket and how we should expect the gross margin to trend towards that mid-50s long-term rate?

Yeah.

I would say that in terms of the first quarter there were a couple of points of benefit related to the high volume manufacturing improved absorption type things and there were a couple of points driven by the high margin product mix.

Really as you look at it, the heavy focus on industrial during the quarter benefits us greatly.

As you go into the second quarter, for the balance of the year we see that trending down gradually until the third and fourth as the mobile consumer revenue overtakes as a percentage of revenue.

Think of it in terms of our consumer mobile and our imaging products are both sitting below our goal of 55%.

Our communications devices are sitting right about that margin.

Our industrials are quite a bit above.

But then you add licensing that are significantly higher.

And so, if the -- and IP was actually down this quarter which should've had a negative impact on our margins but the manufacturing improvements and some of the mix improvements offset that pretty heavily.

So, you want to look at the year -- for the year what you would expect is the 60% margin to drop and I would expect it to drop into the mid-50s and probably a little lower if the volumes become even higher on the multiple consumer OEMs products.

And that's just a balance thing.

I think you had $6 million.

I think you had $6 million that was pushed out on the IP payments from last quarter.

Was that not in this quarter?

Did that have no effect on the gross margin?

That had zero impact because we resolved that.

We unwound that deal and we resolved that deal.

So, there's no impact.

We didn't have that included in the 2016 financial assessment we did earlier because it was out of our original projections.

We do intend to pursue those particular patent sales.

Those were patent sales.

Those aren't IP licenses.

So, yeah.

There's still $7 million that we retracted from Q4 and we have not recognized any of those year to date.

So, anything that comes in from that would be upside to current expectations basically?

Correct.

That's correct.

Okay.

I'll jump out.

Thank you, guys.

Richard Shannon, Craig-Hallum.

Thank you for taking my questions.

I got on the call late so I've got kind of a two part first question here which isn't fully informed by some of your prepared comments.

So, I apologize for that in advance.

But if you could help me figure out a couple things here.

I heard your response to one of Tristan's questions on the revenue guidance you gave us in last quarter's call and then you talked about improved visibility which seemed to be opposed to some extent here.

Am I misreading your comments from the question about revenue guidance for this year?

I.e.

you're not reaffirming it, suggesting you see greater risk in reaching that?

And if so, how do you resolve that with the comments about greater visibility?

Yes.

We did not reaffirm our guidance.

What we said is there's nothing for us to believe that we're off.

So, we tried to do this.

There's no reason for us to change our guidance whatsoever.

But we don't reaffirm it.

That's the thing.

We're not in either of those positions today so I didn't want to set any false expectations.

Okay.

That's fair enough.

Thanks for clarifying that one.

Second question on the mobile side, Darin.

Both in your press release as well as your prepared comments I heard some mention of top five mobile OEMs that you've engaged with or are shipping to.

Just to be clear, is that something that you expect to ship to all the top five in the second half here or sometime in the second half you can say you have historically shipped to all five?

Can you help clarify that comment, please?

Yeah.

When we started five years ago I remember we were in Samsung and everybody said -- one hit wonder.

And then we started one by one saying -- here's the top ten, China and worldwide, OEMs.

But we thought China would be huge growth.

Remember we went after the China Inc.

as we called it.

Since that time we've shipped into all of the top five guys that are remaining, which are completely different, by the way, than the top five, five years ago.

So, what we've been trying to do as we walk through this thing is validate that the fact that consumer mobile FPGAs are real and there are ways for our consumer mobile customers to bring new innovation to market.

And that, my point was, we now have proof points that everyone suggesting that FPGAs which have traditionally not been used in mobile devices, are for real, and they are sustainable.

Okay.

Fair enough.

I appreciate that.

And let me follow up on that, Darin, by -- I've asked this question from time to time over the five years you've had this business, can you give us a sense of how the use cases are broadening for your iCE products and mobile platforms in general?

What areas are you seeing that are new?

Which ones are sustaining?

Where do you see any use cases that you think you can continue to serve over a multiyear period of time?

I think when we started -- and I don't mean to disrespect us, but it was kind of a dumb FPGA that just did IO expansion and simplistic functions like I2C to some bridge that people had or doing a simple IO expansion.

And then we migrated it and started improving and it had an analog mix signal so we could do things like IR remote, barcode labeling, and then we started adding a little more feature sets so we could do antenna tuning and some other cool things.

And in the process, all of a sudden we realized that this identification, the detection, and recognition became super-important.

So, we then began adding more RAM to our devices.

And that RAM included also DSPs so we could not only use the RAM as a comparative function but then also process against it so we could do the identification and recognition features.

So, what we coined it is really always on, always listening.

And so each one of our products today can do multiple features from multiple different applications in different devices and it's all based around the premise of if you have almost no power and you can still listen but react faster than an application processor, then you can win that mobile heterogeneous computing element which is outside the AP.

The other thing that's important to remember is even with all that stuff we didn't lose the simple bridging and glue logic functions called digital duct tape that FPGAs are known for.

And just a quick follow up on that, Darin.

Does that suggest anything about an ASP trend overall in the mobile consumer space that could flatten out or even grow at some point?

Yeah.

Traditionally we look at it, even in the old days, it's funny, our COO and I have a lot of history on this.

There's a bill of material of an ASP that sits within mobile devices and you really have to focus on sitting in there unless you're going to create some really new innovations that nobody's seen before.

I think the ASPs and the margins, we can cost reduce ourselves and still keep the ASPs where we want them too and keep the margins where we want them to.

But we don't kid ourselves.

Unless we're going to develop the next 60 gigahertz mobile solution that sits in everybody's phone, the ASPs probably aren't going to go up.

Okay.

That's kind of what I thought.

I think that's all the questions for you, Darin.

I appreciate your thoughts.

Francis Chang, 3i Debt.

Good afternoon, gentlemen.

Just two questions.

In terms of Q1 and your investment in new business, can you try and quantify or give me a range for what that was in Q1?

As far as dollar?

Yes, please.

I think dollar-wise for the year it's probably going to be about $2 million of math that we didn't account for in our original guidance.

In Q1 it was probably $1 million.

In our expectations, that's why when Max alluded to the fact that we're probably in the high end of OpEx there's probably $6 million of unanticipated spending between professional services and some business process stuff.

But our plan is we're going to be tightening down the ship on things like variable spending, lower investments in math and these other things in the second part of the year.

Also looking at hiring, really trying to focus on not hiring and managing those processes and that overall spending.

So, it's about $1 million in Q1.

There's probably $2 million for the year.

All prudent risks, all stuff that fits right within the bigger RAM, faster DSPs, lower power.

Thank you.

And last question, in terms of asset sale proceeds from that business, how much do you expect to get in net proceeds?

About $1.6 million.

Thank you.

Bill Dezellem, Tieton Capital Management.

Thank you.

A couple of questions.

First of all, deferred income was up about $6 million sequentially.

Would you please talk to that?

Yeah.

That's primarily driven by inventory increases in the distributor channel.

And so coming back to the discussion earlier in the call, is that just simple distributors moving back to a more normal level of inventory or is that giving some indication of their enthusiasm for what's coming in the second half of the year?

Probably the first one.

But later on it would be the second one.

I think the first one first, the second one second.

So, but right now it really is driven by the fact that they were running pretty lean.

People are starting to stock up.

I think you're hearing different people say that some people are saying -- Hey, backlog's up.

Some people are saying it's down.

It totally depends on what market you serve and the customers you're servicing today.

But I think as the macro increases, they're willing to put more inventory on hand.

And given the first one first, the second one second comment, does that imply that we should anticipate deferred income going up in second quarter as then the distributors are adjusting inventory in anticipation of higher business?

I think that's going to remain pretty consistent between the quarters, between Q1 and Q2.

If there was going to be any adjustment up, it might be in Q3 and Q4.

But even then, we'll see.

I just depends on pass through, how fast things are going from shipping in to shipping out.

So, there's a through put there.

You may see a little bit of a bump but then if they potentially ship their products through, you won't see any adjustment.

That's helpful.

Thank you.

And then I do want to come back to the gross margin strength.

And I totally follow your reference to how it will drift over the course of a year as the mix shifts.

But this particular quarter revenues were down -- or I shouldn't say down.

They were a little less than your plan and yet gross margin was significantly above.

Is that just highlighting to us the shift in the mix and how much different it was towards industrial than what you had anticipated?

Maybe you can dive into that in more detail?

Yeah.

Going into the quarter we definitely expected a slightly different mix.

We expected consumer to be higher and industrial to actually be lower.

Obviously it grew quite a bit quarter on quarter but we didn't think it would grow that much.

But we also didn't think consumer would go down that much.

And so I think what happened was we saw that shift but on the other hand as we're building inventory, as we start building the inventory for our product ramps, we get that manufacturing efficiency before we sell that product and that has a huge impact and that was a bigger -- that was a much larger shift than the other one.

It's hard to always determine when those benefits hit.

In this case, the manufacturing efficiencies benefit was much higher than we thought.

Thank you.

(Operator Instructions) Evan Morgan, Rosenblatt Securities.

Hi.

I just had a question.

Max, I'm sure you're doing a terrific job in what's a little bit of a choppy environment in the smartphone world.

But I just wanted to ask, Max, you are an interim CFO.

I wanted to ask if there is a search and how that search is going for a full-time CFO?

Thank you.

I'll answer that for Max.

Max is doing a great job.

He wouldn't have been one of the people that we put into the CFO slot and also one of the potential candidates that we have if he wasn't deserving.

And, yeah, we do have a search going on because the board always kind of requires that you have potential candidates as you walkthrough.

So, Max is our internal candidate, for sure.

The only internal candidate we have.

There are some external candidates for sure that we'll have to go out and reach out to.

And we plan on making a decision in the Q3 timeframe.

Thank you.

(Operator Instructions) David Duley, Steelhead Securities.

Thanks for taking my question.

I was just curious, you talked about the dollar impact of spending more operating expenses on growth opportunities.

What in markets are these newer growth opportunities that you're spending incremental dollars on?

The particular one we had in Q1 was focused primarily on the consumer mobile and it really was a part that we outlined earlier.

So, it really is the next-generation of iCE platform that we've put out there.

We now have five or six different generations.

I can't keep up.

But solid product, solid opportunities as we move forward.

And again, we want to diversify and also have more opportunities so that we don't have the drop off in 2017.

We want to continue that trend as we move forward.

I think on the last conference call you talked about the second half ramp in your consumer mobile business and that was driven by a handful of design wins that you thought would ramp and I think there was one big one and a bunch of other ones.

Is that still the same kind of makeup of the outlook as why you expect a second half ramp or maybe talk about why you do expect a large second half ramp that would put you into the range of the numbers you expect for the year?

Yeah.

I think there's a lot of things that play into it.

One, you saw earlier with industrial, because remember the industrial movement that you're seeing was really independent of the whole consumer mobile ramps that we expect in the second half.

Plus, it's not just that.

We're in a lot of designs for these other growth markets which aren't as big but they also are meaningful.

We talked about drones, we talked about virtual reality headsets.

I don't know if you've used any of those devices but they're pretty trick and I think they're going to be bigger than people think long-term.

Everywhere I look in the generations, probably two below mine, everybody's using this stuff.

I think we have a good healthy pipeline of stuff in the consumer and industrial.

Coms, not so much which is why we said kind of flat to down.

But I think we're positioned very well and again, I'll reaffirm.

There's no reason for us to change our guidance for any of that stuff at this point.

We're sticking to what we think we can achieve both from the OpEx, even though we know on OpEx so far we're spending above what we thought and we still think we're in the high end of our range.

We have some work to do in the second half of the year and we understand that.

I guess the make up of design wins in the mobile space is still very similar to what it was and I think that was the key driver to the second half revenue ramp.

And as I said, I think you mentioned before, there was a handful of wins and one big one.

I'm just curious as to -- is that still the same make up of wins that will drive the second half?

I think it's more that we've been able to close as the quarter moves forward.

There's a couple other opportunities we have in other OEMs that aren't small by any means.

But the key for us is to have that diversification and also have the diversification in these new business -- we mentioned it as greenfield opportunities where it's just stuff that didn't exist two or three years ago.

We spent a lot of time doing it.

We're focused obviously on the wins we have today and shipping them but again we talked about virtual reality, drones, things like that.

They're going to be bigger than people think.

Thank you.

Todd Morgan.

Jefferies.

Hi, guys.

Thanks for taking my call.

This is actually Eric on for Todd.

My first question is can you just talk about the USB 3.0 rollout and how you're positioned for this?

And more specifically has this unfolded as you anticipated when you did the Silicon Image acquisition and financing?

Absolutely not.

I think everybody in the market's completely disappointed by USB type C. I don't know anyone that says -- Yeah, it's going great.

But I can tell you this.

All of the new devices that we're seeing rolling out in '17 that we can see from the mobile devices finally adopting it, that does display the FPGA and put it right back into the Silicon Image.

And one of our largest opportunities to date, as we talked about, a prudent risk taking effort, has everything to do with our imaging technology and USB type C. There's some really good opportunities out there.

But all in all for this year I think it's right about where we thought.

So, I don't think the USB is -- it's not as big as what I think everybody thought going into 2015.

Okay.

Perfect.

I was wondering, can you talk about the trends in the MHL adoptions in new smartphones?

Yeah.

I don't think there is any.

I think what you're going to see is -- and the big players today, they're going to create different solutions.

Where you are seeing a lot of adoption is where MediaTek and this thing became important to us which is in India and the emerging companies because they're still using it as a productivity tool.

The United States not so much, right?

So, we're seeing -- I'll give you the two different models that at least we see.

Emerging companies, MHL rocks because they only have their phone and they have a TV and they can control and use the TV for a lot of things we don't do because we have tablets and set top boxes and things like that.

But then you switch to drones and the reason it's important to have a smartphone high definition output is because you're going to fly a drone or use a virtual reality headset through your phone that does all the connectivity and does all the downloading plus you can watch a movie at home through your headset.

So, all of a sudden you get two different applications.

One, needing more of a high-def video.

The other one needing MHL.

So, they're both going to exist.

And automotive is another place where MHL is super important.

So, we're seeing a lot of traction still in automotive, still in emerging countries, but not so much in the US and not so much in Europe.

So, we see it as fragmented between but they're both still coexisting and they could be large depending on how big India gets.

At least I think so.

That's some great color.

Just one last question.

Would you be able to talk about the current levels/trends of license revenues?

Yeah.

We expected licensing to go down between '15 and '16.

And it has.

You can see the run rates that we're running today.

But then we also think it's going to go down gently into 2017.

And then as we push to do more licensing beyond the HDMI thing, there's multiple places from embedded display port to MHL.

Let's not forget some of the other AP cores that we could begin servicing and putting in more of a synopsis-like approach.

And then we also have FPGA fabrics.

So, we have a lot of different IP and right now we're focused on our strategic long range plan for the business.

So, we expect it to go down '16, probably down a little bit more in '17 and then we expect it to come back in '18 as we reinvigorate ourselves.

Perfect.

Thanks for taking my questions and good luck for the rest of the year.

There are no further questions at this time.

I'd like to turn the call back over to Lattice's CEO, Mr. Billerbeck, for closing remarks.

Okay.

Thank you, Operator.

And thanks again for everyone who joined us on the call today.

We're on track for a great year in a pretty much mixed macro environment.

We continue to execute to our plan.

We control what's within our control and to deliver excellent solutions and support customers worldwide.

We're delivering to our vision of accelerating customer innovation for a better connected world which will drive growth, increase profitability, and build value for our shareholders.

Thanks for joining us again today.

We appreciate your support, as always.

Thanks.

Thank you for participating.

That does conclude today's conference.

You may now disconnect.