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Lattice Semiconductor Corporation (NASDAQ:LSCC)

2012 Citi Technology Conference Transcript

September 5, 2012 3:00 PM ET

Executives

Darin Billerbeck - President and CEO

Analysts

Unidentified Analyst

With us from the company we have Darin Billerbeck presenting today. So let’s get started.

Darin Billerbeck

Okay. Thanks [Sandra]. Thanks everybody for listening in. We are going to (inaudible). Here is our forward to the next page. Okay. So I’m going to go with the Lattice corporate update first, Lattice is (inaudible) in the wrong place, so if you can.

Okay. Normal Safe Harbor which discuss if we make any forward-looking statements and all other things we discuss, be careful about what we do with information today.

I’m going to talk a little bit about who we are? Obviously, our programmable devices allow customers to do a lot of things. Some of the marketplace that we’re focus on little bit different. We look at ourselves if not really competitive, with some of the people, everybody think we are competitive with, we kind of strike out really on all the areas where we can win, we define, and we can profitably grow.

So we want to lead with lower power, we want lead with low cost, no matter what we call a portable innovation. So we don’t want to just innovate to sake of innovating it, because we are solving problem for the customers that we support.

Also we always want to grow new product, specifically in the areas that we feel not been a problem as of late. And then the healthy balance sheet and financial strength we want to obtain, which is also fair healthy. In the last 10 years we sold a lot of these things. So billions about anything, I know that, McDonald probably sold the most billion of anything, that’s pretty big.

If you look what we’ve done in the last 12 months essentially, when I came to work at Lattice, they ask me to really help revamp the R&D structure. We hadn’t got the product out. We haven’t been able to take products out or sample products in a timely manner at multiple sites.

So the first thing we did was, we really discontinued some of the operations, some of the companies have already offshore a lot of operations Lattice and now we are still doing toward test technology development and a lot of manufacturing in Oregon.

Since we’ve move that over to the Philippines, we discontinued the Allentown silicon development site, we opened obviously the Philippines to support some of the initiatives we have and then we repurposed our Shanghai facility to support primarily on user interface and software. We do some hardware support for them, just a validation and verification, but primarily focused on R&D.

And then we acquired Silicon, also we strengthen the product line and channel market for two new ECP3, those derivatives were fairly new with high speed, low power and a lot of miniature versions for small firm factors, things video, cameras or collision of VoIP.

And then finally, we strengthened our distribution network through new hope, which was important for us. Because again, it seems like a lot of distributor network line cards have everybody in their brother on it and we really wanted to be the number one focus and at NuHo we -- we handle NuHo both from a American standpoint and also from Asia, so we are biggest line card that they have.

Finally, we acquired SiliconBlue, a lot of people thought that we acquired SiliconBlue just for comp, not comp but for consumer. That’s not really true. We acquired them because we felt SiliconBlue technology can able us to growth both through distribution and all of our market segments. So even though we primarily target at a few key OEMs for consumer, it can go just about everywhere and our salesforce.com data really prove that as we want to.

It also provided a scalable month, non-volatile memory technology which today we are the only one that had pursued that. What that means is we can scale all the way to 28-nanometer through high-K metal gate on an OTV or we can make up few more cycles if we want to depending on the architecture.

And then, last year we grew the topline revenue about 7%. I don’t want to compare that to anyone, but that’s pretty good for the environment we are in.

Our environment, realistically there is a big huge comp infrastructure, a lot of people see us just playing in that last inch if you will of the infrastructure which is really the Access portion of it. If you look at long-haul moving all the way over to the enterprise, the speed of the long-haul is obviously much higher than what we in pursue or what we are capable of delivering.

As you move in more towards the Access which is residential enterprise, you can start to see our capability is matching. We don’t just sell our ECP330 family into that market, we sell majority of our XO product also. So our biggest product today is our XO product which does sell into comp. So, XO, XO2, iCE and ECP3 will all be sold into that infrastructure.

If you look at, how we look, as the Internet, we call the Internet a things, if you haven’t seen that, if all appliances is connected, whether it would be LTE or 3G or even 802.11. But from car to tablets, the refrigerators, the smartphones, everything is connected and we are really trying to focus on is the areas that we think will provide unique capability to our customer, but also the right product feature set that enable them to succeed.

Our competition does a lot higher performance devices than we do and in some of that, if I can go back, can we go back up there, okay, can we jump backward, so, there we go. So the other thing if you look at this is that where we focus is really on things that are power, they are really power focusing, very low power.

So as you move out on the thing that if you’re going to find things where battery life is really important as you move entity is important, those two things are in conflict. So we are going to focus on the areas that we think our architecture does provide those benefits and that more things are going to be capable.

You may ask why FPG most of those have ASIC today. I believe something a little bit different than the comparative, which I think will be displacing ASIC in the low end not in the high end and some of that is just basically because in the low end its about functionality for price point, its not about left through I/O. So completely different game when you play in the low end.

If you look at the market segment, we’re going to try to service. There is a billion units of opportunity. I remember when I was at the previous company around about a $2.5 million company that sold non-volatile memory. And I remember we were dreaming that one day smartphones will top 1 billion units and then after while to service that market you have to sell about 1 million units a day.

So in this particular case if you look at smartphones and actually surprise is smartphones have surpassed cell phones in general and also digital still camera. So that’s a huge marketplace, it doesn’t take a lot of penetration and if you multiply that by $0.75 or buck it’s pretty big, in fact it’s bigger than our entire company.

So great opportunity for us, it’s fragmented a little bit but if look at the top three or four players, there are all pretty significant and if you look at the one in red and the nice thing about that they embrace timely market, they embrace innovation, so they embrace a lot of the things that we are focused on.

If you look at the evolution of really the opportunity in the comps market, you are going to see the things are moving from a homogeneous network to a heterogeneous network. The first expantiation of this was actually in my house, where AT&T work, because I had a house in California that’s fairly rare and if we can’t give you cover but we can give you the film (inaudible) system.

And all the days they hook it into a wireless network and now you get your own little tiny terminal that gives you sidebars all the time. So that’s in, they are deploying that today and its significance, because now they have to put towers everybody, every place for everyone.

You are starting to see, and is also mean that there is a super microstation that you see out there that make trees and different things aren’t going to exist but they will be compliment with a lot of different structure.

And we are seeing different version of that from the smart cells to some of the microwave backhaul, you get tiny remote radio, there are form factor constraint, no fans, sitting out in the open, there can be an environment that’s freezing, there can be an environment that’s very, very hot.

So this is some of things that as we look at it we think that the low density FPGAs plus ASIC, plus ASSPs for bridging and control really do favor some of the things that we are doing as the great direct application, lower density is again low power, and the same thing with some of the smaller phone factor connected devices on the network.

If you look at the competition versus us, obviously remote radio had high-speed, microwave backhaul and all the micros, that’s really their focus, the compact for the low end radios and small phones, that’s really where we are going to focus, and that’s where we get most of the penetration with the new low cost offerings that we have today.

What we are going to target more than anything is really taking the appetite that we had in shrinking it, really in the sub 100-kilo, doesn’t mean we won’t play in 150 or 200 but more selective. We can’t really plan those to on 28 or 22-nanometers.

We do a lot of innovation on both higher solutions and architecture that we use, a lot of people ask, what’s a difference between these guys and you guys, is like, they build New York, we build Portland, New York have ex-street, you can route anyone, everywhere. In Portland, that had two streets and you put that in Portland and New York, you never get through New York, you put New York in the Portland, and you get very little, very little building and structure.

So both are inefficient, if you trying to solve the problem they need to have actions to best at, so we really focus on the smaller architecture, you still have to be reliable, you still have to be low cost and then more importantly you have to supply a great service and support.

If you look at the product differentiations, there is a lot of different market segments in here and people can even breakup the midrange segments into different segments, depending on the lots and the I/Os that are there.

But for the most part, we focus on the midrange, low density and for those that don’t know, we have a mixed-signal division or small mixed-signal product line that’s primarily focused on power management.

And we find that that’s a great solution that we can also play into the comp segment where they already use ECP3 for SerDes communications. They used control path for some of the XO and then they use power management for the rest of the system power.

So great and then below that is also the Design Software, IP and development kit. So you can have FPGAs, all you want that if the user interface for people to program it isn’t as good as the competition, people really struggle with toolsets.

If you look at the product roadmaps that we had today in the midrange, we really have the ECP3 and 4. You have iCE40 and XO2 and then you really have platforms and power manager and all.

Our platform manager is you’ve coupled the markets, so two capability within the analog mixed-signal. So you have programmable mixed-signal devices that use power management. So it’s innovative part that we sell and a lot of really cool applications that people embrace on that.

If you look, again, the midrange wireless infrastructure, obviously EPC3, it was late to market but it had a lot of really cool features and it was a lot lower power than the competition or the price point. It was high valued. It had all the feature sets, so that’s been a big winner for us.

Wireline access for certain interfaces -- we can do a lot of that, even though we do not have high enough speeds. So that’s the fastest our wireline access we can play. And more importantly, the same functions that enable you to go fast on data and enable you to go fast on video, and we are finding some of the offerings that we have from 7.1 LVDS and other things enable people to do video switching, enable you to do a ton of the different video severance and then also collision avoidant systems within automotive. So we are finding those systems are very form factored constrain and they go under very difficult used conditions from a temperature standpoint.

If you look at some of the different -- the derivative we’ve done this year, obviously we’ve produced a lower power version of ECP3 and that was primarily driven for some of the automotive and industrial accounts that really wanted power management in the video offerings that we have

We also have a high-speed version and that was for the people where power and performance was everything. And finally, we did a small mini form-factor version of that, which is almost the size of desk, which was really nice when people want to simplify boards or signs or even miniaturize the application.

If you look at some of the -- this is just showing kind of an example of one of the reference solutions we do for cameras, which really just takes an under and overexposed picture, enables users to sum between and come up with a clear picture. And we use outside services to help us develop those development kits. But once they are out, it’s a pretty interesting solution that we have.

Underneath the low density, obviously we talk a little bit about smartphone, tablets, anything that moves are all those things that are battery operated in the Internet. But there is also servers that we spend a lot of time, exposed ourselves a lot into the high-speed servers for bridging it’s a glue logic. XO2 will do the same thing and then the digital still cameras will use iCE40 and XO2 to digital imaging.

And then also what I called some of the younger phones where they have images on both sides, where they drill for stand out there and take a picture of both of them looking at both different screens.

And those typically are some pretty big winners and they are simple to do and for us they are great products and high volume, because the digital still camera market is still about 140 million units.

If you look at some basic sensor, what you do with the mobile FPGA? The video and imaging that you will see, a lot of people translate to (inaudible). You’ve heard different versions, the (inaudible) that are in there and you’ve got all the sensor managements from [Jero] to temp sensors, off loads of battery and light controls, and then you have the memory and storage for hard disk drive, flash or any of the different interfaces from DDR RAM.

And then finally, just some simple connectivity devices depending on the interface, so those applications processors and then we handle a lot of the rest by off loading the app processor on to FPGA to safe power.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

It’s in the mobile FPGA. That is still enclosed. Yeah. That is still we can bring there. We can use XO2 also, but XO2 is a little bit more feature-rich device. And this is another one for sensor expansion. This is an actual expansion that you guys configure out the phone, but really we off load the application processor and lower the power and better performance because you are playing with an FPGA versus having a app processor wake up all the time.

We are seeing a lot more applications for this, specifically when people don’t know what the interface is going to be or the things that they want to control. So we’ve given interface is more generic and they can plug and play if they go. And the price point for that is very attractive compared to an ASIC -- multiple ASIC.

And then we have a program of mixed signal that most people don’t really know that we do. We do a lot of board management in the telecom industry and this expands in bringing up an off board and being able to pour hot troupe board and things like that we do.

On the automation same thing with monitoring, sequencing and different things for power up and power down and then finally the solid state hard drives, which we kind of locked into this one a little bit. But, we found a company that really likes the fact that they could hard troupe and sequence some of the hard disk drives that were gone. So that was the great application for power management. We’ve really exploited the reference design from this one.

And then if you look at power management coming out of mixed signal, people say, what does it really do? What they are doing is taking a lot of the passive components that you will see in normal design and you are integrating into digital logic and then you are being able to program the sequencing of all those things.

So instead of using an ASIC or programmable logic device with discrete to actually innovate them all on piece of Silicon and it’s just not an expensive one that $20 exclusion that we bring today. But you are also finding our way into some of the mobile and hard drive where you go from about $2.70 to a $1.25 or so. And this is real life application kind of deals that we felt today at price point that the customers really value.

Financially, we’ve had our challenges in the last year. Some of its macro driven and other parts of it is just fall up in some of the mature businesses that could have been because it came into effects of last year, the tsunami, some other things that we see. Bottom line is start up to grow other business what our plans are.

If you look at the revenue, that’s still slightly flat between Q1 and Q2, almost more of the same for Q3 that we see. The big challenge for us is that, in one sense we are doing a great job because we are ramping all of our new products, but we are kind of taking in the shorts with the margins because new products would be an offset with some of the old tech margins and some of the mature mainstreams.

But bottom line is not stellar financials by any means and we are working on it. This is the highlight but becomes a low light, because you are ramping some of the highest performance devices we had albeit at lower margins structures, because some of the customers that we service into a market. So it’s been a challenge for us to balance some of the falloff in the macro events from either Europe or from a distribution with the growth.

But this is -- I take this day any day and think this is our progress. We haven’t changed any of the focus on our customers or market segments, the end markets, the geographies or customers.

So everything is still the same. We don’t have any big customers, which is good, we are fairly diversified and we want to keep that going. But we still focus on consumer computing industrial and comps, the geographies of Asia excluding some of our largest geography. And Europe is actually shrinking. It was much higher than that before. So then you can see from an account base, we are really healthy.

Lots of cash, no debt. So that’s all good stuff. The reason our cash actually went down last quarter because we brought back shares and stock and then we had some accounts receivable that got pushed for favorable terms and nothing that would make anybody alarmed at all. We expect to get some of that back this quarter, but we are going to continue to buy stock back in this environment. We have a 10b5-plan in place, that’s not a big deal for us.

From July, essentially revenue was flat a couple of percentage points gross margin. We expect to be move it around, although if we look at it one of the good things is that we got a lot of cost reduction plans in place that we had already done a couple of quarters ago that we just now being able to take account for because of some of the accounting principles I think so.

We got some cost reductions coming in and the operating expenses are essentially flat. So we are committed to the market. We got some great growth trajectories with iCE, XO2, ECP3 search programs and our power management program, so there is no reason we can’t grow where we are at today. We still lead with low power, low cost innovation and we’ve got some good cash and we are still looking around to see if there is other opportunity with people there and with us.

So, with that we conclude. Thanks, guys. Now to your questions.

Question-and-Answer Session

Unidentified Analyst

Any questions from the audience?

Darin Billerbeck

Yeah.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

We don’t really run into them much, because when we got purchase by Microsemi, they were pretty clear on the things that they were going to do from the market perspective. So we actually had some customers that came to us and said hey, we want to convert the step pretty quick. Because they didn’t believe there was a long-term, and remember we gave everybody roadmap from that road down to you s actually that shows 65 or already on 40 have it to 28, so people believe we are going to be there for long time.

So we don’t see them a lot. If we do it might be in small battery operated stuff. I think it’s glue or something like that. But we don’t see them a lot anymore. I think they primarily military automotive, these Microsemi books.

Unidentified Analyst

Can you talk a little bit about the (inaudible).

Darin Billerbeck

Yeah. So, SiliconBlue probably push a quarter some of the capabilities and the design wins we had not because we lost anything, but more because the future set that we had in the some of the phones didn’t actually get to market as soon as the customers would have wanted them. So that’s shows himself up.

Hopefully this quarter the big drop wasn’t because of SiliconBlue. It’s actually because of one big customer South America has reckoned it. And now we’ll comeback overtime, but I will be a little slower and lower and so we modeled that out. So we don’t talk about that.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Everything. What we are finding are things like -- prime example is there maybe some talent attending that we do, right. And to give to the talents, if you look at every single geography, it’s slightly different, some of the frequency some of the other things are slightly different. So people are trying to figure out how to tune the radios now only for the geography but hasn’t tune it for use. So when the phone sitting in my pocket different to one sitting next to my head, right.

And so people are trying to figure out the best way to get. And so we do have some reference bucket, we are working on to that. And then there is a kind of the sensor hub that’s what we do and there is some other application again front of that, because they are proprietary.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Which.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Because not everybody and their brother wants the highest end. So it won’t comeback as high with six year ago or two years ago. So that business wasn’t even hopefully part of it. We expect to that’s go away and I just keep building the same products and not everybody is going to buy the highest in version of that appliance. So we expected to go away, I mean our goal.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Yeah. They will come back this year by the lower great. And then our expectation is that they won’t be new sizes through one plus. But then my next year is going. And so we really don’t have a lot of that is on plan for next year, but we said that three, four years ago and keeps coming back so.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Yeah. Every business -- I think in the business within in different segment and different segments and different areas. Like XO2, look at XO. XO is about 70 something or quite higher business three years. So there is no reason that we expected XO2 won’t to that level when they cannibalize a little bit of XO, but it should get to that level pretty easy, I expect SiliconBlue to be the next version that may get it actually softer than XO2, XO little bit more complicated.

ECP4 or ECP3 bridge which is videos and automotive and all that stuff should also get the 50 million the Power Manager with just the costs of their today to get their also. So those are -- I can’t target everything is, you want to sale with the big guys. We can’t look at those as $50 million incremental business. We just that we want to have enough in Q. So that some of the older businesses are following up or replacing with the new business.

So, this is the first time in history of companies had four new things to sell and we are probably overwhelming with sales force, just a little over to go through that’s okay. I never heard sales force is complained that they have two new products to sale within the history.

Unidentified Analyst

Can you talk a little bit about (inaudible). You’re talking about your foundry relationships and you indicated you had a roadmap first major products from 6528 as you are moving further out in line with you be feed collaborate pretty closely with the foundries and how that support that?

Darin Billerbeck

Yeah. So, FPGAs are little bit more sophisticated in the small standard logic. And there are always tweak in the fabric and your tweak in certain things. So we shows to doing ounce with UMC, because they are very aligned to our business model, and but that means we want to be about M minus one behind the big guys.

You can argue but a little further that we would like but we can’t afford to be on leading that technology with really living as expensive wafers we have to be able someone who and their -- as their products are picking, so their cost structure is much lower than what we’ve out in the market place today.

So we made it deliberate choice based on capabilities, based on relationships, based on our understanding as a forward looking pricing, that the best alternative for us to that point was to go -- was to go with the okay. And I have done a lot of working MCO videos. They are not necessarily on living edge, although I would argue the announcement with IBM. I made challenge that I just had -- but that’s we are on the leading net users.

So I think we are very aligned from the business perspective. And I think it helps us because there will be ramping their technology and they will be providing the technology we need and they are open to some other things they need to do. So it’s pretty good to good relationship first and we are already running some products that we are seeing today.

So we had a relationship with AMC for many years. We actually crossed qualified some of that stuff between some Japanese facilities and AMC and we will do the same thing as we move iCE and with our 28 roadmap.

Unidentified Analyst

So there are no questions from the audience. I can start with some general questions here. How would you characterize the current demand environment versus the first half of 2012, is it better it, is it worse, is this similar?

Darin Billerbeck

The word I’ll use is cautiously optimistic. But I think that the comps made surprise everyone, albeit I don’t think its going to blowout at end of the year, but its different. Last two years comps have gone down significantly in Q4, one was different by the Tsunami and overbuilding other one just over building. I don’t know what -- I don’t see that per comp, I think the biggest challenge I think everybody faces, it’s just the global economic crisis in Europe and some of the things and flood out in China.

What concerns me more with FedEx. I think they released something this morning. I think they were down quite a bit. And FedEx is down at that? So I am still cautiously optimistic because we have some iCE consumer stuff, its coming online. We have a little bit of automotive stuff. We even know the automotive industry shipments per car is down and innovations go up. But still like we’ve got some good design wins on there, but I am very cautious about the environment just like everybody else.

Unidentified Analyst

I see.

Unidentified Analyst

(Inaudible) you meant that it would taken shutdown agenda for the market?

Darin Billerbeck

No. I think in the last two years comp sustained in Q4. Finally, everybody took the hit on comps the last two years and so the question is that we normally just thanks for the Q4, I don’t think its going to doing that. I think this recent putout and I think you are going to see some LTE rolled out that are still progressed. I think we are still seeing 3D cost productions that are out there, there are still progressing, but it’s early.

So, I don’t think its going to hit the level they did, I think coming out of 2010 or even 2011 where just everything went to away from this surprise for national if it does, I think that’s going to be a difficult situation for a lot of people.

Unidentified Analyst

And just the follow-up on the question before, what’s geographies do you think I’ll do better was and you can talk about it in terms of comps, so I just in generally your entire business?

Darin Billerbeck

Okay. So let’s talking Europe. Europe, originally at beginning the year I don’t think people start it with the status it probably was, but it can be best ad forever display it 2007 and '08, they were started bad forever. So Europe, it’s going to obviously still show strength I think in Q3.

Unidentified Analyst

The second company (inaudible).

Darin Billerbeck

Yeah. So I think still going to be that, China I think its going to probably soften a little bit. Our indication is that it already is. U.S. seems surprisingly okay, but it’s early to tell. And then Japan for us seems like a just kind of phrase about the same thought. I think its going to be kind of just more the same.

I don’t think we are going to see a lot of the great opportunities to the geographies. I think there will be specific customers that do really well, which is one of the reasons why consumer attractive, these consumers difficult and almost the reverse comp, right get Christmas want to New Year all the service comps, we get the second, so it should be interesting to see if we can show some growth with some of the consumer and some of the (inaudible).

Unidentified Analyst

And you talked about China softening, do you were hoping that China mobile basics is going to help a little bit. Obviously you are not seeing anything in that area. Is that relevant?

Darin Billerbeck

Yeah. Hard to tell. Hard to tell at this point for the products. Remember our products are different than others as they were still in. Even though, we planned all of those, the backhaul being business connectivity, control (inaudible). We plan just about everything. So that’s not a bad thing because we are fairly diverse with XO, XO2 in those stock. ECP3 are typically 3G and below.

So we wouldn’t necessarily go in ECP3 with some of the higher end stuff growth. We would still grow some of the other products that we have. So it’s nice. And we also fell somehow to manage it by the way into this conception. So there is a lot of goodness for us regardless of where it grows but if it’s a high-end deal or fiber optics that probably favors the competitions versus us.

Unidentified Analyst

In close, your intended use of cash and can you rank in terms of priority, buybacks, dividends, acquisitions, market goods.

Darin Billerbeck

I would probably rank it as buybacks which is what we are doing already and we’ve been doing since I have been here, probably acquisitions and (inaudible).

Unidentified Analyst

Great. Pretty quick.

Darin Billerbeck

That may change over time but for now…

Unidentified Analyst

You’ve been buying some thing else after service in group. Audience, you have another chance to ask questions.

Unidentified Analyst

Can you talk about your industrial business in Europe and what you’ve seen there, kind of, what the trends are and what you are expecting going forward?

Darin Billerbeck

Yeah. Europe, surprisingly, we’re doing this between Q3 of last year and really right now down in the mid 30s which is tremendously bad. A lot of that, I think, is just an artifact. Some of that is artifact of the industrial issues that we are having in the macro. I would expect some of that to recover as people are less sensitive about whether they are going to get paid or not for shipping that product. But some of them get resolved with some of the monetary percentages. I don’t expect that to be counted. I don’t expect the industrial and other to count forever. Rest of the market and we are selling them. They are still fairly healthy.

Unidentified Analyst

I mean, are you assuring (inaudible) or have any other issues there. I mean, it’s just cyclical. What do you see there that gives you comfort that it’s not building share?

Darin Billerbeck

Yeah. I mean, it’s hard to tell in some of these cases because remember if you look at our industrial model, it’s (inaudible) and if there was one specific point, I would argue, yeah we lost this customer to our competition but that’s not true. The whole thing is just kind of drop. And so it’s not an artifact of any one thing and we’re not -- we're so diversified that it will be difficult for us to tell and that’s why I made that statement.

I don’t see any reason that it does say that it doesn’t puppet out and everybody else starts in Europe. (Inaudible) Europe and I think it was May and it didn’t look like there was any recession going on. And then I went back later and it looked like there was a lot going on. So you can see the dynamics of the people are starting to change over there which is going to come back. It always does and it’s not going to be bad forever but it’s bad right now for sure.

Unidentified Analyst

I think you are now a strategic supplier to Huawei. I think you won a award from Huawei. It was very nice to see. So just can you talk about your relationship with Huawei. How is it developing and is there an opportunity where we might see Lattice part and the rate you have?

Darin Billerbeck

You are going to see whatever our capabilities meet the needs. One of the things that we’ve been true to Huawei. One worth will be trusted supplier that we’ll never let you down, two was quality and reliability will be second. And third one is we’ll align our capabilities to unique.

Right. So we’re not going to provide. One thing we come to grip with is what we really can provide them and then getting an input from them. So that we can design and define our products that’s it aligned not with to them but to a broader market. The last thing they want as a custom product but they do want products that can meet the needs that they are going after. So important for us to get that award and we’re very proud of that award but as we need if we are not groing in that account over time with the right solutions. And then the other thing is we have to deal, make money doing it.

So we really have to focus and that’s going to good -- it’s got a good relationship. And we’re not near the size of our competitors for sure but it’s a good starting point for us that’s get going.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

For some of that, you probably are already seeing with new product growth that may have had some difficult times on our margin. But I would argue that you’re going to continue to see growth from us overtime in those accounts. They want to be bigger than 5% or 10%. You always question that but if it happens, somebody last time, it was organic opportunity and we’re going to consider it for sure. But I think you’ve already seen some of that today.

Unidentified Analyst

You mentioned this earlier about your smartphone opportunity. (Inaudible) also talked about it earlier today. Can you tell us what different issue, what kind of opportunity do you have versus sales?

Darin Billerbeck

Well, it is different, there is a lot of small cells. So when people talk about it all.

Unidentified Analyst

(Inaudible)

Darin Billerbeck

Yeah. There is so different architectures and the small cells are very diverse because you can go to one geography and you will find that there is no FPGA content. I think that scared a lot of people right. And then you go to another one and you will see all free suppliers in it. And then you’ll find the other ones where it looks like a PC. And then you’ll find other ones that are really interesting.

So for us what we’re doing is trying to align this to all of the different architectures that we can best fit a smaller higher performance, lower power FPGA2 and that’s relating. So we are assuming that that transition will happen but it doesn’t digitally happen.

You still have a lot of different remote radio heads and big macro base stations. You’re going to have all that stuff and these things are going to be really in addition to that. So we are making so that we align our products to that. It’s funny that people are actually admitting to some of that stuff is actually is happening.

Unidentified Analyst

When do you think that market is going to ramp because we’ve talked about it for a while (Inaudible).

Darin Billerbeck

It ramped in my house.

Unidentified Analyst

In your house, yes.

Darin Billerbeck

Right. And I actually was three-years ahead of it. I think its happening around us and we don’t even know it. I think when you look up, you see stuff that’s already out there that it’s happening. The question is who really gets into that architecture and who solidifies himself is the best architecture of choice, right. But it still requires a different solution when it does when you’re in the big remote radio it has in the backhaul.

Unidentified Analyst

Are you strong in any particular geography that we talked about?

Darin Billerbeck

We service all the geographies today and we have alignments with lot of the big guidance. Since Europe doesn’t really have anybody there but I shouldn’t say that we got to think. I think that’s true, right. But I think everything else we feel pretty good about our relationships in the coverage. We can meet the needs of everybody because we plan certain segments but we are comfortable with the needs.

Unidentified Analyst

Can you talk about future margin targets? Right now your compressed margin levels, when do we get there and what revenue level do you need to get to those targets?

Darin Billerbeck

Yeah. So the big whammy we got in the past quarter was because we sold a lot of really high-end new products that lower margins and had favorable terms which got us in at the same time some of the investor or some of the other products. We are less than what we actually forecasted.

So what are we doing about it. Well, first of all, we are focusing on better way for pricing which is okay, you have at least gold or copper. Lots of big transition we’re making really primarily in Q4. All the operational stuff that we did in March now flows through inventory. So that’s how they are done.

We got 40 nanometer products on iCE that are now shifting in production and about 8% of iCE will be on 40 nanometer this quarter. So they start adding all of those things in, you climb back up to probably the mid 50s, assuming that we’re somewhere around $300 million or whatever that number because you get absorption out there. You get all of the other stuff out of there. So we’re still confident that we can grow away from a margin perspective out.

But that’s dependent on it. So the mix which is around, you get even more stuff that worked and have some issues. But all in over, that’s going away from a model of 57%, 58-ish kind of margins long term, we got to climb the ladder right now. They get to 55 and we’re (inaudible).

Unidentified Analyst

Yeah. We are out of time. Thank you very much.

Darin Billerbeck

Hi. Thank you very much.

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Source: Lattice's CEO Present at 2012 Citi Technology Conference (Transcript)
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