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Executives

David Pasquale – Global IR Partners

Darin G. Billerbeck – President and Chief Executive Officer

Joseph Bedewi – Corporate Vice President and Chief Financial Officer

Analysts

Nick Clare – Robert W. Baird

Ian Ing – Lazard Capital Markets

Richard C. Shannon – Craig-Hallum Capital Group LLC

Bill Joseph Dezellem – Tieton Capital Management LLC

David Duley – Steelhead Securities

Paul McWilliams – NexTag

Lattice Semiconductor Corporation (LSCC) Q2 2012 Earnings Call July 19, 2012 5:00 PM ET

Operator

Good afternoon. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the Lattice Semiconductor Second Quarter 2012 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. David Pasquale with Global IR Partners. Sir, you may begin your conference.

David Pasquale

Thank you, operator. Welcome everyone to Lattice Semiconductor second quarter 2012 results conference call. Joining us today from the company are Mr. Darin G. Billerbeck, the Company’s President and CEO. Mr. Joe Bedewi, Lattice’s Chief Financial Officer is online as well. 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 e-mail 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 third quarter of fiscal 2012. 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 our fiscal year 2011 Form 10-K and our quarterly report 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 Principals or GAAP.

I would like to now turn the call over to Mr. Darin Billerbeck. Please go ahead, sir.

Darin G. Billerbeck

Thank you, David, and thanks to everyone for joining us on our call today. In terms of Q2, revenue was $70.8 million with a 52.3% gross margin. Results for the second quarter 2012 reflect the continued effects of the macro headwinds and the impact of customer mix on our business. From a high level we continue to achieve new product growth. Unfortunately our strong new product growth has been offset by the continued weakness especially in Europe. In addition to the weakness in Europe, we expect softness in the North American consumer market. Finally, growth from our strategic account was a positive, but adversely it impacting our gross margin. Can you guys hear us, by the way? I hope so, okay. On prior calls, we mentioned that revenue growth did not resume, we would take further actions in some of our operating costs. Hey David, I don’t know if you could hear us. But we are hearing a lot of background noise.

Joseph Bedewi

Operator?

Operator

Yes sir, I’m trying to figure out, where that noise is coming from.

Darin G. Billerbeck

Yeah, you’re coming to fine. Okay, okay, we will continue. On prior calls, we mentioned that revenue growth did not resume, we would take further actions in some of our operating expenses. During Q2, we’ve reduced our overall head count by approximately 5%. Reduction in workforce was across the Board and was intend to further streamline our cost structure. I want to be clear however, that we remain fully committed to executing our product roadmap or continuing to provide excellent customer support.

Our recent foundry partner announcement with UMC was another step to increase our new product innovation, lower our cost, and further advance our non-volatile memory technology acquired from SiliconBlue. Q2 highlights and developments included, shipping our One Millionth MachXO2 Programmable Logic Device, production release of our iCE40 family, sampling our high density ECP4 FPGA, releasing the latest version of our new power management architecture and being recognized by Huawei as the only FPGAs acquired to receive their coveted Quality Supplier Award.

In terms of adding color for the second quarter, the revenue mix of New, Mainstream and Mature was 20%, 60% and 20% of revenue respectively in Q2. Revenues from our new products were up 21% quarter-on-quarter, reflecting the strength in our ECP3 product shipments. Mainstream products were up about 11% quarter-on-quarter. Revenue from the mature products, we’re down about 35% when compared to the prior quarter primarily due to the softness in European distribution. The revenue mix between FPGA and PLD products was 35% and 65% respectively.

On a geographic basis, revenue from Asia, including Japan was about 70% of the total revenue, an increase of about 7% to 8% on an absolute dollar basis. Revenue from North America was about 13% of total revenue, a decline of about 24% compared to last quarter on an absolute dollar basis. This reflects weakness in the consumer market segment and specifically non-iCE product shipment. Europe was 17% of revenue compared to 19% of revenue in Q1 that declined 9% on an absolute dollar basis.

On an end market basis, communications was up – represented 52% of revenue in Q2 compared to 43% in Q1. This reflects strength and their strategic comps account. Computing decline to 12% of revenue in Q2 as compared to 13% in Q1 with further softness in the server market. Industrial and other declined to 27% of revenue in Q2 compared to 28% in Q1 as a result of the weakness in Europe. Consumer decreased to 10% of revenue in Q2, from 16% in Q1, primarily reflecting non- iCE consumer market softness.

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

Joseph Bedewi

Thanks, Darin. As noted earlier, revenue for the second quarter was $17.8 million, a decrease of 1.3% from the prior quarter and a decrease of 15.6% from the year ago period.

Gross margin for Q2 was 52.3% compared to 55.1% in the prior quarter and 60.4% in the year ago period. The decline is driven by customer revenue mix, combined with increased success in our new products.

The macro environment continues to be challenging. We are driving operational improvements by leveraging our low-cost operations, implementing cost and productivity improvements and executing to our product cost improvement plans. Total operating expenses for the quarter came in at $39.9 million. This represents a near-term peak as we took additional spending reduction actions in the quarter.

Second quarter spending includes severance charges of $1.4 million associated with the head count reduction. Included in the second quarter spending is approximately $100,000 of restructuring related charges as compared to $500,000 of restructuring related charges included in the first quarter of 2012. The restructuring of our R&D and operations groups under the 2011 restructuring plan is complete and we do not pursue additional charges under this plan. Accordingly, [property] allocations reflect our new structure.

Second quarter 2012 results include approximately $1 million of acquisition related costs, compared to $1.7 million in the first quarter of 2012. Q2 net loss was $12.5 million or $0.11 per basic and diluted share, as compared to a net loss of $7.7 million or $0.07 per basic and diluted share in the first quarter and compared to a net income of $13 million or $0.11 per diluted share in the year ago period.

In the second quarter of 2012 we recorded a tax provision of $10.45 million or $0.09 per basic and diluted share. This tax provision reflects the implementation of our new global tax structure. The tax provision is primarily a non-cash related charge. We expect our tax provision to significantly decline starting in Q3 of this year.

We expect diluted share count to be approximately 117.5 million shares. The share count reflects the retirement of approximately 1.1 million shares valued at approximately $5.4 million in the second quarter. Our year-to-date total shares repurchase is now at approximately 1.3 million shares valued at approximately $7 million under our previously announced 2012 stock buyback program.

We ended the quarter with the cash, cash equivalents and short-term marketable securities balance of $184 million. And we continue to have no debt. Accounts receivables at June 30, were $60.4 million compared to $52.8 million at the end of last quarter and the days sales outstanding were 77 days compared to 66 days last quarter.

We experienced a shift in our receivable balance to accounts with longer payable terms. Accounts receivable collections are current. We have not experienced significant past due or reserve increases for bad debt.

Inventory at June 30, 2012 was $37.1 million compared to $36.8 million last quarter. Months of inventory now stands at 3.3 months compared to 3.4 months at the end of Q1 2012.

We spent approximately $4.6 million on capital expenditures and $5.2 million on depreciation and amortization expense including intangibles during the second quarter compared to $3.4 million and $5 million respectively in Q1.

This concludes the financial review portion of the call. And I will now turn the call back over to Darin, Darin.

Darin G. Billerbeck

Thank you, Joe. Overall, we are operating in a challenging environment. We have excellent new product offerings and a solid product pipeline with continued economic weakness expected in many parts of the world and much remain focused on lowering our operating costs while measuring that we continue to win our fair share of the market opportunity.

We are confident in the value proposition of our products and our competitive position. We are also confident that we can navigate through the current market volatility and emerge even stronger overtime.

Let me now turn to our third quarter 2012 expectations. We expect revenues to be approximately flat plus or minus 2% as compared to Q2. Q3 gross margins are expected to be approximately 52%, plus or minus two points. Total operating expenses are expected to be approximately $38 million, including approximately $0.8 million in acquisition related costs.

This concludes our prepared remarks. Operator, we’d now be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Nick Clare of Baird.

Nick Clare – Robert W. Baird

Hey, guys I’m calling in for Tristan Gerra.

Darin G. Billerbeck

Hi, Nick.

Joseph Bedewi

How are you?

Nick Clare – Robert W. Baird

Good. How are you guys?

Darin G. Billerbeck

Good.

Nick Clare – Robert W. Baird

So I guess first, you kind of touched on it at the beginning of the call, but it was kind of, I was little choppy on my – in terms of being able to hear. But given the weakening macro and kind of top line outlook for the year, I know you kind of displayed it with the head count reduction this quarter, but originally given that $1.5 million reduction to OpEx from kind of the 1Q to 4Q. Is that able to increase further, and I guess in what ways, if EPS to get it back into the black as the market continues to weaken?

Joseph Bedewi

Yeah, we expect it to – we were talking $1 million to $2 million. We expect it to be closer to the $2 million plus range as we move into Q4.

Nick Clare – Robert W. Baird

Okay. Okay, and then for the quarter, how was the 65-nanometer revenue during the quarter, was it above the $10 million kind of range and I guess what’s the target moving forward?

Darin G. Billerbeck

Yeah, are you talking about overall being – we have lot of 65-nanometer, you’re talking about ECP3?

Nick Clare – Robert W. Baird

I’m sorry ECP3, yeah.

Darin G. Billerbeck

Yeah, yeah, ECP3 was very strong during the quarter.

Nick Clare – Robert W. Baird

Okay.

Darin G. Billerbeck

It was very close to that range.

Nick Clare – Robert W. Baird

Okay.

Darin G. Billerbeck

Not quite to the top end, but...

Nick Clare – Robert W. Baird

Okay. Are you guys seeing any strange of pricing pressures whether it would be gross margin, and if so, is it more in the CPLD or the FPGA side?

Darin G. Billerbeck

It’s really more in the FPGA side, I think, than the CPLD side. I think that’s representative. It’s pretty competitive and a lot of those parts are also in very competitive products from our customer side. You are seeing a lot of strategic account pressures from different analysts looking at our end customers and some of the pressures that they are under. So I think that will continue, but I think in the mainstream products, it’s not that you don’t see pressure. It’s just more of a traditional decline.

Nick Clare – Robert W. Baird

Okay, okay. And then, do you have any products that are close to being phased out again either FPGA or CPLD?

Darin G. Billerbeck

At this point nothing significant, nothing to [write on about].

Nick Clare – Robert W. Baird

Okay. Okay. And then, last thing kind of just a quick housekeeping thing here. So since the tax issue kind of significantly declines looking into the next quarter, I mean do we see it kind of reverting back to what it has been before and kind of you undertook this restructuring program?

Darin G. Billerbeck

After the restructuring going into next year, we’re looking to be in the 11% to 14% range. That’s what we’ve been telling folks. Our…

Nick Clare – Robert W. Baird

For 2013?

Darin G. Billerbeck

2013 right. That’s P&L related. This is basically a non-cash event. We had 53k in taxes paid, cash taxes paid this quarter. So this is all non-cash related to the structure and the movement of assets.

Nick Clare – Robert W. Baird

Okay. So then moving forward it’s at that 11% to 14% range?

Darin G. Billerbeck

Right, and now again we still have NOLs that carry forward and we’re going to see less than $1 million annually related to cash taxes paid.

Nick Clare – Robert W. Baird

Okay, great. Thanks guys. That’s it for me.

Darin G. Billerbeck

Thanks, Nick.

Operator

Your next question comes from the line of Ian Ing of Lazard Capital.

Ian Ing – Lazard Capital Markets

Hey, Darin. Hey Joe. Good afternoon.

Darin G. Billerbeck

Hi Ian

Joseph Bedewi

Hi Ian.

Ian Ing – Lazard Capital Markets

First question is this increase in strategic accounts. I mean, do you use new sockets ramping in volume or return of existing business, and is it sort of the same applications just before things like wireless space stations or some new type of comms, applications? Thanks.

Darin G. Billerbeck

Yeah, it’s really the same applications and some are existing, right, some sockets that we had before and some are new. So especially in ECP3 right. ECP3 grew quite a bit. I mean, that’s just an art effect of the work we did years ago.

Ian Ing – Lazard Capital Markets

Okay, great. And then, sort of the overall comms commentary from your competitors [I think] yesterday talked about North America LTE being strong, but sort of the rest of the world seeing some other OEM seeing a bit of inventory work down. I mean, is there a sense that this new run rate business is the same sustainable or could fall up with some points or…?

Darin G. Billerbeck

Well, it’s always rocky. I mean, comms are kind of interesting because the last two years in a row they ramped Q1 through Q3 and then it was down in Q4, right. So there is always a risk in comms that is volatile, but it’s different because what the big guys see and what we see are different applications because they play in the wireline all the way through the remote radio head. We play in the last mile. So what’s happening in the last mile can be slightly different than what they see in the overall buildup.

Ian Ing – Lazard Capital Markets

Okay, great. And then for Joe, I mean, the restructuring charges for this headcount reduction, is that part of the SG&A in June, so does that go away going forward?

Joseph Bedewi

Yeah, the SG&A, we observe the [$1.4 million] in severance in SG&A throughout the OpEx charges we did not classify in restructuring.

Ian Ing – Lazard Capital Markets

I see.

Joseph Bedewi

[Or baked] into that number. It’s a one-time event. We will see a reduction in that normal payroll spending going through the next two quarters because the folks are gone.

Ian Ing – Lazard Capital Markets

Okay. And again, just to clarify this $2 million plus savings you talk about in OpEx that’s from the first quarter 2012 levels. Is that right?

Joseph Bedewi

Correct.

Ian Ing – Lazard Capital Markets

Okay. Got it. Okay, good, good, okay. And then last question this UMC foundry announcements, I mean, it seems specific to the SiliconBlue one type of overall process. So how do you see, do you see that expanding perhaps to the rest of the families and how does that impact your relationship with like TSMC and Fujitsu? Thanks.

Joseph Bedewi

Yeah, it really has a no impact. Everybody uses multiple supplier foundries right, it doesn’t really have a big impact on it if you just think about supply long-term, it doesn’t have any impact. I think what we did with UMC is, we looked at a supplier that was more aligned to the technology that we have, one is SiliconBlue. But remember, that technology can also find its way into our other product lines. And we do plan on using both 40 and 28 long-term to advance our technologies on the all of our product line. So it’s not just iCE, it’s for all product lines.

Ian Ing – Lazard Capital Markets

Okay, thanks, over to you.

Joseph Bedewi

Thanks, Ian.

Operator

And your next question comes from the line of Richard Shannon of Craig Hallum.

Joseph Bedewi

Hi, Richard.

Richard C. Shannon – Craig-Hallum Capital Group LLC

How you guys are doing?

Joseph Bedewi

Yeah, good.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Good. Let me just ask kind of a big picture question on your guidance for the third quarter in sales. How should be view the relative growth rates by vertical markets, you obviously, comps sit quite well in the second quarter and consumer probably not as good as you would like, how should we look at the third quarter?

Joseph Bedewi

Yes, I think comps will continue to be healthy, I mean these from our standpoint, we don’t see anything. You’re going to see some, we’ll see a little bit of variance here and there, because I think people are trying to understand who is gaining what share, where you see a little bit of flex between the customers. Consumer will snapback, I don’t think it’s going to get back quite as much in Q3, but I think by Q4, consumer comes back and is fairly strong.

So I think, consumer comes back in all of the way and what we should expected to do quite well in Q4. And a lot of that’s customers build up and other things like that, because we’re seeing people starting to load up some of the products a bit later in the back half of the year.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay. Were the consumers are related to any specific sector or even a specific customer in that area? Can you detail that anyway?

Joseph Bedewi

Yeah, specific sector and a specific customer and that’s as far as I can go.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay. That’s fair enough. Let's see here. I guess, Darin, as you look beyond the current macro environment, clearly Europe is difficult in that [shorting] distribution. If you look at your distribution business outside of that, anything that can help, that you view which can help improve that, because clearly that’s a big chunk of your business, and just I wanted to hear your thoughts on any sorts of improvements that Lattice can have an impact on?

Darin G. Billerbeck

Well, yeah, I think the biggest challenge that we have is, a lot of our products shipped through distribution especially we’ll call our simpler products. It doesn't mean that they are super cheap or anything, but at our XO or MachXO, and MachXO2 do ship a lot through the distribution [network]. They are easier to design in, our customers are very familiar with them.

So, we’re really driving the XO family through distribution today, along with iCE, because remember iCE has never been driven through distribution, because it was an OEM specific place for smartphones and for tablets. But a lot of things we're learning enable us to an outplay and more broad applications and specifically we’re starting to see people look at this for industrial.

Right, because, it’s grew logic in its simplest form. So, I think both XO2 and iCE through distribution are going to be our big growth engines, along with just trying to get a kick back from distribution year-on-year is down significantly across all geographies, not just Europe.

And so, we really just need to see some macro events that's the kind of profit back up to even a natural run rate. And I think that helps our absorption, it helps our gross margins, because those are typically higher gross margins, that it lowers our cost, because we’re shipping more than lower densities, which are higher volumes, all that stuff. So we do need some snap back at distribution, albeit, it doesn’t have to be significant, but we also have to drive all the new products offerings through distribution in a midway, and that’s what we’re focusing on today.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay. Some more questions from me, I guess first on OpEx, you gave us a number for the third quarter hereafter a small head count reduction. How should we think about your OpEx, going forward in the context of largely flattish result of the economy continues to be poor perhaps things start to improve, but you can move towards that $80 million per quarter [bogie] I know you’ve talked about before. Where should we see the OpEx layout quarterly in that kind of a context?

Joseph Bedewi

So we're still on track to that $2 million reduction we discussed by the end of the years. So we are hitting 38, we’ll hit 38, if we continue to see softness in the market, we’re going to continue to aggressively drive OpEx. So we took this 5% head count reduction this quarter, as a result of seeing softness. So we’re taking this as we can, and we’ll continue to be aggressive on that moving forward. So we're managing OpEx, very tightly as we finished the – all of our restructuring work, we should see benefits from the Manila operations and the movement that we’ve got go in there. So we’ve got plans to decrease cost in OpEx, and that’s on contract, we’ll drive in this as hard as we can?

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay. Fair enough. One last question from me on Silicon Blue. Darin, I want to get your thoughts on this final activity and pipeline in, specifically the smartphone space, and also relative to what you’re seeing, which is our Qualcomm results last night, and it seemed to be pushing out some of the expectations for this market in the second half of the year, kind of love to hear your thoughts on both of those dynamics.

Darin G. Billerbeck

Yes. So let’s not forget that we’re in digital still cameras, tablets and also smartphones and then we’re finding our way into [Car Nav] and things like that so.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay.

Darin G. Billerbeck

There is a lot of market opportunities that are available to us. We do have quite a few design wins. But remember most of those design wins that we had from the SiliconBlue acquisition, we’re targeted a few key OEMs it was really Taiwan and then Korea is some major winners and we’re continuing our progress there. The challenge that we have, which I feel very good about is all of the different opportunities that we’re getting every play cells, because people embracing the fact that there is a lot lower bar if you will with iCE, especially the price point that we can offer that in the margin structure versus some of our other products. So it enables us to really differentiate between XO2 and iCE on a feature and also on a cost per I/O.

So we’re really starting to embrace the fact that anything we learn from tablets and smartphones and from navigation and digital still cameras we applied in the broad market. And that’s the big challenge with iCE as just getting people to recognize and understand how to use the low cost SPJ or you can displace on anything. And that’s new for people, so as we go – we’re going to really teaching, training and then creating opportunities that didn’t exist before.

Richard C. Shannon – Craig-Hallum Capital Group LLC

What is that sales cycle there? What is that sales cycle there and in terms of when people first see the value proposition to getting them towards designing in? Is that a two month process, 12 months process, what the…?

Darin G. Billerbeck

It’s the design-in I mean it’s a typical cell phone design-in, if you’re in a cell phone. So I mean you can get from start to finish, you can be end between nine and 12 months, you can find yourself going from the beginning to starting production. Right now it takes them a while to ramp easily takes them three to six months to ramp. So you’re in about half of the time if you will have a normal SPJ, if they’re familiar with it.

And if it’s a glue logic deal I go I just want an I2C to SLIMbus that can be faster. Right, someone just walks in, so I just want to connect these two interface because that’s a much faster deal, because I’ll just still throw an FPGA on the board program and up and they’re going. So the key for us is to make it affordable very, very low power, and then enable them to very easily apply those to their application. And that’s the biggest challenge as we have right now as you are teaching and training a lot of people again and they are getting it fast.

Richard C. Shannon – Craig-Hallum Capital Group LLC

Okay, great guys. I will jump in the line.

Darin G. Billerbeck

All right, thanks.

Joseph Bedewi

Thanks, Richard.

Operator

(Operator Instructions) Your next question is from the line of Bill Dezellem of Tieton Capital Management.

Bill Joseph Dezellem – Tieton Capital Management LLC

Thank you. I had a couple of questions. First of all relating to MachXO2 and the ramp that you discussed in the release, how does that compared to prior product ramps and the reason I ask is a $1 million devices in four months seems pretty fast.

Darin G. Billerbeck

Yeah, the nice thing is, we brought the XO2-1200 out of the ship, which was one of the higher volume runners on XO. And I think the familiarity of that product helps us quite a bit, we’re ahead of the XO ramp by a little bit, I think today and we expect that we will continue to ramp that a little bit slightly different application, because it’s a different voltage. But it has all the features says, that XO has on it and it’s actually on a more advanced technology.

So we expect that to do quite well and we expect it to ramp faster than XO.

Bill Joseph Dezellem – Tieton Capital Management LLC

And relative to other products that have ramped quickly in the company’s history, how does this compare?

Darin G. Billerbeck

I think XO will be the fastest ramping products that we have only outdone by iCE.

Bill Joseph Dezellem – Tieton Capital Management LLC

Great, thank you. And then relative to your gross margin guidance plus 2% to minus 2%, what are the swing factors between being up to versus down to relative to this quarter?

Darin G. Billerbeck

It’s very much customer mix and how quickly some of the district comes back. So as we ship more into our strategic customers, we have margin pressure with the strategic customers. That’s absolutely the biggest swinger is customer mix.

Bill Joseph Dezellem – Tieton Capital Management LLC

And then, you’ve mentioned distribution and something that I’m confused about is that that distribution as a percentage of revenue was up 3 percentage points in the quarter. And yet you’re referencing the weakness in distribution, there’s something I’m missing, if this just creating a disconnect for me?

Darin G. Billerbeck

Yeah, so let me add it a little bit. So if you think about, North America was relatively flat, it stays up a little bit, Europe is down, Europe is most of our industrial and where our high margin products and Asia which more of your low margin products. By I would say even the distribution worldwide kind of looks flattish or slightly up, right, you can get a different customer mix just by the geography.

Bill Joseph Dezellem – Tieton Capital Management LLC

And so the spot where you saw that the real distribution decline would have been Europe then?

Darin G. Billerbeck

Yeah, it was down 11%.

Bill Joseph Dezellem – Tieton Capital Management LLC

Great, thank you both.

Operator

Your next question comes from the line of David Duley of Steelhead Securities.

David Duley – Steelhead Securities

Yeah, just a couple of quick questions for me. When you look at your gross margins this quarter versus the June quarter of last year, there is a pretty big difference. I realized a lot of that’s volume related. Could you just kind of review what the key reasons are that the margin are different versus what you printed last June quarter. And what are the plans to improve margins going forward? Thanks.

Darin G. Billerbeck

So you hit on some of it, if the volume is very helpful to us, so it helps on absorption of our product cost. We had a different mix of strategic products and we didn’t have as many new brand new products running through the pipeline back in 2011. So it really boils down to learn new products ramp in strategic, and we don’t have the volume of revenue, it really impacts margins. So I mean it’s kind of a broken record around customer mix, but that’s really, what it is.

David Duley – Steelhead Securities

And so, what’s the reasonable target for margins going forward like as when we get back to an $18 million run rates with the current…

Joseph Bedewi

So when we get back to an $18 million, we see our way to the mid-50s again. We have cost improvements that are coming into play. We shifted our operations offshore to low cost environment, which helps us in terms of cost of good sold. We have product cost improvements with the gold and copper that will start flowing through strongly in the next couple of quarters, and we see some absorption savings on related to that. So we see our way back to this number set. And as we start, as Darin mentioned earlier, moving our products out of the strategic and into [dusty]. So as these new products shift out of our strategic accounts into a broader market, we’ll see some market, our margin uplift on that also.

David Duley – Steelhead Securities

Okay. And just two housekeepers, is the ECP family is that all classified in the comp section?

Darin G. Billerbeck

Not all of it because it does service some industrial video and some other places besides that. So yeah, it’s not all inclusive of comps.

David Duley – Steelhead Securities

Okay. And what was the stock comp expense during the quarter?

Darin G. Billerbeck

$2 million I believe. We have a schedule attached at back of the press release.

David Duley – Steelhead Securities

Okay.

Darin G. Billerbeck

It was $2.54 million.

David Duley – Steelhead Securities

Okay, thank you.

Operator

And your question comes from the line of Ian Ing of Lazard Capital Markets.

Darin G. Billerbeck

Nice to come back Ian Ing.

Ian Ing – Lazard Capital Markets

Just had to come back here, consumer being down on iCE products, is that more MachXO, MachXO2 and do you expect that type of business to come back or is that sort of more permanent?

Darin G. Billerbeck

It’s not MachXO and MachXO2 it’s a different product, some of that yes we do expect to come back. But I don’t expect it to comeback solid this quarter or maybe the next quarter, right, it’ll come back over time, but not to the level expected.

Ian Ing – Lazard Capital Markets

Okay and then given SilionBlue you acquired them back in December last year and you got some visibility now hopefully into the end of this year, I mean what are your thoughts on the yield in terms of the design win pipeline is that sort of to your expectations or is there some changes in the dynamic of what’s ramping and what’s not?

Darin G. Billerbeck

Yeah, I mean, I think in every acquisition you will get some pluses and minuses and we certainly had some of those, most of them came in the terms of the push up. We haven’t lost any design from any of the iCE prices, just some have taken longer to get into production that we would have anticipated not fine, right, because that’s a natural thing. I think what’s impressed me more than anything is looking at our Salesforce.com data and how many opportunities there are on iCE outside of cellphone and tablets and all these other areas, which is refreshing because the other part is when you go up against some of our competitors part with even XO and XO2 there are product lines that they have that are difficult for us to compete and iCE than enables us to compete quite aggressively and with decent margin. So that’s the good news, we’ve that low cost, low cost per IO product and small form factors that I think is world, it’s going to be the world’s lowest cost FPGA over time.

Ian Ing – Lazard Capital Markets

Okay, great that’s all I have for now, thank you.

Operator

(Operator Instructions) Your next question is from the line of Paul McWilliams of NexTag.

Paul McWilliams – NexTag

Hi guys thanks for taking my call. I was following you right along on the gross profit conversation that you had with the previous analyst. And so when you said to the second guy that at $80 million, you would be back in the mid-50s. We were looking at mid-50s guidance of $73.1 million midpoint of original guidance for Q2. Why that disconnect there? Where we see mid-50s and $73.1 million?

Darin G. Billerbeck

It’s possible, but it really is mix dependent. So once we get to the $80 million that’s a – I mean we see our way back there pretty I won’t say easily, but it is simpler with the absorption side. Depending on a mix, we can be there at $73 million, $75 million also.

Paul McWilliams – NexTag

Gotcha, okay. I just want to make sure, I didn’t miss something there. Within your COGS as you haven’t reported, was there any acquisition charges, amortization of intangibles, reserves, or anything of that nature?

Darin G. Billerbeck

No.

Paul McWilliams – NexTag

Okay. What was your cash flow from operations?

Darin G. Billerbeck

I think we had a negative two.

Paul McWilliams – NexTag

$2 million?

Darin G. Billerbeck

On a GAAP basis.

Paul McWilliams – NexTag

Cash flow from operations?

Darin G. Billerbeck

I am looking at the cash flow statement, right now. It’s a negative three, I believe. I’m sorry, I’m trying to – I don’t have in front me. On a GAAP basis, hold on Paul, sorry.

Paul McWilliams – NexTag

That’s okay.

Darin G. Billerbeck

Negative three.

Paul McWilliams – NexTag

Minus three, and then your CapEx?

Darin G. Billerbeck

CapEx…

Paul McWilliams – NexTag

It’s minimal.

Darin G. Billerbeck

Well, it was $4.6 million this quarter. That’s the [fit] up in Manila and the movement of our R&D and operations to Manila as we fit Manila with testers and so forth.

Paul McWilliams – NexTag

Yes. I neglected to consider that. What is your full year target on CapEx?

Joseph Bedewi

CapEx full year, it’s close to $20 million.

Paul McWilliams – NexTag

Got you. I appreciate your help very much. Thank you.

Joseph Bedewi

Sure.

Darin G. Billerbeck

All right. Thanks.

Operator

(Operator Instructions) And there are no additional questions in queue at this time.

Darin G. Billerbeck

Okay. So I’ll go ahead and close. It’s clearly a tough market. We have a lot of great products that we have to sell. We just need to control that which we can control, things like right-sizing our cost structure, developing new and innovative low-cost and low power product offerings, continuing our exceptional customer servicing support and profitably winning the markets where we have all the advantages. Thanks for joining us on the call today.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect.

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